Tips, Gratuities and Service Charges: UK Tax and Legal Rules 2026
How tips are taxed in the UK, the Employment (Allocation of Tips) Act 2023, service charges vs voluntary tips, tronc arrangements, and your right to see tip records.
How tips are treated for tax: the basics
In the UK, tips and gratuities have been fully taxable as employment income since April 1999. There is no threshold, no tax-free allowance, and no distinction between cash and card tips for tax purposes. All tips must ultimately pass through the PAYE system.
This means:
- Income tax is due at the worker's marginal rate (20%, 40%, or 45%).
- Employee National Insurance at 8% (up to the Upper Earnings Limit) is due.
- Employer National Insurance at 13.8% is due on tips that pass through the employer's hands.
The key question -- which has significant NIC implications -- is whether tips pass through the employer, or are allocated independently through a tronc.
Voluntary cash tips left directly for a worker
If a customer leaves cash directly for a specific worker (e.g. leaves notes on the table at the end of a meal, addressed to the server), and the employer plays no role in collecting or allocating that cash:
- The tip is still taxable income.
- The worker must declare it via Self Assessment if the employer does not process it through PAYE.
- Employer NIC does not apply (the employer is not handling it).
- Employee NIC still technically applies, reported through the worker's own tax return.
In practice, HMRC acknowledges that direct cash tip enforcement is difficult. However, the legal position is clear: the income is taxable, and workers have an obligation to declare it.
Card tips and mandatory service charges
When a tip is added to a card payment, the money goes to the employer before being distributed to workers. In this case:
- The employer must pass it to workers via PAYE.
- Both employee and employer NIC apply (unless a tronc is used).
- The employer cannot keep any portion of the tip after 1 October 2024 (see below).
A mandatory service charge (where the bill states "a 12.5% service charge will be added") is always taxable, regardless of whether it is described as discretionary on the menu. If it is on the bill and collected, HMRC treats it as taxable pay. The same applies to "optional" service charges that are rarely removed in practice.
Employment (Allocation of Tips) Act 2023
The Employment (Allocation of Tips) Act 2023 came into force on 1 October 2024. It fundamentally changed the legal position on employer retention of tips.
Key provisions
1. All qualifying tips must reach workers
Employers cannot retain any share of qualifying tips. "Qualifying tips" means tips, gratuities, and service charges that are subject to the employer's control (i.e. not cash left directly by customers to workers).
2. Allocation must be fair and transparent
HMRC/ACAS published a statutory Code of Practice on tip allocation which took effect alongside the Act. Employers must allocate tips in accordance with this Code. The Code does not prescribe a single method but requires the allocation to be objectively fair and not discriminatory.
Factors that may legitimately influence allocation include:
- Type of role (front-of-house vs back-of-house).
- Hours worked.
- Length of service.
- Performance.
Factors that must not influence allocation:
- Protected characteristics (age, race, sex, disability).
- Whether the worker is on a zero-hours contract vs permanent contract.
- Immigration status.
3. Written tips policy required
Every employer who receives or collects tips must have a written tips policy in place, available to all workers. It must explain how tips are collected, how they are allocated, and when they are paid. The policy need not be long, but it must exist and must be accessible.
4. Records for 3 years
Employers must keep records of tips received and how they were allocated for at least 3 years.
5. Worker's right to request information
Workers have a statutory right to request information about their employer's tip arrangements, including how their individual tips are allocated. Employers must respond within 4 weeks. Workers can bring a claim to an employment tribunal if the employer fails to comply or if they believe their tips have been unfairly withheld.
Enforcement
Employment tribunal claims can be brought for:
- Failure to comply with the allocation requirement.
- Failure to maintain a written policy.
- Failure to provide information on request.
Tribunals can order the employer to pay workers the tips they are owed and can make additional compensation awards. There is no cap on the amounts recoverable.
