Hospitality workers overpaying national insurance on tips

More than 1.2 million hospitality staff in the UK are paying too much national insurance on their tips, according to research from Iris Software Group.

The overpayment stems from 46% of companies in the hospitality sector adding pooled tips to existing PAYE or payroll without using a tronc system to evenly share tips, gratuities and service charges given by customers with staff.

A tronc scheme is exempt from national insurance contributions (NICs) under HMRC rules, meaning all tips handled through such a system would be fully returned to workers. 

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In addition to cash tips, 64% of restaurants, cafes, pubs and bars accept card tips, while more than 50% of companies use a service charge. All methods need to be shared with staff through payroll in order to comply with tax law. 

Stuart Stephen, vice president of managed services at IRIS, said companies should be working harder to protect their employees' money.

He said: “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.”

The long-planned reversal of NIC increases also came into effect in the UK this week (6 November). Most employees will start to receive this tax cut directly through payroll during November, with all workers expected to receive the the tax cut by February.

Bhanu Dhir, group chief executive officer at employment support charity Steps To Work, said it is crucial that HR teams understand the new changes thoroughly.

He told HR magazine: "With the reversal of the 1.25% rise in NIC taking effect, employers across the nation should ensure that they use this as an opportunity to reinvest funds saved into growing their businesses, whilst attracting and retaining top talent. Smaller companies and those sectors heavily impacted by the pandemic, such as hospitality and retail, will feel relief as owners can now reinvest freed-up cash into their business to support growth or help mitigate the impacts of inflation.

"It is crucial that staff and HR departments are aware of all changes. Therefore, if not done already, employers should be transparent and immediately have conversations with their employees and especially their payroll teams about any changes that will impact them."