Comply with tipping law in hospitality

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 written policy and record-keeping duties apply where tips are paid more than on an occasional and exceptional basis.

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.

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.