Tips and service charges: the new allocation rules

From October 2024, employers in the UK are legally required to pass tips and service charges to workers in full. The tips legislation — now incorporated into the broader Employment Rights Act 2025 framework — applies to any business where customers leave gratuities, whether by card, cash, or the automatic service charge added to a bill.

The core obligation is this: tips must go to workers. They cannot be kept by the employer to offset wages, absorbed into the general business account, or used to subsidise the wages of salaried managers who are not involved in direct service. Every tip, every service charge, every customer gratuity must reach the people it was intended for.

Employers must have a written tipping policy. That policy must be available to workers — not just posted somewhere accessible but actively made available, so that workers know it exists and can read it. The policy must explain how tips are allocated, who oversees the process, what happens with tips paid by card versus cash, and how agency staff who receive tips through a tronc arrangement are covered.

A tronc is a system for distributing tips collectively. If your business operates a tronc, a tronc master — typically an independent individual or a payroll provider — manages the distribution. The tronc master must allocate tips fairly, and the method of allocation must be transparent. HMRC has its own view of when tronc arrangements are operated correctly and when they carry additional tax risk, so the structure matters.

Fairness is the operative test. What does fair allocation look like? The legislation does not define a single formula — it allows employers and workers to agree on an allocation method, whether that is points-based on hours worked, a percentage of covers served, or any other reasonable basis. What is not acceptable is a method that systematically disadvantages certain groups — for example, excluding back-of-house staff from tronc distributions in a way that creates a discriminatory outcome.

Agency workers are expressly included. If you bring in agency workers who participate in service and who receive tips through a tronc or other collective arrangement, they must be included in the distribution on the same basis as direct employees. You cannot exclude them simply because they are engaged through an agency.

HMRC can investigate. The tips legislation sits alongside existing payroll obligations. Tips paid through payroll are subject to PAYE and NI. Tips distributed through a compliant tronc may have different tax treatment. Getting this wrong creates not just an employment law risk but a potential tax liability.

For businesses with high tip volumes — restaurants, hotels, spas, taxi services — the administrative requirement is real. Tracking which tips came in, on which shift, via which method, and distributing them to the right people requires a process. That process should be documented and consistent.

See our guide on employer obligations across ERA 2025 for the wider context of the tips provisions within the Employment Rights Act. Our HR policies guide covers which written policies are now legally required and how to keep them accessible.

Mellow's policy document store lets you publish your tipping policy in the employee self-service portal, so every worker can access it. [Start a free trial →](https://mellowhr.com/register)