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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.

Guide summary

You must distribute tips, gratuities and service charges fairly to your workers by the end of the month after you get them. Write a policy explaining how you share tips, keep records for 3 years, and never deduct anything except tax and National Insurance. Workers can ask how tips are shared and you must reply within 28 days.

  • Write a policy that explains how you share tips
  • Share tips fairly between workers — consider role, hours and seniority
  • Do not take money from tips except for tax and National Insurance
  • Give tips to workers by the end of the month after you receive them
  • Keep records of tips received and how you shared them for 3 years
  • Reply to worker requests about tips within 28 days
  • Set up a tronc scheme to save 15% employer National Insurance
  • Make sure a troncmaster — not you — controls how tips are shared in a tronc
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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.

The Employment (Allocation of Tips) Act 2023 applies in Great Britain only (England, Scotland, and Wales). It does not extend to Northern Ireland, where employment law is devolved and no equivalent statutory tipping regime is in force.

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 15% on every pound distributed at the employer NICs rate in force since 6 April 2025)
  • 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.

  1. 1

    Draft your written tipping policy

    Set out how tips are collected, pooled, and distributed. Explain the allocation method (points, equal split, percentage split). State whether you operate a tronc. Include how agency workers and part-time staff are treated.

  2. 2

    Appoint a troncmaster (if using a tronc)

    Choose an independent person — typically a senior member of staff who is not an owner or director. Register the tronc with HMRC for PAYE purposes. The troncmaster must keep their own records and operate payroll on tronc distributions.

  3. 3

    Set up your allocation process

    Ensure tips are allocated to workers by the end of the month following receipt. For card tips collected in January, workers must receive their share by the end of February.

  4. 4

    Communicate the policy to all workers

    Give every worker a copy of the tipping policy. Make it available to new starters as part of their induction. Display it where staff can easily find it.

  5. 5

    Set up record keeping

    Record all tips received (cash, card, digital), how they were allocated, and to whom. Keep records for 3 years. Workers can request this information and you must respond within 28 days.

  6. 6

    Review your service charge structure for VAT

    If you add a service charge to bills, ensure it is clearly optional (can be removed on request) to keep it outside the scope of VAT. If it is mandatory, you must account for VAT on it.

Penalties for non-compliance

Workers can bring employment tribunal claims if you breach the tipping rules. Tribunals can order you to pay any tips owed plus compensation. Fair Work Agency enforcement powers are expected around October 2026, subject to commencement regulations. Repeated breaches risk reputational damage — staff and customers increasingly expect transparent tipping practices.

Changes expected around October 2026

The Employment Rights Act 2025 is expected to strengthen tipping law around October 2026, subject to commencement regulations. Once commenced, before making any changes to your tipping policy, you will need to consult with workers. You will also be required to carry out a triennial review of your tipping policy at least every 3 years. Start preparing now by documenting your current policy and establishing a consultation process.

Official guidance