Tips, Tronc & Service Charges

What does the UK tipping law require?

The Employment (Allocation of Tips) Act 2023 came into force on 1 October 2024. It's the biggest change to tipping law in UK history. Five requirements apply to every hospitality business:

1. 100% of qualifying tips go to staff. No deductions for admin costs, credit card processing fees, till shortages, or anything else. Cash tips, card tips, discretionary service charges — all of it reaches the people who earned it.

2. Tips paid within one month. Tips need to reach staff by the end of the month following the month they were received. A tip left on 15 June should be in the worker's hands by 31 July at the latest.

3. Distribution is fair. "Fair" doesn't mean "equal." Different roles, hours worked, and levels of customer interaction can justify different shares. But allocation needs to be transparent, consistent, and follow a documented policy.

4. Written tipping policy. If your business receives tips on more than an occasional basis — which is every hospitality venue — you need a written policy explaining how tips are collected, allocated, and distributed. This must be available to all staff.

5. Records kept for three years. Every tip received. Every distribution made. Available for inspection if a worker or tribunal requests them.

Most good operators were already passing tips on fairly. The law makes it official — and gives it teeth.

Source: GOV.UK — Tips, gratuities, service charges and troncs

What is a "qualifying tip"?

A qualifying tip is any tip, gratuity or service charge where the employer receives it or has significant influence over how it's allocated. That covers card tips, service charges added to bills, and any cash tips that pass through the business.

Cash tips that a customer hands directly to a server and the server keeps, with no employer involvement at all? Those aren't qualifying tips under this law.

Do tips count toward the National Minimum Wage?

No. Tips cannot be used to meet National Minimum Wage requirements. This has been the law since 2009 under the National Minimum Wage Regulations. If your server is on £12.71/hour (the NLW from April 2026 for workers aged 21+), tips sit on top of that.

How long can a worker complain about tip allocation?

Workers can bring a complaint about unfair tip allocation for up to 12 months after the issue occurred. Tribunal compensation can be up to £5,000 for financial loss.

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What is a tronc scheme?

A tronc is an organised system for pooling and distributing tips, gratuities and service charges among staff. The word comes from the French tronc des pauvres — the poor box in a church. In hospitality, it's a structured way of collecting tip income into a common fund and dividing it by agreed rules.

The person who manages a tronc is called the troncmaster. They set the allocation criteria and handle distribution. The troncmaster operates independently from the employer.

A tronc is not legally required — you can distribute tips without one. But a properly structured tronc provides a significant financial advantage.

Why do hospitality businesses use tronc schemes?

The main reason: National Insurance exemption.

When tips are distributed through a properly run, independent tronc, they are exempt from both employer's NIC and employee's NIC. Income tax is still payable (the troncmaster operates a separate PAYE scheme), but the NIC saving is substantial:

• Employer saves 15% on every pound distributed. For a venue distributing £100,000 in tips per year, that's roughly £15,000 in annual savings.
• Staff keep more. No employee NIC means more take-home pay. On £5,000 in annual tronc income, that's about £400 extra in staff pockets compared to the same money going through standard payroll.

A tronc also promotes transparency. When an independent person manages distribution by published rules, it reduces the perception that management is playing favourites.

Source: HMRC — Tips, gratuities, service charges and troncs

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Who can be a troncmaster?

The NIC exemption only applies if the tronc is genuinely independent of the employer. HMRC sets strict criteria, and the threshold for "influence" is low.

Who cannot be a troncmaster?

• The employer, owner, or any director of the business
• Anyone with authority over hiring, firing, or staff wages
• Anyone whose allocation decisions are directed or influenced by management

What does the troncmaster need to do?

• Have genuine discretion over how the tip pool is divided
• Operate a separate PAYE scheme registered with HMRC
• Maintain tronc records independently of the employer's payroll
• Make allocation decisions without direction from management

Even indirect influence can undermine independence. A text from the owner saying "go easy on the new starter's share" is exactly the kind of evidence HMRC looks for. If they determine the tronc isn't genuinely independent, the entire NIC exemption is lost — and the employer is liable for back-payments on all historical distributions. For a busy venue, that could be tens of thousands of pounds.

Source: HMRC Employment Income Manual — Tronc schemes

Internal vs external troncmaster — which is better?

Internal — a staff member who isn't in management and has no authority over other people's terms. Cheaper to run, but creates a single point of failure. If they leave, you need a replacement. The administrative burden (PAYE scheme, record-keeping, HMRC compliance) sits on someone who's also doing a day job.

