Why National Insurance Contributions should not be due on tronc schemes

In the hospitality industry, understanding the nuances of tronc payments and their tax implications can save businesses and employees significant amounts of money. One of the most important aspects to understand is that National Insurance Contributions (NICs) are not due on properly administered tronc payments..

What Is a Tronc scheme?

Let’s start off by clarifying what a tronc scheme actually is:

A tronc is an arranged system for pooling and distributing service charges, tips, and gratuities in businesses like restaurants, hotels, and bars. The system is managed by an appointed person known as a “troncmaster” who is responsible for fairly allocating these funds among staff members based on agreed criteria.

The legal basis for NIC exemption

The exemption of tronc payments from National Insurance Contributions is not a loophole but a well-established legal position based on specific HMRC regulations.

Bear with us, but the legal basis is covered in Paragraph 5 of Part 10 of Schedule 3 to the Social Security (Contributions) Regulations 2001 (you can all wake up again now!) and states that payments of a gratuity are disregarded from earnings if either of the following is satisfied:

• It is not paid directly or indirectly to an employee by the employer and does not compromise monies previously paid to the employer; and
• It is not allocated directly or indirectly to the employee by the employer.

Requirements for NIC exemption

So what that means is that for tronc payments to qualify for NIC exemption, specific conditions must be met:

1. Genuine independence: The Troncmaster must operate with genuine independence from the employer in the distribution of the tronc.
2. Allocation discretion: The troncmaster, not the employer, must have discretion over how the pooled funds are allocated among staff.
3. Proper administration: The tronc system must be properly documented and administered.
4. PAYE requirements: While exempt from NICs, tronc payments are still subject to PAYE income tax.

Financial benefits

The NIC exemption creates significant financial benefits.

For Employees

Staff receive more of their earned gratuities since employee NICs (currently 8% for most earners) aren’t deducted from these payments.

More money in your employees’ pockets

For a server allocated £5,000 in tips over the year, they would save £400 in tax deductions from this amount.

For Employers

Businesses save the employer’s NICs (currently 15%) on these payments, which can represent substantial savings in high-tipping establishments.

See how the savings stack up

For a restaurant with £100,000 in annual tronc distributions, the employer could save approximately £15,000 in employers’ NICs alone.

Common Misconceptions

Several misconceptions persist about tronc payments, so let’s address them now.

1. “It’s tax avoidance” False. This is a legitimate exemption recognised by HMRC, not a form of tax avoidance, and specifically written into National Insurance legislation
2. “All tips are NIC-free” Not true. Only tips properly administered through an independent tronc system qualify for the exemption.
3. “Employers can control distribution” Incorrect. Employer control would invalidate the NIC exemption. It is the Troncmaster who sets the allocation rules (see more below)

Implementing a compliant tronc scheme

To ensure your tronc scheme qualifies for NIC exemption:

• Appoint an independent Troncmaster – this person should not be an owner, director or in a position with control over staff wages, hiring or firing.
• Document the scheme – create clear documentation outlining how the tronc operates, including the rules for the allocation and distribution of the tip pool.
• Maintain clear records – keep detailed records of all tronc distributions. What monies have been added to the pool, and who has received what.
• Ensure genuine independence – the employer should not influence or control how the Troncmaster allocates the funds.

The exemption of tronc payments from National Insurance Contributions represents a significant and legitimate tax efficiency for the hospitality industry. With proper administration, both employees and employers can benefit from this arrangement.

However, it’s crucial to ensure your tronc system is genuinely independent and properly administered. The line between compliance and non-compliance can be fine, and the consequences of getting it wrong can be costly.

For hospitality businesses looking to maximise staff retention while managing costs effectively, a properly administered tronc system isn’t just good practice, it’s good business.