1. Clear definitions

Understand the difference between tips and service charges as outlined by the Act:

• Tips are discretionary payments made by customers beyond the billed amount.
• Service charges are additional amounts added to a customer’s bill before payment.

2. Fair distribution

All tips and service charges be distributed fully and directly to your staff, without deductions by the business. You will need to set up a transparent and equitable system for distributing these amounts, which could be based on hours worked or another fair method agreed upon by the team.

3. Transparency obligations

The law requires you to maintain clear records of how tips and service charges are collected, pooled, and distributed. Ensure your payroll system can generate detailed reports to show compliance with these requirements to both staff and regulators.

4. Payroll integration

Adapt your payroll systems to handle tips and service charges separately from regular wages, ensuring accurate tax calculations and compliance with legal standards. This might require software updates or modifications.

5. Legal and tax considerations

Be aware of the tax implications related to tips, which might differ from other types of income. Non-compliance with the Act could lead to penalties, so it’s crucial to align your payroll practices with the new requirements.

6. Educate your team

Train your staff on the new policies and how they will affect payroll and personal earnings. Clear communication is key to avoiding misunderstandings and ensuring that everyone knows their rights under the new law.

7. Regular audits

Conduct periodic audits of your tipping practices to ensure ongoing compliance. Consider both internal audits and external reviews to help maintain standards and catch any issues early.

8. Consider setting up a tronc system

You can manage, distribute and calculate tips yourselves as management but this will become increasingly challenging with the above legislation coming into effect. Managing the process yourself may also mean that your staff are overpaying National Insurance as there are significant savings to be made by using a tronc system instead.

A tronc system is one of the best ways to ensure your business is distributing tips and service charges fairly among all employees and to ensure you are compliant with the new legislation coming in.

A tronc system requires a ‘Troncmaster’ to be appointed who would be responsible for running the tronc system and can help improve the transparency and integrity of the scheme further.

If set up and operating correctly, a tronc system will also enable you to claim exemptions from National Insurance on tips and services charges (on both employee and employer contributions), resulting in significant cash savings for both you and your staff.

9. Preparing for change

We recommend starting preparations well ahead of the implementation date to ensure a smooth transition. Review your current payroll and tipping policies, consult with legal and tax advisors, and consider potential software or system upgrades if necessary.

At Old Mill, we are your trusted partner bringing passion, expertise, and a shared commitment to your financial future.

Want to know what we can do for you and your business? Speak to Laura Seaward or click here…