Ten years ago, tips meant a jar by the till. Staff split the coins at the end of the week, HMRC was theoretically interested, and that was that. Then cash died. Today the tip is a button on the card reader, which means it lands in your business bank account, which makes it your legal and tax problem. And in October 2024 the law changed to make sure of it.
Get this right and your team keeps more of their tips at no cost to you: a genuine, legal pay rise you don't fund. Get it wrong and you're looking at employer NI you didn't need to pay, or worse, a tribunal claim. Here's the whole picture in plain English.
For business owners who want to take this further, our complete coffee shop finance guide can help you put it into practice.
The Tips Act: what you're now legally required to do
The Employment (Allocation of Tips) Act has applied since 1 October 2024. If your café takes tips (and if you have a card reader with a tipping prompt, you do), the obligations are:
- 100% of tips must be passed to workers, with no deductions. You can't skim card processing fees, admin costs or breakages off the top. All of it goes to the team.
- Allocation must be fair, and you need a written tips policy your staff can see: who gets what, on what basis.
- You must keep records of tips received and allocated, and staff have the right to request them.
- Tips must be paid out by the end of the month following the month they were received. January's tips reach staff by the end of February, at the latest.
One more rule that predates the Act but still surprises owners: tips never count towards minimum wage. You can't pay £11 an hour and top up to £12.71 with tips. Wages are wages; tips are extra. (For what wages really cost once NI and pension land, see our guide to what café staff really cost.)
How tips are taxed: the three routes
Income tax is always due on tips — no route avoids that. What changes dramatically is National Insurance, and that's where the money is. The three routes:
| Route | Income tax | Employee NI (8%) | Employer NI (15%) |
|---|---|---|---|
| Cash tips kept directly by staff | Due — staff self-report to HMRC | No | No |
| Card tips distributed by the employer | Due — via your PAYE | Yes | Yes |
| Card tips via a compliant tronc | Due — via the tronc's PAYE | No | No |
Spot the trap. Cash tips were NI-free, but cash has all but gone. The default replacement (card tips paid out through your payroll) is the worst route in the table: the moment you, the employer, allocate and pay the tips, they attract employee NI at 8% and employer NI at 15%. Every jar that became a card-reader button quietly became 23% more expensive.
The tronc route restores the old cash treatment — legally — for card tips.
Related reading: What Café Staff Really Cost in 2026 — and How to Keep Labour Under 30%.
What a tronc actually is
A tronc is simply an arrangement where tips are pooled and shared out by a troncmaster — someone independent of the employer — under a separate PAYE scheme registered with HMRC. The tronc's PAYE deducts income tax on tip payments, so HMRC gets its income tax either way. But because the employer neither pays nor allocates the tips, directly or indirectly, the payments are exempt from both employee and employer National Insurance.
That last condition is the whole game, so let's be precise about it:
- The troncmaster must not be the employer: not you, not a director, not the company. Typically it's a trusted senior team member, or an external tronc provider.
- The troncmaster genuinely decides the allocation. They can consult the team and follow agreed rules (points for seniority, hours worked, role), but the decision must be theirs. If you're setting the split and the troncmaster is rubber-stamping it, HMRC can look through the arrangement — "indirectly allocated by the employer" kills the NI exemption.
- The tronc runs its own PAYE scheme, separate from your payroll, and income tax is deducted on payments through it.
- It all still has to sit inside the Tips Act rules above: 100% passed on, written policy, records, paid by the end of the following month.
The worked example: what a tronc saves a six-person café
Take a busy independent café with six staff, where the card reader's tipping prompt generates £12,000 a year in tips: £1,000 a month across the team, about £2,000 per person per year. (Illustrative, but not unusual for a site doing steady volume with a well-placed prompt.)
Related reading: The Coffee Shop Owner's Tax Guide 2026/27: What You Can Claim.
Route 1 — you distribute the tips through your payroll. The tips attract employer NI at 15%: £12,000 × 15% = £1,800 a year out of the business's pocket (your staff are already earning above the NI threshold on wages alone, so tips are taxed from the first pound). Your team also pays employee NI at 8%: £12,000 × 8% = £960 taken from their tips. Plus income tax, which is due regardless.
Route 2 — the same tips through a compliant tronc. Income tax is still deducted via the tronc's PAYE. But no employer NI and no employee NI. The business keeps its £1,800. The team keeps its £960 — £160 more per person, per year, for the identical tips.
Total NI saved: £2,760 a year. Nothing about the café changed except the paperwork. And notice who benefits: it's a rare arrangement that pays both sides, with the business saving real money while every team member's tips stretch further. In a sector where UKHospitality found 1 in 5 businesses fearing failure within 12 months, £2,760 of legal, permanent saving is not small print.
Related reading: Should Your Café Register for VAT? The £90k Question.
Service charges are a different animal
Don't confuse tips with service charges — the tax treatment splits sharply:
- Mandatory service charges (a compulsory 10% added to the bill) are treated as your income, not a tip. They're always liable to NIC when passed to staff, and they're standard-rated for VAT — HMRC takes a sixth before anyone sees a penny.
- Voluntary service charges and tips are outside the scope of VAT, and can flow through a tronc with the NI exemption above.
For a café, the practical read: a genuinely optional tip prompt on the card machine is far more tax-efficient than a mandatory service charge, for you and your team. If your till or menu says "a discretionary service charge will be added", check with us whether it's really discretionary in HMRC's eyes — the wording matters.
Is a tronc worth it at café scale? An honest answer
A tronc isn't free to run. There's a separate PAYE scheme to operate, a troncmaster to appoint (and keep genuinely independent), rules to document, and either internal time or an external provider's fee — often a few hundred pounds a year for a small operation (illustrative).
So the honest threshold guidance:
- Under roughly £2,000–£3,000 a year in card tips, the saving (£460–£690 at combined 23% NI) may not justify the admin, especially if you'd be paying an external provider. Simpler to run tips through payroll properly, or keep a genuine staff-managed cash pool where it still exists.
- Around £5,000 a year, a tronc saves £1,150 in NI — usually comfortably worth a lean, well-documented internal tronc.
- At £10,000+, it's not really a debate. £2,300+ a year in combined savings, every year, for one-off setup effort.
Count your card tips for a typical month before deciding — most owners guess low. And whatever the size, the Tips Act obligations (100% passed on, written policy, records, month-end deadline) apply regardless. Those aren't optional at any scale.
Getting it set up without the headaches
The failure modes we see are all avoidable: a director acting as troncmaster (kills the exemption), the owner "suggesting" the split each month (kills the exemption), tips paid through the main payroll with NI ticked on by default (nobody notices for two years), or no written policy when a staff member asks for one.
Payroll is one of those areas where small technical details carry real money — the tronc NI exemption, the £10,500 Employment Allowance, holiday accruals for casual staff. It's exactly what our payroll service handles for hospitality clients day in, day out, and it's one corner of the broader finance function we build for coffee businesses — the full picture is in our complete guide to accounting for coffee shops. You can also use our free coffee business tools.
If you're not sure whether a tronc stacks up for your café — or you suspect your card tips are already being NI'd unnecessarily — book a Free Profit Meeting. Bring a month of card-tip totals and we'll do the sums with you there and then.
Ready to take action? request a no-obligation strategy call.