Tips and service charges in UK restaurants: the 2026 rules explained

If you run a restaurant in the UK, the way you handle tips and service charges is no longer a matter of house tradition. Since 1 October 2024, the Employment (Allocation of Tips) Act 2023, usually just called the Tipping Act, makes it a legal duty to pass 100% of tips, gratuities and service charges to your workers, to allocate them fairly, and to be able to prove it.

The rules are not complicated, but they are precise, and they touch payroll, VAT, your menus and even your bills. This guide walks through what the law actually says, how tips are taxed, what a tronc is and when it saves you National Insurance, what must appear on your menu, and finishes with a compliance checklist sized for a small independent restaurant.

One quick note before we start: tips are earned at the table, and a table only earns tips if someone is sitting at it. A free online booking system with 0% commission keeps your dining room full without skimming a fee off every cover, which matters when every pound of service charge now belongs to your team.

What changed on 1 October 2024: the Tipping Act in brief

The Employment (Allocation of Tips) Act 2023 inserted a new Part 2B into the Employment Rights Act 1996. It applies in England, Scotland and Wales, and it covers what the law calls "qualifying tips, gratuities and service charges": broadly, any tip your business receives or controls, including card tips and service charges added to the bill.

In plain terms, since 1 October 2024:

• 100% of qualifying tips must go to workers. No deductions are allowed except those required by law, such as income tax. You cannot keep a slice for card processing fees, admin costs or breakages.
• Allocation must be fair between the workers at each place of business, and that includes eligible agency staff working in your restaurant.
• Payment is time-bound. Tips must reach workers no later than the end of the month following the month in which the customer paid. A service charge collected in July must be paid out by 31 August.
• You need a written tipping policy if tips are paid at your restaurant more than occasionally, and it must be available to all your workers.
• You must keep records of how every qualifying tip was dealt with for three years, and workers have the right to request them.

The Act is backed by a statutory Code of Practice on the fair and transparent distribution of tips, also effective from 1 October 2024. Employment tribunals must take the Code into account, and a worker who wins a claim can see the tribunal order you to redo an allocation and pay compensation of up to £5,000.

Cash handed directly to a waiter and kept by that waiter, with no involvement from you, sits outside most of these duties: you never receive or control it. The moment tips flow through your till, your card terminal or your rules, the Act applies.

Tip, service charge or cover charge: what is the difference?

The three terms end up on the same bill but behave very differently in law and in tax. Getting the vocabulary right is half the compliance work.

Two traps hide in that table. First, a mandatory service charge is still a qualifying service charge under the Tipping Act, so you must pass it on in full to staff, yet for VAT purposes HMRC treats it as part of the consideration for the meal, so VAT is due on it even though you keep none of it. Many operators moved to discretionary service charges after October 2024 for exactly this reason. Second, a cover charge is not a tip at all: it is simply part of your pricing, the business keeps it, and VAT applies, but you should never present it as a gratuity.

HMRC's position on the VAT side is set out in its internal manual VATSC06130: freely given tips and genuinely optional service charges are outside the scope of VAT, while compulsory charges follow the same VAT liability as the meal "even if they are passed on in full to staff".

Your legal duties under the Tipping Act, one by one

Pass on 100%, with no deductions

Every qualifying tip must reach workers in full. The only permitted deductions are those required or authorised by statute, essentially tax and National Insurance through payroll. Card fees, till shortages, tronc administration software, uniform costs: none of these may be financed out of the tip pot.

Allocate fairly at each place of business

Fair does not have to mean equal. The Code of Practice lets you weigh factors such as role, hours worked during the period the tips were received, seniority and length of service, as long as the factors are clear, objective and applied consistently, without discrimination. A kitchen share is perfectly lawful, and common: front of house and back of house can both be included. What you cannot do is favour people arbitrarily, or exclude part-time or agency workers as a category.

Pay on time

The deadline is the end of the month following the month of payment by the customer. Monthly payroll runs comfortably meet this if tips collected in one month are paid with the following month's wages.

Publish a written tipping policy

If your restaurant receives tips more than occasionally (for almost every restaurant, that means yes), you must have a written policy for that site stating whether you require or encourage tips and how you allocate and distribute them. It must be available to all workers, including agency staff. A single page is enough if it is accurate.

Keep records for three years

For each qualifying tip: how much was received, how it was allocated, and how it was distributed. Workers can make a written request to see the tipping record for a past period, and you must respond within four weeks. If your tronc or payroll software produces a monthly statement per worker, you are most of the way there.

Tronc systems: how to run one properly

A tronc is simply an arrangement for pooling and sharing tips, run by a troncmaster. It has existed in British hospitality for decades, and the Tipping Act explicitly allows employers to meet their fair-allocation duty through an independent tronc.

The reason troncs remain popular is National Insurance. Under HMRC's E24 guidance on tips, gratuities, service charges and troncs, tips distributed through a properly independent tronc are free of both employer and employee National Insurance contributions, provided the employer does not decide, directly or indirectly, who receives what. Income tax is still due: the troncmaster runs a PAYE scheme, separate from yours, and is personally responsible for operating it correctly.

The independence condition has teeth. If the owner "suggests" the allocation, signs it off, or uses the tronc to top up favoured staff, the exemption collapses and NICs become due, with the employer liable. In a small restaurant the troncmaster is often a head waiter or manager elected by the team; larger groups use external tronc providers. Either way, document the tronc rules, let the troncmaster genuinely decide within them, and keep the tronc's records alongside your own.

