Employees in hospitality are paying unnecessary National Insurance (NI) contributions on their tips, according to new research* The research also found many employers could be liable for significant penalties around the way they handle tips and service charges.
The study highlights 1,169,0001 employees are paying excessive NI on their tips. 46% of hospitality businesses add pooled tips to existing PAYE or payroll without using a tronc – a special pay arrangement that lets businesses fairly share tips, gratuities and service charges given by customers with staff. This results in employees unnecessarily paying NI on their tips.
The hospitality industry employed 2,543,000 workers in 2021 and this is on the rise. Many are earning the National Minimum Wage or National Living Wage and rely on tips to top up their income. This is more critical than ever before in today’s economic crisis.
Although new laws will make it illegal for employers to withhold tips from workers, this won’t come into effect until late 2023. Every penny counts for employees. A tronc scheme is a special arrangement where the employer doesn’t control allocations of tips, and under HMRC rules is excluded from NI contributions, providing a financial boost to hospitality workers across the country.
Cash is no longer the only form of tipping with 64% of restaurants, cafes, pubs and bars accepting card tips and more than 50% operating a service charge. These have to be shared with staff through payroll to be compliant with tax law.
Half (50%) of businesses pay tips through their payroll and nearly half (46%) distribute though payroll without a tronc scheme. This rises to 67% in pubs.
The research further reveals bias or non-compliance in distributing tips is common. Of those hospitality businesses which have a troncmaster, who controls how the tips are allocated, 38% are managers and 30% are directors or business owners. This is non-compliant as the troncmaster cannot be biased or have any hiring responsibilities and opens the business up to potential HMRC penalties. This non-compliant situation rises to 75% in restaurants and 30% in cafes. The penalty for non-compliance could be equivalent to the backdated National Insurance contributions for up to six tax years, a huge hit to any business.
Stuart Stephen, Vice President of Managed Services at IRIS comments, “Tips and service charges provide a significant and welcome boost to hospitality employees’ take-home wage. Although the government has put a spotlight on unfair practices, more needs to be done to ensure tips are pooled fairly and comply with the law.
“Payroll is a highly sensitive and ‘mission-critical’ function. A properly run tronc scheme is not only compliant and accurate, but also ensures employees continue to feel motivated as more of their hard-earned tips, gratuities, or service charges go into their pocket.”
Research conducted by IRIS Software Group in partnership with Censuswide.