Service Charge and Tips: What UK Law Says

Since October 2024, UK cafés, restaurants and takeaways have had to follow a law on how tips and service charges are shared with staff. Many small businesses already did the right thing, but the law now sets out what "the right thing" is, and gives workers a way to challenge it. This guide explains what the law says about service charges and tips, what you need to have in place, and how to handle them at the till.

It is a plain summary, not legal advice. The government's statutory Code of Practice on fair and transparent distribution of tips is the full guidance.

The law in brief

The Employment (Allocation of Tips) Act 2023 came into force on 1 October 2024. In short, employers must:

• pass on all qualifying tips to workers, with no deductions other than tax
• share them fairly between workers, following the Code of Practice
• pay them out no later than the end of the month after the month the customer paid them
• have a written tipping policy that workers can see
• keep a record of the tips received and how they were shared, for three years

Workers can ask for information about how tips were dealt with, and can take a claim to an employment tribunal if the rules aren't followed.

Which tips are covered

The law covers tips, gratuities and service charges that the business receives or controls. That includes:

• card tips added on the card machine, the QR menu or an online order
• service charges, whether you call them discretionary or optional
• cash tips that are handed to the business, put in a shared jar or collected by managers to be shared

A cash tip that a customer gives directly to one member of staff, and which they keep without the business being involved, isn't covered. If the business collects cash tips and shares them out, they are.

What "fair" means

The law doesn't set a formula. The Code of Practice asks employers to share tips in a way that is fair and transparent, and to be able to explain the method. Things you can take into account include:

• the hours each person worked
• the role they do and whether it is customer-facing
• seniority or length of service
• performance, if it is measured fairly

Many cafés share by hours worked, sometimes with front-of-house and kitchen staff in separate pools. What matters is that the method is written down, applied the same way each time, and can be explained to staff.

Owners and the business itself can't keep tips. A working owner who is also a worker in the business can only share in the tips for the work they do alongside staff, not as the owner.

Your written tipping policy

If you get tips more than occasionally, you need a written policy and you must tell workers where to find it. Keep it short. It should say:

• how tips are collected (card, cash, service charge)
• who shares in them
• how they are split, for example by hours worked
• when they are paid, and how
• whether a tronc is used, and who runs it
• who to ask with questions

Pin it in the staff area and keep a copy with your staff handbook.

Records you need to keep

You need a record of the tips you received and how you shared them, kept for three years from the date the tips were received. A worker can ask for their own record, and you must give it to them within four weeks.

A practical record for each period shows the total tips received, split by card, cash and service charge, the hours each person worked, and what each person received.

Service charges and showing prices

A service charge is an amount added to the bill for service, usually a percentage. In the UK:

• A service charge must be clear before the customer orders. Put it on the menu and on the bill, not only in the small print.
• An optional or discretionary service charge can be added to the bill, but customers can ask for it to be removed. Staff should remove it without fuss.
• A compulsory charge that every customer must pay is part of the price. Consumer law requires mandatory charges to be included in the price you show, not added at the end.
• Service charges are covered by the tipping law like tips, so they must be passed to workers.

Avoid calling a charge "optional" if staff are told not to remove it. That can mislead customers.

Tax and National Insurance on tips

Tips are taxable income for the worker. How they are taxed depends on how they are paid:

• Tips paid through payroll are subject to income tax under PAYE. Whether National Insurance is due depends on who decides how they are shared.
• A tronc, where tips are shared by an independent person (the troncmaster) rather than the employer, means National Insurance is not usually due on the tips, though income tax still is.
• Cash tips kept directly by the worker should be declared by the worker to HMRC.

Tronc schemes have their own rules and must be registered with HMRC. If your tips are large enough for National Insurance to matter, it is worth talking to your accountant or payroll provider about one.

Tips can't be used to top up pay to the National Minimum Wage. The minimum wage must be paid in full before any tips.

VAT on tips and service charges

A tip that is genuinely voluntary is not part of the price, so it is outside the scope of VAT. A discretionary service charge that customers can refuse is also usually outside the scope of VAT. A compulsory service charge is part of the price and VAT is due on it.

A worked example in pounds

Here is how a fortnight of tips might be shared by hours worked. The café takes £840 in tips over two weeks: £610 on card and £230 in cash collected in the shared jar.

Each person's share is their hours divided by the total hours, multiplied by the tips. The record of this table, kept with the hours and the totals, is what the law asks for. If you share kitchen and front-of-house tips in separate pools, do the same sum for each pool.

Shares rarely come out to whole pennies. Decide how you round, so the shares always add up to exactly what was received, and write it in your policy.

Common mistakes

• Deducting card fees from tips. The law doesn't allow deductions other than tax, so card processing fees on tips can't be taken from staff.
• Keeping service charges. A service charge is covered by the law and must go to workers.
• No written policy. If you get tips regularly, you need one.
• No records. Without a record of hours and amounts, you can't show the split was fair.
• Paying late. Tips must be paid by the end of the month after the month they were received.

How it works in Café QR

Café QR records tips and service charges separately from sales, and shares tips by hours worked.

• Tips at the till, on the QR menu and at pay at table are recorded with how they were paid, so the tips report and the cash drawer count can tell cash tips from card tips.
• Service charge is set as a percentage in Settings and shows as its own line on the bill. Reports and the daily accounting journal keep service charge and tips apart from sales.
• Shared by hours worked. The time clock shares the fortnight's tips by the hours each person clocked, split to the penny so the shares add up to the total.
• Hours from the time clock. Staff clock in and out on the till with their own PIN, so the hours behind the split are recorded as they happen.

The tips report and the hours-based share help with your records; your written tipping policy is still up to you. The time clock is in the POS plan at £39 per venue a month, or the "Till and cash-up" add-on at £15 a month on Order & Pay. See how the time clock and tips work.

Related reading

• Free Staff Rota Template for Cafés (Excel Download)
• Café Profit Margins
• Best Card Machines for Small Cafés in the UK