Tronc Tax Rules: NIC Exemption, PAYE Setup, and Tips Act Duties

Under the tronc tax rules, tips shared through a genuinely independent tronc are free of National Insurance contributions for both the employer and the worker, but every payment is still subject to Income Tax and must go through a separate PAYE scheme run by the troncmaster. The NIC exemption depends on two things: the money was not originally paid to the employer, and the employer plays no part in deciding who gets what.¹

What Makes a Tronc Qualify for the NIC Exemption

Independence from the employer is the whole point. HMRC will only accept the National Insurance exemption where the employer neither receives the tips originally nor directs how they are split. If either condition fails, the payments are treated as ordinary wages for NIC purposes.¹

That is why the choice of troncmaster matters so much. The role cannot be filled by the employer, a director, a business partner, or a sole trader. Close relatives of the employer (spouse, civil partner, parent, sibling, child) are also disqualified because they lack genuine independence. So are employees who hold financial authority over the business, such as financial controllers, payroll managers, and company secretaries with signing power. A head waiter or senior bartender without management or financial control over the business is the typical choice. The practical test: can this person say no to the boss about how tips are split? If not, the arrangement fails.¹

HMRC’s guidance draws a fine but important line on who decides. If a restaurant owner tells a staff member to distribute tips using a particular points system, that counts as indirect control, and NICs become due on every payment out of the tronc. If the staff themselves adopt the same points system voluntarily, with no pressure from the employer, NICs are not due. The distinction is about who made the decision, not what the decision was.¹

How Much the NIC Saving Is Worth

For the 2025/26 tax year, the employer NIC rate is 15% on earnings above the secondary threshold, and the employee rate is 8% between the primary threshold and upper earnings limit.² When tips flow through a qualifying tronc, neither side pays NICs on those amounts.¹

The numbers add up quickly. A worker receiving £200 a week in tips through a compliant tronc keeps roughly £16 more per week than they would if those tips ran through the employer’s payroll. The employer saves £30 per week on that same worker. Across a team of 20 staff over a full year, the employer’s NIC savings alone can reach tens of thousands of pounds.

When NICs Are Still Due

Even with a tronc in place, National Insurance is owed in three situations: where the employer is involved in deciding the distribution, where mandatory service charges pass through the tronc, or where the troncmaster is someone who counts as the employer (a director, owner, or partner). In any of these cases, the employer must calculate and pay NICs through its own payroll, even if the troncmaster still handles the physical distribution of cash.

Mandatory service charges deserve special attention. If the business adds a compulsory service charge to bills and then feeds it through the tronc, the employer remains responsible for operating PAYE on those payments, not the troncmaster. Mandatory charges are treated differently from voluntary tips because the customer has no choice about paying them.¹

Income Tax Through a Separate PAYE Scheme

Every tip paid through a tronc is subject to Income Tax. There are no exemptions, whatever the structure. The troncmaster must set up and run a PAYE scheme in their own name, entirely separate from the employer’s payroll.¹

The troncmaster calculates the tax owed on each worker’s share using the tax code HMRC assigns, deducts it before payment, and reports through Real Time Information like any other payroll operator. The employer’s payroll software can be used for convenience, but the tronc records must be kept completely separate from the employer’s payroll data. The troncmaster is personally liable for any failure to deduct the right amount of tax, so mistakes fall on them rather than on the business.¹

Setting Up the Tronc and Notifying HMRC

The employer must notify HMRC when a tronc is established, unless the arrangement predates 6 April 2004. The notification should identify the troncmaster and confirm the start date. HMRC uses that information to assign the correct PAYE responsibilities.¹

HMRC then sets up a separate PAYE scheme in the troncmaster’s name. Once that scheme reference arrives, the troncmaster can begin processing payments and filing Real Time Information returns.³

Alongside the HMRC notification, the employer should prepare a written document setting out how tips are collected, who is eligible, and the formula used to split the pool. Under the Employment (Allocation of Tips) Act 2023, this written policy is a legal requirement for any business that regularly handles tips.

Records the Troncmaster Must Keep

The troncmaster must maintain records that track every payment into and out of the tronc, including dates, amounts, and the identity of each recipient. These records must be kept separate from the employer’s general payroll records to support PAYE compliance and prove the correct income tax was deducted.¹

Duties the Tips Act Adds on Top

The tax treatment is only part of the picture. Since 1 October 2024, the Employment (Allocation of Tips) Act 2023 has required employers to pass on all qualifying tips, gratuities, and service charges without deductions, and to distribute them fairly under a statutory Code of Practice. Businesses can no longer keep a cut of card tips to cover processing fees or administration.⁴

Tips must reach workers no later than the end of the month following the month they were received. Employers must keep allocation and payment records for three years, and respond to worker requests for their own records within four weeks. Workers can bring claims to an employment tribunal within three months of an alleged breach; tribunals can order compliance and award compensation for financial loss of up to £5,000.⁴

An independent tronc does not let the employer off the hook. The employer remains responsible for ensuring the allocation is fair and must intervene if the troncmaster is distributing tips unfairly. In practice this means the employer’s three-year retention duty runs in parallel with the troncmaster’s tax records, and failing on either side can trigger HMRC penalties or a tribunal award.

Tips Cannot Count Toward the Minimum Wage

Tips distributed through a tronc, or by any other method, cannot count toward the National Minimum Wage. The National Minimum Wage Regulations 2015 explicitly exclude tips, gratuities, service charges, and cover charges from a worker’s remuneration for minimum wage purposes.⁵

From April 2026, the National Living Wage for workers aged 21 and over is £12.71 per hour, with lower rates for younger workers and apprentices.⁶ The employer must pay at least this rate as base wages before any tronc income enters the picture. Setting base pay low on the assumption that tips will top it up is unlawful, however the tronc is structured.

1
HM Revenue & Customs. Guidance on Tips, Gratuities, Service Charges and Troncs
2
GOV.UK. National Insurance Rates and Categories
3
HM Revenue & Customs. PAYE Manual – Employer Records: Set Up Employer Record: TRONC Scheme
4
GOV.UK. Distributing Tips Fairly – Statutory Code of Practice
5
Legislation.gov.uk. The National Minimum Wage Regulations 2015
6
GOV.UK. The National Minimum Wage in 2026