Allocation of Tips

The Employment (Allocation of Tips) Act 2023 looks set to change how hospitality businesses treat their loose change. In this article, we dig deep to reveal what the new legislation could mean for employers and employees.

The basic principle behind the new law will require businesses to fairly distribute all tips, gratuities and service charges. While the bill received Royal Assent in May 2023, the Government has not yet announced a start date for the changes, but it is expected in the first half of 2024. The delay is down to the details of the legislation being created, including a new statutory Code of Practice involving a public consultation.

Who will be affected by the Allocation of Tips rules?

According to the UK Government, around two million workers in the hospitality industry will benefit from the changes, which will impact the cash flow of employers. The rules cover “spontaneous” payments such as a tip or gratuity, made voluntarily by a customer for good service, and service charges added to a bill.

What are the current rules?

In a restaurant, cash tips given directly to a member of the waiting staff can either be kept by them, or the employer can state they are distributed equally among all waiting staff (in accordance with the terms of employment).

Tips and service charges paid by card go straight to the restaurant owner, who can decide to keep them or create a “tronc” – basically an independently controlled fund for the waiting staff.

Tax rules mean VAT is payable on service charges but not tips given voluntarily. Tips given directly to staff are tax free, while those distributed by an employer via a tronc are subject to PAYE, income tax and national insurance contributions.

What is the reason for the changes?

The current system is open to abuse, with some employers being accused of withholding tips and service charges, or charging staff an admin fee for handling the extra money. While most employers adopt fair practices, deductions of up to 5% are still common in the hospitality industry.

The new laws, when passed, will amend the Employment Rights Act 1996 by adding new clauses covering the distribution of tips and service charges. There will also be clarification of “qualifying tips, gratuities and service charges”.

Essentially, employers should adopt a policy of passing on all qualifying tips fairly and with no deductions, apart from taxes. Payments should be made to staff by the end of the month following the month when the tip was given. Records should be kept for three years.

Key additions include closing a loophole that omitted agency workers from agreements, and outlawing deductions by employers (other than those required by law).

Importantly, staff and agency workers will now be able to bring Employment Tribunal claims relating to the payment of qualifying tips. Employers could be forced to pay compensation of up to £5,000 to cover any financial loss due to non-compliance.

Need advice on the Employment (Allocation of Tips) Act 2023?

While the new legislation aims to protect workers, it also creates some important considerations for employers. Before the act comes into force, hospitality businesses need to understand their new obligations and whether or not to pass on admin charges to customers.

If you are concerned about how your business will meet the challenge posed by the new rules, get in touch with myself at JT HRConsultancy. We are an established HR services company based in Bedfordshire with clients across the UK. Call 07715 026128 or email

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