Pillar Guide · Updated June 2026

Tips, Gratuities and Service Charges: Complete UK Tax and Legal Guide 2026/27

All tips, gratuities and service charges received by UK employees are taxable income subject to PAYE. Since October 2024, the Employment (Allocation of Tips) Act 2023 requires employers to pass all qualifying tips to workers in full with no deductions, allocate them fairly, maintain a written tips policy (employers with 10+ workers), and give workers a right to request their allocation statement. Employers who use a tronc arrangement avoid employer National Insurance on tip distributions but must maintain genuine independence of the tronc master. This guide covers the tax treatment, the 2023 Act obligations, tronc arrangements, service charge rules, record-keeping and worker rights.

Last updated: 10 June 2026Last reviewed: 10 June 2026How we verify

Key tips rules at a glance -- 2026/27

All tips taxable: income tax + employee NI via PAYE or self assessment since 1999
Employer NI on employer-controlled tips: 15% above £5,000 threshold
Tronc advantage: no employer NI on tronc distributions (independent tronc only)
Tips Act 2023 (in force Oct 2024): full pass-through, fair allocation, written policy
Tips cannot count toward NMW: confirmed by 2023 Act
Credit card fee deductions: prohibited since Oct 2024
Record retention: 3 years minimum for allocation records

How Tips are Taxed (PAYE since 1999)

Tips, gratuities and service charges are employment income and have been fully taxable in the hands of employees since the Finance Act 1999 removed the prior distinction between "directly received" cash tips and employer-pooled tips. The current position is:

Tips passing through the employer (including card tips, service charges and pooled tips) -- employer must deduct income tax and employee NI via PAYE before paying them to workers.
Tips distributed via a tronc -- the tronc master operates a separate PAYE scheme; employee NI is deducted but employer NI is not due (if the tronc is genuinely independent).
Cash tips received directly by the worker (not passing through employer or tronc) -- technically taxable and the worker should declare them on Self Assessment, though enforcement is limited in practice.

The income tax rates applicable to tips income are the same standard marginal rates: 20% basic rate (up to £50,270), 40% higher rate (£50,271 to £125,140), 45% additional rate (above £125,140) for 2026/27, applying on top of the Personal Allowance of £12,570.

Employee NI on tips income is 8% between £12,570 and £50,270 (2% above), the same rates as on regular employment income. Employer NI at 15% (above the secondary threshold of £5,000 from April 2025) applies on tips that pass through the employer's payroll -- this is the cost employers seek to avoid through tronc arrangements.

Employment (Allocation of Tips) Act 2023

The Employment (Allocation of Tips) Act 2023 received Royal Assent in May 2023 and came into force on 1 October 2024. It fundamentally changed the employer's obligations in relation to tips in UK hospitality, leisure, retail and other tipped sectors.

The four core obligations introduced by the Act:

Full pass-through: all qualifying tips must be paid to workers in full. No deductions are permitted -- not for credit card processing fees, not for administrative costs, and not to supplement the employer's own income.
Fair allocation: tips must be allocated fairly across workers. The statutory code of practice (published by ACAS and BEIS) provides guidance on what fairness means in practice. Factors may include hours worked, the role of the worker in serving the customer, seniority and contribution to the tipped service.
Written tips policy: employers with 10 or more workers must have a written tips policy and make it available to all workers on request. The policy must explain how tips are collected, allocated and paid.
Allocation statements: workers can request a written statement showing their individual tips allocation. The employer must respond within 4 weeks.

The Act applies to "qualifying tips" -- tips, gratuities or service charges received by the employer (not those paid directly by a customer to a worker). It does not compel customers to tip or set a minimum tip percentage.

Tronc Arrangements and the Tronc Master

A tronc is a voluntary pooling scheme for tips and service charges, operated independently of the employer by a designated tronc master. The primary purpose of a tronc is to distribute tips to workers without triggering employer National Insurance -- a saving of 15% above the £5,000 secondary threshold from April 2025.

