Guide
Comply with tipping law in hospitality
How to comply with the Employment (Allocation of Tips) Act 2023 as a hospitality employer. Covers fair distribution rules, written policies, tronc schemes, VAT treatment, and the upcoming October 2026 consultation requirements.
Since October 2024, employers must distribute tips, gratuities, and service charges fairly to workers. The rules apply to all businesses where customers leave tips, but they have the greatest practical impact in hospitality — restaurants, hotels, bars, cafes, and takeaways.
Getting this wrong exposes you to employment tribunal claims and reputational damage. This guide explains the legal requirements and how to set up a compliant system.
Choosing how to distribute tips
The Act does not prescribe a single method. You must choose an approach that is fair and transparent for your business. Common approaches in hospitality include:
- Points-based system — assign points by role, seniority, or hours worked. A head chef might receive 1.5 points per hour while a commis chef receives 1.0. Tips are divided by total points.
- Equal split — divide tips equally among all workers on shift. Simple but may not reflect different roles.
- Front-of-house / back-of-house split — allocate a percentage to kitchen staff and the remainder to servers. A typical split is 70/30 or 80/20.
- Tronc scheme — an independent arrangement run by a troncmaster (not the employer) who allocates tips. Offers tax advantages.
Whatever system you choose, you must document it in your written tipping policy and ensure all workers understand how it works.
Setting up a tronc scheme
A tronc is the most tax-efficient way to distribute tips. The key features are:
- An independent troncmaster (not the business owner or a director) collects and distributes tips
- The employer has no control over how tips are allocated — this independence is essential for the tax treatment
- Tips distributed via a tronc are not subject to employer National Insurance contributions (saving approximately 13.8% on every pound distributed)
- Workers still pay income tax on tronc payments — the troncmaster must operate PAYE
If HMRC considers the employer controls the tronc (for example, by dictating allocation percentages), the NI exemption is lost. The troncmaster must genuinely make independent decisions about distribution.
VAT treatment of tips and service charges
How you structure service charges affects your VAT liability. Get this wrong and you may owe VAT you have not collected.
If you add a mandatory service charge that customers cannot remove, it is part of the price and you must charge VAT on it. If your service charge is optional (the bill states it can be removed on request), it is outside the scope of VAT. Most hospitality businesses use optional service charges for this reason.