External — a professional firm specialising in tronc administration. They handle PAYE, records, HMRC compliance, and distribution. There's a cost, but it removes the independence question entirely.

For most venues with meaningful tip volumes, an external troncmaster pays for itself through the NIC savings alone.

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Are service charges the same as tips?

For the purposes of the Tipping Act, yes. A discretionary service charge added to the bill is a qualifying tip if the employer receives it or controls it. Same rules apply: pass it on in full, distribute fairly, keep records.

The old practice of businesses retaining a percentage of service charges as revenue is no longer legal.

Mandatory vs discretionary: If your service charge is genuinely optional and the customer chooses to pay it, it's a qualifying tip. If it's a mandatory, non-discretionary charge that's part of the price, the position is less clear — but most service charges in hospitality are discretionary, even when pre-printed on the bill.

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What is the Statutory Code of Practice on tipping?

The Code of Practice on Fair and Transparent Distribution of Tips came into force alongside the Tipping Act on 1 October 2024. It provides guidance on:

• What "fairness" means in the context of tip distribution
• How to set up and communicate a tipping policy
• The role of tronc schemes and troncmasters
• Record-keeping requirements
• Dispute resolution

The Code is statutory — employment tribunals will take it into account when deciding claims. While it doesn't have the force of law itself, employers who follow the Code will have a much stronger defence if challenged.

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How is tronc income taxed?

Tronc payments are subject to income tax but exempt from National Insurance (provided the tronc is genuinely independent).

The troncmaster is responsible for operating a separate PAYE scheme for the tronc. This means:

• The troncmaster registers a PAYE scheme with HMRC in their own name (not the employer's)
• Income tax is deducted from tronc payments before they reach staff
• The troncmaster reports to HMRC through Real Time Information (RTI) like any other PAYE scheme
• Tronc payments appear separately from wages — ideally on a separate payslip or clearly itemised

The critical point: If tronc payments are processed through the employer's own payroll without a separate PAYE scheme, HMRC may treat them as wages — making them liable for NIC. This is also the scenario that triggered the Palanki holiday pay ruling (see below).

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Do tips have to be included in holiday pay?

This is an evolving area of law. In 2025, an Employment Tribunal ruled in Palanki v The Big Table Group that tronc payments should be included in holiday pay calculations. The employee worked at a Las Iguanas restaurant where tronc income sometimes made up around half of their total pay. When they took holiday, they received only basic pay.

The tribunal found that the tronc payments were part of the employee's normal remuneration. The key factors:

• The employment contract referenced the tronc system
• The troncmaster didn't have a separate bank account
• There was no separate PAYE scheme for the tronc
• Tips were paid through the employer's payroll on the same payslip as wages

This is a first-instance tribunal decision — it's not binding on other courts. But it's persuasive, and employment lawyers widely expect similar claims to follow.

How to protect yourself

If your tronc runs through your business payroll without a genuinely separate PAYE scheme and bank account, you're exposed on two fronts: NIC exemption risk and holiday pay liability.

The structural fix is the same for both: ensure your tronc is genuinely independent with its own PAYE scheme and bank account. That makes it much harder to argue the payments are "payable by the employer."

For more on how holiday pay is calculated, see our Holiday & Leave guide.

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What's changing in October 2026?

The Employment Rights Act 2025 strengthens the existing tipping rules further. Expected from October 2026:

Mandatory consultation with staff — when creating or changing your tipping policy, you'll need to consult with recognised unions, elected representatives, or workers directly.

Three-year policy review cycle — tipping policies must be formally reviewed and consulted on at least every three years.

Stronger enforcement — workers can bring tribunal claims if employers fail to consult or comply, with compensation of up to £5,000 for financial loss.

The Fair Work Agency — launched April 2026, this enforcement body has powers to investigate tipping compliance.

The secondary legislation is still being finalised, but the direction is clear: transparency and fair process are becoming legal requirements, not just good practice.

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Practical checklist

Should already be in place (since October 2024):

• Written tipping policy, accessible to all staff
• 100% of qualifying tips going to workers
• Tips distributed within one month of receipt
• Three-year record-keeping system running
• If using a tronc: independent troncmaster, separate PAYE scheme with HMRC

Worth reviewing now:

• Does your troncmaster have a separate bank account and PAYE scheme?
• Should tronc payments be reflected in holiday pay calculations?
• Do employment contracts reference tronc in a way that could create an implied entitlement?
• Are agency and zero-hours workers included in distribution?

On the horizon (October 2026):

• Staff consultation process for tipping policy changes
• Three-year formal review cycle
• Fair Work Agency enforcement

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