For a tronc to achieve the employer NI exemption, it must satisfy HMRC that the tronc master operates genuinely independently of the employer:

The employer cannot dictate individual allocation decisions -- the tronc master determines who gets what.
The tronc master must register separately with HMRC for a PAYE scheme.
The tronc master files RTI Full Payment Submissions and deducts income tax and employee NI from each distribution.
Distributions are treated as employment income of the worker, not self-employment income.

The employer can set the overall framework -- for example defining which roles are eligible to participate in the tronc and the broad weighting basis -- but the day-to-day allocation must be the tronc master's independent decision.

Under the Employment (Allocation of Tips) Act 2023, the tronc mechanism is explicitly recognised as a compliant route for tip distribution, provided the tronc allocates tips fairly in accordance with the statutory code. Employers using a tronc still have an overarching obligation to ensure the allocation is fair -- they cannot use the tronc's "independence" as a shield against challenges from workers.

Service Charges vs Voluntary Tips

The legal and tax treatment of service charges depends on whether they are discretionary (optional) or mandatory (compulsory):

Type	VAT treatment	Income tax for worker	Tips Act obligation
Mandatory service charge	VAT applies (part of revenue)	Taxable via PAYE	Must pass through in full
Discretionary service charge	Generally no VAT if customer can remove	Taxable via PAYE	Must pass through in full
Voluntary cash tip (direct to worker)	No VAT	Taxable (worker self assessment)	Does not pass through employer -- outside Act scope

The practical effect of the 2023 Act is that the distinction between service charge and discretionary tip matters less than before from the worker's perspective: all qualifying tips that flow through the employer must now reach workers in full. The VAT treatment of mandatory service charges (VAT-inclusive, as it is part of the consideration for supply) remains unchanged.

Written Tips Policy Requirements

Employers with 10 or more workers must have a written tips policy as of 1 October 2024. The policy must be:

In writing (electronic is acceptable).
Made available to all workers on request -- within a reasonable time (best practice: 3 to 5 working days).
Kept up to date and reviewed when tips arrangements change.

The policy should cover:

How tips, gratuities and service charges are collected (card, cash, service charge pool).
How the total pot is allocated between workers (the allocation basis or formula).
Whether a tronc is used, and if so, who the tronc master is.
The pay frequency and timing of tip payments to workers.
How workers can request their individual allocation statement.
The process for raising concerns about tips allocation.

Employers with fewer than 10 workers are not legally required to have a written policy but are still bound by the substantive obligations of the Act (full pass-through, fair allocation, allocation statement right). Best practice is to implement a written policy regardless of size to demonstrate compliance and protect against tribunal claims.

Record-keeping Obligations

The Employment (Allocation of Tips) Act 2023 requires employers to retain records of tips allocation for at least 3 years. Records must be sufficient to demonstrate fair allocation and to respond to worker requests. Required records include:

Total tips collected each pay period (by payment method).
The allocation basis applied (formula, weighting, tronc master decision record).
Amount paid to each individual worker, per period.
Where a tronc is used: tronc master allocation records and RTI submissions.
Copies of any worker requests for allocation statements and the responses provided.

For PAYE and NI purposes, HMRC requires payroll records to be retained for at least 3 years from the end of the tax year to which they relate (the statutory minimum). In practice, 6 years is recommended to align with the HMRC enquiry window for income tax self assessments.

Many hospitality businesses use point-of-sale and payroll software that automatically captures tips collected by card and allocates them to workers. This creates an automatic audit trail. Cash tip pools should be documented manually or through a tronc master daily record sheet.

Worker Rights and Enforcement

Workers have the following statutory rights under the Employment (Allocation of Tips) Act 2023:

Full receipt: the right to receive all qualifying tips without employer deduction.
Fair allocation: the right to have tips allocated fairly in accordance with the statutory code of practice.
Allocation statement: the right to request a written statement of tips allocation at any time; employer must respond within 4 weeks.
Timely payment: tips should be paid in the same pay period they are collected, or the immediately following pay period at the latest.
No NMW offset: the right for base pay to meet NMW/NLW independently of tips.
Protection from detriment: workers cannot be dismissed or subjected to detriment for asserting their rights under the Act.

