Tips, pensions and student loans – what actually counts?

Tips are the best part of a packed Saturday shift. They’re also one of the trickiest bits of hospitality payroll, because 4 separate sets of rules have a say:

1. Employment law
2. Tax
3. National Insurance
4. Pensions.

We get two questions more than most.

1.  Are tips pensionable?
2. Should they be included when you work out student loan deductions?

Both answers depend on how the tips are allocated and paid.

Follow the money first

Tips usually reach your team in 1 of 3 ways.

Cash tips kept by staff. A customer hands a server £5, and they pocket it. It never touches your payroll.

Tips allocated by the employer. Card tips and service charges land in the business account. You decide the split and pay it through your own payroll.

Tips paid through an independent tronc. A Troncmaster decides the split and pays it through a separate tronc PAYE scheme. Regulation 100 of the Income Tax (PAYE) Regulations 2003 puts the PAYE duty on the Troncmaster, but the tips can still be processed through the employer’s payroll.

The law on sharing tips

The Employment (Allocation of Tips) Act 2023 added a new Part 2A to the Employment Rights Act 1996. It came into force on 1 October 2024 and covers England, Wales and Scotland.

• Every penny of tips, gratuities and service charges has to go to workers.
• It must be shared fairly and paid by the end of the month after the customer paid.
• If tips are paid more than occasionally, you need a written tipping policy and 3 years of tipping records, which workers can ask to see.
•  Get it wrong and a tribunal can award up to £5,000 per claim.

The statutory Code of Practice on fair and transparent distribution of tips sits alongside the Act.

There’s more on the way. The Employment Rights Act 2025 will require employers to consult workers, and trade union or worker representatives, when writing or revising a tipping policy, and to review it at least every 3 years. The government withdrew its draft revised Code on 13 July 2026 after criticism from Unite, and a replacement is expected. Acas says the tipping changes are due by the end of 2026.

None of this law tells you how to pay tips out. That choice is where the detail sits, because it decides whether payments are pensionable and whether student loan deductions apply.

Every tip is taxable

Whichever route a tip takes, it’s taxable. Section 62(2)(b) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) includes in employment earnings “any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth”.

It doesn’t matter that the money comes from a customer and not from you. The courts settled that in Calvert v Wainwright [1947], when a taxi driver’s tips were held to be taxable earnings from his job. A tip is paid because of the job, so it’s taxed as part of the job.

What changes between routes is who collects the tax.

Employer-allocated tips. You’re making a payment of PAYE income, so you deduct tax through your payroll under Part 11 of ITEPA and the Income Tax (PAYE) Regulations 2003.

Independent tronc. The Troncmaster sets each employee’s share under the tronc arrangement. You can hold the money and run the payments through your payroll, but only PAYE income tax is deducted from the amounts the Troncmaster sets.

Cash kept by staff. You aren’t making the payment, so there’s no PAYE for you to run. Your employee is still liable. They either declare the tips through self assessment (section 7 of the Taxes Management Act 1970 says they must tell HMRC about untaxed income) or HMRC collects the tax through their tax code.

A quick note on VAT

Service charges bring VAT into it. Under section 19 of the Value Added Tax Act 1994, VAT is charged on the consideration for a supply. A truly optional service charge or tip isn’t payment for the meal, so it’s outside the scope of VAT. A compulsory service charge is part of the price and is standard-rated. HMRC’s VAT guidance on tips and service charges takes the same line.

National Insurance is where the routes split

Everything else hangs on this section, because student loan deductions follow it and, in practice, so does pension treatment.

The starting point

Section 3(1) of the Social Security Contributions and Benefits Act 1992 defines earnings as “any remuneration or profit derived from an employment”. Section 6 then charges Class 1 contributions (primary for the employee, secondary for the employer) when earnings are paid to or for the benefit of an earner.

On its own, that would catch every tip. The exclusion is what changes the answer.

The tips disregard

Regulation 25 of the Social Security (Contributions) Regulations 2001 leaves the payments listed in Schedule 3 out of earnings. Schedule 3, Part X, paragraph 5 covers gratuities and offerings, and disregards them if either of 2 conditions is met:

1. The payment isn’t made, directly or indirectly, by the employer, and doesn’t come from money previously paid to the employer.
2. The employer doesn’t allocate the payment, directly or indirectly, to the employee.

Meet either one and there are no Class 1 NICs on the tip.

How each route plays out

Cash kept by staff. The customer pays the server directly, so condition 1 is met. No NICs.

Employer-allocated tips. Card tips and service charges land in your account first, so condition 1 fails. You then decide who gets what, so condition 2 fails too. The tips are earnings under section 3, and Class 1 NICs apply for you and your staff.

Independent tronc. Card tips still pass through your account, so condition 1 fails. The troncmaster decides the split, though, so condition 2 is met. No Class 1 NICs, and your team keeps that saving.

Where troncs come unstuck

Condition 2 only works if the independence is real. HMRC’s guide E24 (Tips, gratuities, service charges and troncs) sets out what it looks for. You can’t decide the allocation, influence it behind the scenes or hold a veto over it. A troncmaster who rubber-stamps a split you’ve already chosen fails the test.

E24 also says that if tronc money is used to cover pay you owe under the contract, such as a guaranteed minimum level of earnings, those payments are earnings and NICs are due.

