Tips and service charges: the rules for hospitality employers
Every tip must reach the staff in full, a written policy is required, and now workers must be consulted on it. How to run tips fairly, and how they are taxed.
Since the Employment (Allocation of Tips) Act 2023 took effect, employers must pass on all tips, gratuities and service charges to workers, without deductions other than tax. Allocation must be fair and transparent, and there must be a written policy that staff can see. The Employment Rights Act 2025 adds a duty to consult workers when the policy is written or revised.
Running tips well
- PolicyWrite down how tips are shared, who decides, and when they are paid.
- ConsultAsk workers at the site for their views before you set or change it.
- Pay on timePass every tip on by the end of the month after it was received.
- Keep recordsRecord what was received and how it was shared.
How tips are taxed
Tips are always subject to income tax. Whether National Insurance is due depends on who decides how they are shared. Where an independent troncmaster runs the scheme, without the employer’s involvement, payments are usually free of National Insurance. Where the employer decides, they are treated as earnings.
Common pitfalls
- Card payment fees cannot be taken out of staff tips.
- Tips cannot be used to top pay up to the minimum wage.
- Agency workers who work your shifts must be included.
The statutory code of practice is being revised after the Employment Rights Act 2025, with a public consultation to come. Until then, the existing code applies.
Sources
This insight is general information, not advice for your circumstances. Talk to us before acting on it.