Enforcement routes for workers:

Internal complaint: raise formally with the employer using the tips policy complaints process.
ACAS early conciliation: before bringing a tribunal claim, workers must notify ACAS for early conciliation.
Employment Tribunal claim: workers can bring a claim for up to 2 years of withheld or unfairly allocated tips. The tribunal can order payment of the withheld amounts plus a compensatory award.

HMRC enforces the tax and NI aspects of tips -- underpayment of PAYE on tips, failure to operate a properly constituted tronc, or employer NI avoidance using sham tronc arrangements. The two enforcement regimes (employment law and tax) run in parallel. An employer facing both a tribunal claim and HMRC compliance check for the same tips arrangements faces compounded risk.

Frequently Asked Questions

Are tips taxable in the UK?

Yes. All tips, gratuities and service charges received by employees in the UK are taxable as employment income and subject to income tax and National Insurance contributions. This has been the position since Finance Act 1999, which removed the previous distinction between cash tips received directly by the employee (which were taxable but often unreported) and tips distributed through employer-controlled systems. Since 1999, all routes of receipt are taxable, and employers are responsible for operating PAYE on tips that pass through their hands.

What changed under the Employment (Allocation of Tips) Act 2023?

The Employment (Allocation of Tips) Act 2023 came into force on 1 October 2024 and introduced four key obligations for employers in hospitality, leisure and similar sectors: (1) all qualifying tips -- whether card, cash or service charge -- must be passed to workers in full with no deduction; (2) employers must allocate tips fairly and transparently; (3) employers with 10 or more workers must have a written tips policy and make it available to all workers on request; (4) workers have a right to request a statement of tips allocation and can bring employment tribunal claims if tips are withheld or unfairly allocated. The Act made it illegal for employers to use tips to supplement wages or to top up pay to minimum wage levels.

What is a tronc and who is the tronc master?

A tronc is an independent arrangement for pooling and distributing tips, service charges or gratuities to workers. A tronc master is the individual responsible for operating the tronc -- collecting the pooled tips and distributing them to workers according to the agreed allocation rules. The tronc master can be an employee (often a senior staff member) or an independent third party. The key tax advantage of a properly constituted tronc is that distributions made by the tronc master are not subject to employer's National Insurance contributions (currently 15% above £5,000). Income tax and employee NI still apply. To qualify for the employer NI exemption, the tronc must be genuinely independent of the employer's control -- the employer cannot dictate the allocation.

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What is the difference between a service charge and a voluntary tip?

A service charge is a mandatory or discretionary addition to a bill, typically 10-15%, added by the establishment. If it is mandatory (compulsory), it is subject to VAT and treated as part of the business's revenue. Whether it reaches workers -- and how much -- is governed by the Employment (Allocation of Tips) Act 2023 since October 2024: qualifying tips including service charges must be passed to workers in full. A voluntary tip is a direct, optional payment from a customer to a specific worker or the employer's pooling system. Under the 2023 Act, the distinction matters less for workers' rights than previously -- both are "qualifying tips" that must be allocated fairly.

Can an employer deduct credit card processing fees from tips?

No. Since the Employment (Allocation of Tips) Act 2023 came into force on 1 October 2024, employers cannot make any deduction from qualifying tips before passing them to workers. This specifically includes credit card processing fees (which some employers previously deducted at the point of tip collection). The full gross tip amount must reach workers. The only deductions that may be applied are income tax and National Insurance deducted via PAYE or through the tronc's payroll -- these are required by tax law and do not constitute an employer deduction from the tip itself.

Are tips included in minimum wage calculations?

No. Since 1 October 2009, tips, gratuities and service charges cannot be counted toward National Minimum Wage (NMW) or National Living Wage (NLW) compliance. An employer cannot pay a worker below NMW and then argue that tips make up the shortfall. Base pay must meet NMW/NLW independently of any tips. This was explicitly confirmed and strengthened by the Employment (Allocation of Tips) Act 2023. HMRC NMW enforcement visits to hospitality businesses routinely check that tips are not being used to supplement base wage payments.