If you distribute tips yourself through your own payroll instead, nothing is illegal about that, but every pound attracts employer NICs on top of the employee's tax and NICs. On a meaningful volume of service charge, that difference funds the cost of setting up a tronc many times over.

Tax on tips: who pays what

The Tipping Act changed who receives tips, not how they are taxed. HMRC confirmed in its E24 guidance that the 2024 legislation "does not change how these payments should be assessed for tax and National Insurance contributions". The rules:

One more payroll rule worth engraving above the office door: tips never count towards the National Minimum Wage. That has been the case for pay reference periods starting on or after 1 October 2009, and it is stated both in E24 and on the government's tips at work page. Base pay must reach the minimum wage on its own, before a penny of tips is added.

What to show on your menus and bills

Transparency towards customers is where employment law, VAT and consumer expectations meet.

• Any mandatory charge must be visible before the customer orders. HMRC's long-standing VAT analysis is that the menu forms the contract with the customer, so a compulsory service charge or cover charge that is not clearly stated on the menu is on shaky ground both contractually and fiscally. Print it on the menu, not just the bill.
• Label discretionary service charges as exactly that. Wording such as "a discretionary 10% service charge will be added to your bill; it is entirely optional and 100% is shared by the team" does three jobs at once: it keeps the charge outside the scope of VAT, it manages the customer's expectations, and it advertises that your team keeps every penny, which customers increasingly ask about.
• Keep the arithmetic honest. The service charge percentage applies to the food and drink total; do not compound charges or apply service on top of a cover charge.
• Align your prices with the new reality. If you absorbed a "house share" of service charge into your economics before 2024, that money now belongs to your staff, and your menu prices may need to carry more of the load. Our guide to restaurant menu pricing covers how to reprice without frightening regulars, and it pairs well with a clear-eyed look at your restaurant profit margins.

Compliance checklist for a small restaurant

Here is the whole law reduced to a checklist you can work through in an afternoon:

1. List every route tips enter the business: cash on tables, card tips, discretionary service charge, QR tipping, delivery platform tips. Anything you receive or control is qualifying.
2. Decide the allocation scheme: who is in the pool (include kitchen and eligible agency workers), what the split factors are (hours, role, seniority), and write them down.
3. Choose the distribution route: independent tronc (no NICs, separate PAYE, genuine troncmaster independence) or your own payroll (simpler, but employer NICs are due).
4. Write the one-page tipping policy for each site and hand it to every worker, including new starters and agency staff.
5. Set the payment calendar so tips collected in month N are always paid by the end of month N+1.
6. Set up record-keeping: a monthly log of amounts received, allocated and paid, retained for three years, with a process to answer a worker's written request within four weeks.
7. Check your menus and bills: mandatory charges stated before ordering, discretionary charges labelled optional, VAT treatment matched to each line.
8. Brief the team: staff who can explain the policy to a curious customer are your best proof of transparency, and tribunals look kindly on employers who can show exactly that.

Point 8 deserves one operational footnote. Fair distribution only matters if there is something to distribute, and the fastest way to grow the tip pool is to serve more covers with the same team. That is a bookings problem before it is a legal one: confirmed online bookings, automatic confirmation emails and fewer no-shows all translate directly into busier services. ViteUneTable's free plan does exactly that with no commission and no per-cover fees, forever, so the booking system never competes with your staff for the customer's money, and the Standard pack at €29 excl. VAT per month adds email reminders and Reserve with Google when you are ready.

What is coming next: worker consultation on tipping policies

The rules are not finished evolving. Following the Employment Rights Act 2025, the government drafted a revised statutory Code of Practice that would require employers to consult workers when developing or revising their written tipping policy. The draft was laid before Parliament in 2026 and then withdrawn for a further public consultation; until a new version is in force, the existing 2024 Code continues to apply. The practical takeaway: involve your team in the policy now. It costs nothing, it is very likely to become mandatory, and a policy the team helped write is a policy nobody takes to a tribunal.

Frequently asked questions

Can I deduct card fees or admin costs from tips?

No. Since 1 October 2024, 100% of qualifying tips must reach workers. The only permitted deductions are statutory ones such as income tax and National Insurance collected through payroll. Card processing fees, tronc software and admin time are business costs, not tip deductions.

Is a mandatory service charge covered by the Tipping Act?

Yes. Mandatory service charges are qualifying service charges, so the full amount must be passed to workers. Be aware that, unlike a genuinely optional charge, a mandatory service charge is part of the consideration for the meal and carries VAT at the meal's rate, per HMRC guidance.

Do kitchen staff and agency workers have to receive a share?

The law requires fair allocation among workers at the place of business, and eligible agency workers are expressly included. You are not obliged to give everyone an identical share, but excluding back of house or agency staff as a blanket category is very hard to defend as fair under the statutory Code of Practice.

Do tips count towards the National Minimum Wage?

No. Tips, gratuities and service charges have not counted towards National Minimum Wage pay since October 2009. Base wages must meet the minimum on their own.

What happens if I do not comply?

A worker can bring an employment tribunal claim. The tribunal must take the statutory Code of Practice into account and can order you to revise the allocation, pay what is due (including to other workers), and award compensation of up to £5,000 per worker for financial loss.

Does a tronc really save National Insurance?

Yes, when it is genuinely independent. Tips paid through a tronc whose allocation the employer does not control, directly or indirectly, are exempt from employee and employer NICs. Income tax remains due through the troncmaster's separate PAYE scheme. If the employer decides or influences who gets what, the exemption is lost.