Discover how a tronc scheme can save significant money for hospitality businesses and their employees
Tronc schemes have been around for a while, but although there may be an awareness of the name when hospitality businesses contact us, they are often unclear about how troncs work.
So we have developed this simple diagram that explains the monetary impact of an effective tronc for both employer and employee. Because troncs are a win, win for both parties and in today’s economic climate, there aren’t many instances where you can say that!
Let’s start at the beginning
A tronc is a pay arrangement that allows for the fair distribution of pooled tips and service charges given by customers to employees.
Troncs are becoming more prevalent as customers move away from paying by cash or leaving cash tips to card and contactless payment and tipping methods. However, when tips land in the business bank account, it becomes mandatory to pay the tips to employees through the payroll, and there begins the challenge as to how these should be distributed to employees.
It may seem as simple as adding to their pay, but by doing this, the tip amount attracts not only tax but also National Insurance for both the employer and employee. However, with a correctly set up tronc scheme, the tips are paid out to employees through the tronc and?do not incur National Insurance payments.
A financial win for all parties
If we take a sum of ￡100 in pooled tips as a simple example, without a tronc scheme, the employer will pay ￡13.80 (13.8%) National insurance (ERs), and the employee would pay ￡12.00 (12.00%) in NI (EE’s) in addition to their income tax, for all employees earning above the NIC thresholds.
What could your business do with the additional money saved?
With spiralling costs creating additional pressure on the hospitality sector, the fact that many businesses are paying unnecessary NI on pooled tips is shocking. Research in 2022 by IRIS Software highlighted the scale of this issue with 46% of businesses adding pooled tips to existing PAYE without the use of a tronc scheme which means it attracts ER's.
For hospitality sectors, the amount of pooled tips (and therefore NI charges on them can quickly add up. Here are a few typical examples;
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Just think of what could be done with these types of savings!
If you would like to see how the savings could stack up for your business and employees, take a look at our Tronc Calculator
More money for your employees too
Using a tronc scheme to distribute the tips, the same ￡100 would not attract National insurance on the amount for employees too.
With a tronc scheme in place, the employee would receive ￡80 for every ￡100 of tips (assuming an income tax rate of 20%). Without a tronc, the employee would only receive ￡68.00 from ￡100 of tips due to the National Insurance.
With tips often making up a considerable part of a hospitality employee’s take-home pay, this percentage increase is significant, especially as we are in the midst of a cost-of-living crisis.
What about the costs of the tronc administration?
You can decide to factor in the cost of administering the tronc through a third party, which can be as a percentage of the tips, a fixed fee, or a mixture of both.
Currently, this can be taken out of the tronc tips pool, and this arrangement would be made clear and agreed upon by the tronc members (employees). However, some clients we have worked with have decided to take on this cost rather than deduct it from the tips pool as a further commitment to their staff.
The much-awaited Employment Bill (Tipping Bill), referring to the allocation of tips, is designed to ensure all tips go to staff by making it unlawful for businesses to hold back tips and service charges from their employees. Although the sentiment of this proposed legislation is not disputed, there have been some grey areas about whether any costs incurred for managing tips, such as card fees and troncmaster third-party fees, could be taken from the pooled tips.
Whilst the code of practice is worked through over the next months, there is still no definitive answer on whether these will be able to be taken out of the tips or if they will be born by the employer. But, even if these costs become the employer’s financial responsibility, through the use of a tronc, the savings on National Insurance will more than cover this cost and will still see savings for employers and employees.
Want to know more about tronc schemes and how to get started? Contact our Troncmaster experts to?learn more.