What records must an employer keep for tips?

Employers with a qualifying tips arrangement must keep records sufficient to demonstrate fair allocation for at least 3 years. Required records include: total tips received (by payment method -- card, cash, service charge); the allocation basis used (the formula or method applied); amounts paid to each worker (by name and pay period); and if using a tronc, the tronc master's allocation records. Workers have a statutory right to request their individual tips allocation record at any time. Failure to keep adequate records or to respond to a worker request within 4 weeks can be cited in an Employment Tribunal claim.

What are the worker rights under the 2023 Tips Act?

Workers' rights under the Employment (Allocation of Tips) Act 2023 include: (1) the right to receive all qualifying tips in full without employer deduction; (2) the right to receive tips in the same pay period in which they were collected (or the next pay period at the latest); (3) the right to request a written statement of tips allocation within 4 weeks of request; (4) the right to bring an Employment Tribunal claim for up to 2 years of underpaid or withheld tips; (5) protection from detriment or dismissal for asserting these rights. Employment Tribunals can order employers to pay the withheld tips plus a further compensatory award.

How are cash tips treated for tax differently from card tips?

The tax treatment is the same in principle -- all tips are taxable employment income -- but the practical compliance route differs. Card tips and service charges pass through the employer's payment systems and must be processed through PAYE by the employer (or via the tronc). Cash tips given directly by a customer to a specific worker (not passing through the employer's tills) are a grey area in practice: technically taxable and reportable by the worker on their self assessment, but HMRC has limited practical enforcement leverage unless the employer is using cash tips to supplement wages. The trend toward card payments has reduced the prevalence of direct-to-worker cash tipping.

Does a tronc arrangement require its own PAYE registration?

Yes. A tronc operated by a tronc master who is independent of the employer must register separately with HMRC as an employer for PAYE purposes. The tronc master files RTI returns, deducts income tax and employee NI from distributions, and pays them to HMRC. The tronc does not pay employer NI (that is the tax advantage). In practice many troncs use payroll bureau services to manage the RTI compliance. Where the employer controls the tronc -- for example, a manager decides the allocation -- HMRC will treat the arrangement as employer-controlled and charge employer NI as well, negating the advantage.

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About the author

Emma Clarke

UK Tax Writer

Emma Clarke has been writing about UK personal tax since 2018, with a particular focus on Self Assessment, PAYE coding and the practical mechanics of how HMRC actually applies the rules to ordinary salaries. Her work concentrates on translating the dense language of HMRC manuals and Finance Act schedules into worked examples that show, pound by pound, how income tax and National Insurance reduce a gross salary to the figure that lands in a UK bank account. Emma covers the full PAYE lifecycle: tax codes (1257L, BR, K codes, emergency codes), the Marriage Allowance, the High Income Child Benefit Charge, salary sacrifice arrangements and their effect on pensionable pay, the Apprenticeship Levy, and the differences between the rUK and Scottish income-tax regimes. She is particularly interested in the edge cases that catch PAYE employees out — the £100,000 personal-allowance taper, the 60% effective marginal rate it creates, and the interaction between student-loan plans and pension contributions. Every figure in Emma's articles is verified against the current HMRC rates pages and worked through a Self Assessment calculation by hand before publication. She writes to CalcHub's editorial standards: primary-source citations, plain English, no promotional language, and clear "this is general information, not financial advice" disclaimers where appropriate.

Personal-finance writer since 2018
UK tax specialism — PAYE, Self Assessment, National Insurance
Writes to CalcHub editorial standards (primary-source citation, annual review)

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Last updated: 10 June 2026How we verify

Disclaimer: This guide reflects UK tips tax and legal obligations as of June 2026, including the Employment (Allocation of Tips) Act 2023 in force from October 2024. The statutory code of practice on tips allocation is published by ACAS and BEIS and may be updated. Employment tribunal decisions may develop the law further. See gov.uk for current official guidance. Complex tronc arrangements should be reviewed with a payroll specialist or employment lawyer.