The new Employment (Allocation of Tips) Act 2023, which takes effect on 1 October 2024, will make it unlawful for employers to withhold tips and service charges from staff. More than two million workers will have their tips protected.

The legislation follows a lengthy consultation process during which it was revealed that an estimated £200 million was being held back from staff by companies withholding tips. The new rules require 100% of the tips generated at a place of work to be passed to employees in a fair and transparent manner.

As a minimum, employers must:

• Allocate tips fairly and transparently
• Have a written policy on how tips are allocated to workers
• Distribute 100% of tips to workers by the end of the month following which they were received

Clair Williams, tax partner with Azets in Scotland, said: “Employers must review their current arrangements for administering tips and ensure that they comply with the new legislation.

“There is no transition period so employers must make the required changes in advance. It must be stressed that if a worker raises a concern that the allocation of tips and gratuities is not fair or feels that they are being discriminated against, whether deliberate or not, they are able to raise a claim with the employment tribunal which, if successful, could result in compensation payable of up to £5,000.

“As this new legislation falls within employment law legislation, the risk will solely sit with the employer. The risk cannot be discharged to a third party such as a troncmaster (someone appointed by a business to be responsible for sharing tips to staff via a tronc scheme).”

Such a scheme, which originates from ‘tronc des pauvres’ (collecting boxes for the poor) in 1920s France – is a pay arrangement which allows hospitality and leisure businesses to fairly share tips and service charges given by customers to staff.

If an employer decides how tips are allocated, the payment of them is subject to both PAYE and Class 1 National Insurance Contributions (NICs). When an independent troncmaster is appointed to decide how any tips and gratuities are distributed and to manage the allocation and payment of those tips, they are not considered earnings for NICs purposes and therefore only attract PAYE. Appointing a troncmaster can provide savings of both primary and secondary NICs.

Ms Williams added: “Appointing a troncmaster does not remove the obligation on the employer to ensure that the method of distribution is fair and reasonable – as required by the Employment (Allocation of Tips) Act 2023.

“There is a fine line between the employer directing how tips are allocated, which would jeopardise the NICs advantages, and ensuring the method of allocation applied by the troncmaster is fair and reasonable.

“Our advice to businesses is to seek professional help to understand and act upon the new legislation, host employee consultations, identify potential risks and implement a tronc scheme.”

Azets’ employment tax team is hosting a webinar to discuss the legislation on Monday 16 September and will be joined by a representative from UK law firm Trethowans. The panel will cover processes to support compliance, legal considerations and requirements, what businesses need to have in place by 1 October and the tax treatment of tips and gratuities, followed by a Q&A session.