Get this wrong and HMRC treats the whole arrangement as employer-allocated. That means employer and employee NICs on every payment, plus interest and possible penalties.

Why NI matters for more than NI

The same NI-able figure drives other deductions.

Student loans.The Education (Student Loans) (Repayment) Regulations 2009 take their definition of earnings from the Class 1 rules, so NI-free tronc payments are student loan free too. More on that below.

Apprenticeship Levy. Under Part 6 of the Finance Act 2016, the levy is worked out on your pay bill, meaning earnings subject to secondary Class 1 NICs. Employer-allocated tips count towards it. Tronc payments don’t.

Are tips pensionable pay?

Two terms get muddled here. “Qualifying earnings” is the auto-enrolment definition set by law. “Pensionable pay” is whatever your pension scheme’s own rules say. They’re often different, so check both.

What the Pensions Act 2008 says

Section 13 of the Pensions Act 2008 defines qualifying earnings as earnings between a lower and upper limit. For 2026/27 the earnings trigger stays at £10,000, the lower limit at £6,240 and the upper limit at £50,270.

Section 13(3) lists what counts as earnings: sums payable in connection with employment, including salary, wages, commission, bonuses, overtime and statutory payments such as SSP and SMP. Tips and gratuities aren’t named, so the question is whether a particular tip payment falls into one of those categories.

How each route plays out

Employer-allocated tips. You pay these through your payroll as part of pay, so treat them as qualifying earnings and deduct pension under a qualifying scheme such as NEST. Set the pay element up wrong and you risk a fine from The Pensions Regulator.

Cash tips kept by staff. You don’t pay them and they never touch payroll, so there’s no pension contribution.

Independent tronc. This is the grey area. The test is whether the payments come from the employment. When the troncmaster allocates them, they don’t, so tronc tips aren’t pensionable pay. That won’t always stop The Pensions Regulator asking questions, and some tronc schemes have been asked to complete a declaration of compliance, so keep your paperwork in order.

Pensionable pay under your scheme rules

If your scheme defines pensionable pay as basic pay only, tips fall outside it. That’s allowed, but the scheme still has to pass one of the quality tests in the Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010.

Under the certification tests, pensionable pay must be at least equal to basic pay, and one test needs pensionable earnings to make up at least 85% of total earnings across relevant jobholders.

Staff can also opt out of auto-enrolment, and with so many part-time roles in hospitality, plenty of your team may not reach the £10,000 trigger anyway.

A word on fairness. Leaving tips out of pension does mean a smaller retirement pot, so spell it out in your tipping policy and nobody gets a surprise at 67. A tronc run by an independent third-party troncmaster delivers the NI savings, while pension is worked out on the earnings set out in each employee’s contract.

Should tips be included in student loan deductions?

This one’s cleaner, because the student loan rules borrow the National Insurance definition wholesale.

The Education (Student Loans) (Repayment) Regulations 2009 (SI 2009/470) cover England, Wales and Scotland. The matching Northern Ireland regulations define earnings as sums that count as earnings under section 3 of the Contributions and Benefits Act, calculated under the Contributions Regulations, and taken into account for secondary Class 1 contributions. The GB regulations take the same approach.

Regulation 45 also says earnings are added together for student loans in the same way as under the Contributions Regulations. So, do these tips attract Class 1 NICs?

Employer-allocated tips. Yes, so they’re included.

Independent tronc payments. No, so they’re excluded, as long as the troncmaster allocates them.

Cash tips kept by staff. Outside payroll, so there’s nothing to deduct.

You don’t get to choose. The law decides, based on how the tips are paid.

There’s a sting in the tail for anyone tempted to get creative. Regulation 45(2) lets HMRC give directions where paying earnings through different people cuts or avoids student loan repayments, so repayments are made as if that hadn’t happened. A sham tronc set up to reduce deductions is exactly what HMRC can unpick.

The opposite problem crops up too. In our experience, HMRC officers don’t always look at the full picture when tips are allocated by an independent troncmaster, and some insist tronc payments count as earnings for student loans. Challenge this every time. The regulations follow Class 1 NICs, and properly allocated tronc payments don’t attract them.

Most businesses slip up in the software. A tronc payment set up as a standard pay element, or employer tips flagged as NI-free, leads to wrong deductions, unhappy staff and a clean-up job at year end. Always show tronc payments as a separate item on the payslip.

Tips and the minimum wage

Tips can’t be used to top pay up to the legal minimum. Regulation 10(m) of the National Minimum Wage Regulations 2015 excludes tips, gratuities and service charges from pay that counts towards the National Minimum Wage and National Living Wage, whichever route they’re paid through.

The quick reference

Legislation at a glance

What to do now

Check how each type of tip is set up in your payroll software, pay element by pay element. Read your pension scheme rules to see how they define pensionable pay, and run the quality test.

If you run a tronc, test its independence against HMRC’s E24 guide. Then get ready to consult your team on your tipping policy before the new rules land.

Get it right first time

Ascend runs payroll for hospitality businesses every day, so pay elements, pension settings and student loan plans are set up correctly from day 1. Tips & Troncs runs independent tronc schemes that are fair for all, fully compliant and simple for your team to understand.

Talk to us about getting your tips, pensions and student loans sorted. Your team gets paid right, and you get your Mondays back.