New UK Tipping Act laws: what’s changing in October 2024?

In October 2024, new laws on the allocation of tips will be introduced in the UK.

The Employment (Allocation of Tips) Act 2023 aims to ensure that the staff who earn the tips receive the benefit. The Act is targeted at protecting hospitality staff, but also applies to other professions where workers receive tips paid by cash or card.

The draft act was introduced in September 2021, passed its third reading in the House of Commons in January 2023 and the House of Lords for further checks in March 2023. It will become law in October.

A new Code of Practice on tipping is to be published, which states that employers must demonstrate “fairness and transparency”, ensuring employees are rewarded for the tips they receive. According to the government, around two million workers will receive an extra £200 million due to the changes.

Employers need to consider what changes to make to their tipping allocation policy, how the new law will affect how they operate, and the impact it will have on pay and tax.

What is the new Tipping Act?

The new law, often referred to as the Tipping Act, states that all tips and service charges must be given to the staff who actually served the tipper, rather than being allocated at the company’s discretion. The new law covers tips from both cash and card payments.

The changes will primarily impact how hospitality sector employers distribute tips. That said, employers in other sectors that receive tips, including retailers, hairdressers and taxi drivers, will also be affected.

These businesses must now ensure workers receive the full benefit of tips. Under the new statutory code of practice, employers must:

• Publish and distribute to workers a written policy on tip allocation.
• Pay all qualifying tips to workers, including those on zero-hours contracts, within one month of when the tip was received, subject only to appropriate, authorised deductions (e.g. PAYE).
• Keep records of all tips and how they were distributed, and make these records available to workers on request.

The code outlines what is meant by “fairness” in relation to the new rules, how businesses can comply, and how the principles should be applied.

What rules are actually changing?

When will the new Tipping Act be introduced?

The Employment (Allocation of Tips) Act 2023 will become law in October 2024 in England, Scotland and Wales. It does not apply to workers in Northern Ireland, where employment law is devolved.

Why is the Tipping Act being introduced?

Some hospitality businesses use service charges to cover other costs they incur, including customers who leave without paying the bill, and administrative expenses such as credit card fees. This is one of the reasons the Act has been introduced, to ensure that tips and service charges are not diluted and 100% of them go to the staff who served the customer.

Many hospitality staff earn the National Minimum Wage or Living Wage and rely on tips to top up their salaries. Now, all tips and service charges must go to them, which may mean they receive more compensation for their work.

Another aim of the new act is to encourage high quality employee performance and service. Previously, not receiving the tip reward could blunt the attraction for employees to provide quality service and demotivate them.

What do employers need to do to prepare for the Tipping Act?

Employers must understand the new law and implement a new system, ready for compliant use in October. For the most part this will involve creating a policy for allocating tips. Employers must use ‘clear and objective’ factors to decide how tips are allocated and distributed among staff, utilising employee feedback.

Employers have some choice over their tip allocation policy, but they must publish their policy and distribute it to relevant workers. Employers have the discretion to offer employees in different roles more tips than others. For instance, staff dealing directly with customers may deserve more tips than the staff working behind the scenes.

As part of this, employers should:

• Identify who in your workforce is affected by the new law. This includes employees, workers on zero-hours contracts and qualifying agency workers
• Introduce a system to accurately classify what income received is tips so the business can demonstrate it does not control or influence that process
• Write a policy that allocates tips fairly and transparently
• Communicate the new policy effectively to all staff

Employers who have previously relied on tips to boost revenue will also have to assess the impact on their cash flow and adjust budgets.

What are the different ways to allocate tips?

Tip pooling is when all tips are pooled and shared amongst all staff, or separated and paid out by section, for example bar staff, kitchen staff, or front-of-house hospitality staff.

Hybrid tip pooling is when staff who receive a tip keep a certain percentage, usually 30% to 50%, and the rest is pooled and shared equally.

Tip pooling is usually arranged by a ‘troncmaster’, who is responsible for tip management. They report tip allocation details and transactions to HMRC.

Using a ‘troncmaster’ means tips are not liable for National Insurance, so employees receive the full amount, which is part of the aim of the Act.

Alternatively, each employee could simply keep their own tips. Such a system is easy to operate, and a troncmaster is not required. However, this can create rivalry amongst staff as they vie to get the most tips. The ‘fairness’ required by the Act may be compromised as the person who receives the tip might not be the person the consumer wishes to reward.

What does the law class as tipping?

Tips are paid by consumers at their own discretion to reward excellent service. They are not added to the bill.

Service charges, however, are included as an additional percentage added to a customer’s bill. Business owners set the amount or percentage rate of a service charge. Although not classified as tips, the new laws apply to service charges too, so they must also be shared fairly with employees.

Is there any change to pay and tax treatment?

There will be no change to how tips are treated for income tax, National Insurance (NI), and social security purposes. Whether the employer or employee pays NI depends on who tipped the employee and how the tips are distributed.

When employees receive tips directly from customers, they should report it through their personal tax account or self-assessment tax return, and no National Insurance contribution (NIC) is due. Under this arrangement, there is no tip pooling, so no employer payroll deductions are needed.

However, if an employer uses a tip pooling system to allocate tips, both the employer and employees may face PAYE and NIC charges. Tips that are allocated and distributed via a tronc system are liable for PAYE charges but not NIC.

Tronc administrators must ensure they structure arrangements to cover student loan deductions and pension contributions compliantly, as in some circumstances, the treatment can impact NICs.

What are the potential penalties?

Employers who don’t abide by the new rules could be taken to an employment tribunal by affected employees, who can use the new Statute – and the way their employer has integrated the code of practice when designing policies to comply with the new law – to support their claim.

Employers can potentially be prosecuted through an employment tribunal. Workers can be awarded up to £5,000 in compensation from the employer for any financial losses suffered because of the employer’s failure to pay them their tips correctly. Therefore, it is vital that employers understand the new rules and how to apply them.

Conclusion

The new laws on tipping allocation are designed to protect the employees who are serving customers, ensuring they are rewarded for their work.

The Act aims to ensure employees who earned the tip receive 100% of the benefit, and that employers do not keep tip income and use it to supplement business income.

The Act includes provisions to control how tip income is used and to ensure it is not used as part of an employee’s actual salary.

A new Code of Practice will be published to support the act and outline how employers should apply the act. It can also be used by employees at an employment tribunal.

Benjamin Salisbury - business journalist

Benjamin Salisbury is an experienced writer, editor and journalist who has worked for national newspapers, leading consumer websites like This Is Money and MoneySavingExpert.com, business analysts including Environment Analyst, AIM Group and written articles for professional bodies and financial companies. He covers news, personal finance, business, startups and property.