Tronc arrangements
A tronc is a pooled tips system operated by an independent troncmaster rather than the employer. The troncmaster receives pooled tips (from card payments, pooled cash, or service charges) and distributes them to workers according to the agreed tronc rules.
The NIC advantage
The key benefit of a genuine tronc is National Insurance. If the tronc is genuinely independent of the employer:
- Employer NIC does not apply to tronc distributions (saving 13.8%).
- Employee NIC does not apply to tronc distributions (saving 8% up to the UEL).
- Income tax is still due and must be collected by the troncmaster operating a PAYE scheme.
For a restaurant paying out £200,000 per year in tronc, the saving on employer NIC alone is £200,000 x 13.8% = £27,600 per year.
What makes a tronc genuine?
HMRC scrutinises tronc arrangements. For a tronc to be genuine:
- The troncmaster must have genuine autonomy over allocation decisions.
- The employer cannot direct or override the troncmaster's decisions.
- The tronc must not simply replicate the employer's wage structure.
- The tronc scheme document should be independent.
Where HMRC considers the employer has effective control, the NIC exemption will be denied.
Tronc and the 2023 Act
Even with a tronc, the employer must still ensure the overall arrangement complies with the Employment (Allocation of Tips) Act. The Act applies to the employer's obligations regarding allocation fairness and records -- the existence of a tronc does not exempt the employer from these obligations.
Worked example: card tip through PAYE vs tronc
Scenario: A restaurant collects £5,000 in card tips in a month. 10 workers share the pool equally (£500 each). Average worker marginal rate: 20%. All workers earn between the Lower Earnings Limit and the Upper Earnings Limit.
Route 1: Tips through employer payroll (PAYE + NIC)
| Item | Amount |
|---|---|
| Tips to distribute | £5,000 |
| Employer NIC (13.8%) | £690 |
| Employee NIC (8% on £5,000) | £400 |
| Income tax (20% on £5,000) | £1,000 |
| Net received by workers | £3,600 |
| Cost to employer | £5,690 |
Route 2: Genuine tronc
| Item | Amount |
|---|---|
| Tips to troncmaster | £5,000 |
| Employer NIC | £0 |
| Employee NIC | £0 |
| Income tax (20% on £5,000) | £1,000 |
| Net received by workers | £4,000 |
| Cost to employer | £5,000 |
The tronc route saves workers £400 in NIC and saves the employer £690 in NIC. Workers receive £400 per month more in net pay.
What records should workers keep?
Workers in the hospitality sector should keep their own records of tips received, particularly if any cash tips are not processed by the employer. These records help complete Self Assessment returns accurately. Records should include:
- Date and amount of cash tips received.
- Any tip pool share-out records provided by the troncmaster.
Workers have 22 months after the end of the tax year to file a Self Assessment return and disclose undeclared cash tips.
Sources
Frequently asked questions
Are tips and gratuities taxable income in the UK?
Yes. All tips, gratuities, and service charges received by workers in the UK are taxable as employment income and must go through PAYE. This has been the case since 1999. There is no minimum amount below which tips are tax-free. Workers must declare cash tips on a Self Assessment return if their employer does not collect tax through PAYE.
What does the Employment (Allocation of Tips) Act 2023 require?
In force from 1 October 2024, the Act requires employers to pass 100% of qualifying tips to workers without deduction. Employers must have a written tips policy, allocate tips fairly (following a statutory Code of Practice), and keep tip records for 3 years. Workers can request to see their employer's tip records and can bring claims to an employment tribunal if the employer fails to comply.
What is a tronc arrangement?
A tronc is an independent tip-sharing arrangement managed by a troncmaster (usually a senior employee or independent person) rather than the employer. The troncmaster distributes pooled tips among workers. If the tronc is genuinely independent, National Insurance Contributions do not apply to tronc distributions, though income tax is still due. Post the 2023 Act, tronc arrangements must still comply with the fair allocation requirements.
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