If your organisation collects service charge and or gratuities via credit/debit cards, you must operate PAYE on these payments as part of the normal payroll.
Moreover, the tips received by credit/debit cards are initially paid to proprietor of the organisation. They represent monies previously paid to an employer and if employer re-allocates these tips to staff, tax as well as National Insurance Contributions (NIC's) are payable on these tips. When credit/debit card tips are pooled and shared other rules may apply (see Tronc management).
Firstly, the organisation is liable for paying tax on these tips. If you hand out an equivalent amount of cash, assuming that staff should declare it via self-assessment, the company is still liable for paying tax.
Secondly, this approach introduces the need to pay National Insurance Contributions from employer. This means that staff get even less of their tip money and there is an extra cost for the employer to pay NIC’s.
If your staff pool tips, the person (other than employer) responsible for arrangements to share tips amongst employees is known as Troncmaster.
Employer must tell HMRC who is the employee who is responsible for sharing tips.
Once the troncmaster is identified, from this point onwards, they are personally liable of all aspects of operating a seperate PAYE scheme. ‘He or she may be held responsible for any failure to deduct tax from payments from the tronc.’ (HMRC, E-24, 2015)
National Insurance on tips is not payable if money allocated by the Troncmaster was not originally paid to employer and employer doesn’t pay the money to employees (directly or indirectly).
Also, payments of tips do not attract NIC’s if employer doesn’t decide on the allocation of those tips (directly or indirectly).
More information about service charge, tronc and tip management can be found here https://www.gov.uk/government/publications/e24-tips-gratuities-service-charges-and-troncs. We advise that you consult with your accountants about your current practice.