Tips, service charges and troncs: keep customer money visible until workers are paid

Since October 2024, UK tipping law has required qualifying tips, gratuities and service charges to be allocated fairly and passed to workers without employer deductions. For hospitality finance teams, that creates a banking obligation as well as an employment-law obligation: card tips and service charges need to be identified, allocated and paid to workers on time.

Qualifying tips must be passed to workers fairly and without employer deductions

The Employment (Allocation of Tips) Act framework requires employers in England, Scotland and Wales to ensure qualifying tips, gratuities and service charges are allocated fairly to workers. Government guidance says employers must pass all in-scope tips to workers without deductions other than those required by law, such as tax.

Do not treat card tips as ordinary restaurant revenue simply because the acquirer settles them into the same bank account as food sales. The accounting system should identify the amount attributable to workers from the moment the card settlement is reconciled.

Tips must normally be distributed by the end of the following month

The statutory code says employer-received tips must be distributed to workers no later than the end of the month following the month in which the customer paid them. A tip received on 23 June must therefore be distributed by 31 July at the latest.

That gives the finance team a legal timetable. Weekly or monthly tronc payroll can be faster, but a business cannot indefinitely retain tips as working capital. Maintain an unallocated-tips ledger so management can see what must still be paid to workers.

An independent tronc can allocate tips, but independence must be real

The code recognises independent troncs, which can be operated by an external payroll or accountancy firm or an appropriately independent worker. Where the employer reasonably believes the tronc is operating independently and fairly, it can satisfy the allocation requirement through that structure.

The employer still needs to respond if it learns the tronc is operating unfairly. Keep the tronc rules, allocation methodology and payment reports. A separate tronc bank account can improve visibility where the structure requires it, but the legal and tax treatment depends on how the tronc is operated.

Tipping law did not remove PAYE and National Insurance rules

HMRC's updated E24 guidance says the 2024 tipping legislation did not change the tax and National Insurance treatment of tips. The treatment depends on whether tips are paid directly, handled by the employer or distributed through an independent tronc.

Payroll should determine the correct PAYE and NIC treatment before the bank payment to workers. Do not distribute gross card tips from the business account and assume tax can be fixed later. The banking amount needs to follow the payroll or tronc calculation.

Reconcile gross tips from card settlements to worker distributions

Card acquirers can settle sales, service charges and tips in one net payment. Reconciliation should separate food or service revenue, VAT where applicable, processing fees and worker tips. That gives finance a starting liability to the workforce.

Then reconcile allocations, payroll tax and actual payments to workers. If £18,000 of qualifying tips was received in June and only £17,200 was distributed by July month-end, the £800 difference needs an explanation rather than being absorbed into restaurant cash.

Keep the written tipping policy consistent with banking practice

Employers must have regard to the statutory code and maintain the required tipping policy where the legislation applies. In 2026 the government consulted on revisions after the Employment Rights Act 2025, but its July update said employers should continue following the existing code while the revised process continues.

The written policy should match what the bank and payroll records actually show. A policy promising monthly distribution is weak evidence if tips routinely remain in the operating account for three months. Test policy against settlement and payroll data periodically.

Use a separate balance-sheet liability for undistributed qualifying tips. If £25,000 of card tips has been collected but only £18,000 allocated so far, the remaining £7,000 should remain visible as money due to workers rather than disappearing into general restaurant margin. This also makes the statutory following-month deadline easier to monitor.

Where several sites share a tronc, document how each location's tips feed into the allocation methodology and make sure the policy matches the legal rules for public and non-public places of business. Cash tips handled directly by workers can follow a different operational path from employer-received card tips, so finance should not force every gratuity into the same banking workflow.