UK Tips and Gratuities: What Employers Need to Know in 2026
If your business receives tips, gratuities or service charges, the way you handle and report them has changed in recent years. In the UK, these payments must be treated fairly, transparently and compliantly with both tax and employment law. Getting this right protects your business and ensures your staff receive the income they have earned.
Tips Don’t Count Towards the National Minimum Wage
First and foremost, tips received at work do not count towards the National Minimum Wage. That means employers cannot use tips to make up an employee’s pay to meet minimum wage obligations. However, tips are still taxable income for employees and must be handled appropriately through payroll where required.
New Legal Requirements: Allocation of Tips
Since October 2024, the UK’s Employment (Allocation of Tips) Act 2023 requires employers to ensure all tips, gratuities and voluntary service charges are passed on to workers in full and distributed fairly. This legal requirement aims to protect employees by making sure tips go to the people who earned them, rather than being withheld or diverted by the business.
Under the law, employers should:
- Treat all qualifying tips as income that must be given to employees.
- Ensure a fair and transparent distribution method.
- Maintain accurate records of tips received and how they were allocated.
- Share these records with staff on request.
- Have a written tips policy if tips are a regular part of your business income.
These steps help demonstrate compliance and reduce the risk of disputes or enforcement action.
What Counts as a Tip?
“Qualifying tips” include:
- Cash tips left directly by customers.
- Card or digital tips paid via the business.
- Voluntary service charges added to bills (where the customer can choose to pay it).
Exceptions remain where tips are truly given directly and without employer involvement. But as soon as the employer collects or influences how tips are shared, they fall under these compliance rules.
Tax and Payroll Treatment of Tips
Tips and gratuities are taxable. How tax and National Insurance are applied depends on how the tips are distributed:
• If tips are paid through the employer’s payroll, tax must be deducted via PAYE.
• If a troncmaster (a designated employee, not a manager or owner) is elected to distribute pooled tips, the tips are still taxable but National Insurance may not apply if the scheme meets HMRC conditions.
The key point is that tax treatment must be correct and transparent. Misclassifying tips or misapplying deductions can expose your business to compliance issues and weaken trust with staff.
Best Practice for Employers
To stay compliant and support a positive workplace, consider the following:
- Review your current tipping practices to ensure they align with the law.
- Document a clear policy on how tips are collected, pooled and distributed.
- Communicate the policy to all relevant staff so they understand how tips are treated.
- Keep thorough records of all tips received and how they’re allocated.
Doing this not only meets legal requirements but also builds transparency and fairness into your payroll processes.
How Pecunia Pro Can Help
Treating tips properly, allocating them fairly and reporting them correctly through PAYE can be complex. At Pecunia Pro, we help UK employers ensure their payroll is accurate, compliant and aligned with current guidance. We can support with:
- Payroll setup and administration.
- Tax and NIC treatment of tips and gratuities.
- Advice on policies and processes for fair distribution.
- Documentation and record keeping.
If you’re unsure whether your tipping arrangements meet the latest standards, we’d be happy to talk through your situation and offer practical support.