The tips we thought were ours to divide

Every hospitality business has a tipping arrangement, and most of them were never written down. The service charge goes into a pot, the manager splits it at the end of the week, the kitchen gets a share because it would be unfair not to, and a small slice comes off the top because the card machine costs money.

That describes an arrangement that was normal for decades and has been unlawful since 1 October 2024.

What the law changed

The Employment (Allocation of Tips) Act 2023 came into force on 1 October 2024 and did three blunt things.

It requires employers to pass on 100% of qualifying tips, gratuities and service charges to workers, with no deductions other than those required by law such as income tax. Card processing fees, administration charges and breakages come out of the business, not the tip pot.

It requires those tips to be paid by the end of the month following the month in which the customer paid them. A tip left on 14 September must reach the worker by 31 October.

And it requires the allocation to be fair and transparent, having regard to the statutory Code of Practice, with a written policy and records to prove it.

A qualifying tip is one the employer receives or controls: card tips, a service charge added to the bill, tips collected centrally. Cash handed directly to a member of staff and kept by them is outside the rules, provided the business exerts no control over it.

The card fee was the expensive habit

Deducting the merchant fee from tips felt defensible. The business genuinely pays it, and on tips it is a real cost — the mechanics of that are in card processing fees: what taking a payment really costs your margin.

It is no longer permitted. Take an illustrative site collecting £4,000 a month of card tips at a blended processing cost of 1.4%: the £56 a month that used to come off the pot is now an operating cost the business absorbs, £672 a year. That is a genuine hit for a small independent, and it is not optional.

The correct response is to price for it once, in the margin, rather than to keep taking it from the pot and hope nobody asks.

Fair does not mean equal. It means defensible, written down, applied the same way every week, and explainable to the person who got the smaller share.

Fair is not the same as equal

The Act does not require every worker to receive an identical amount, which is the point most owners get wrong in the opposite direction. Differentiating by role, by hours worked, by seniority, by whether the role is customer-facing, by length of service and by performance can all be legitimate factors.

What matters is that the factors are chosen in advance, applied consistently, and capable of being explained. A points system where a chef earns 8 points a shift and a runner earns 4 is defensible. A weekly decision made by whichever manager is closing is not, however fairly that manager believes they are behaving.

Agency workers count too. If someone works your bar through an agency, they are inside the allocation, and leaving them out because they are not on your payroll is one of the more common breaches.

The policy and the records

Where tips are paid more than occasionally and exceptionally, you need a written tipping policy available to all workers. It should set out whether tips are accepted, how they are allocated, and the basis for any differences between roles.

You also have to keep records of all qualifying tips and their allocation for three years, and a worker can ask to see them. That request is not something you can defer while you reconstruct six months of splits from memory, so the record has to be created weekly as part of payroll rather than retrospectively.

Enforcement runs through the employment tribunal. A worker can bring a claim about the policy or the records within three months, and a claim about allocation or payment within twelve months. A tribunal can order the employer to comply, and can award up to £5,000 for financial loss. The larger exposure for a small site is not that ceiling — it is the same claim being brought by eleven people at once.

Whether you need a tronc

A tronc is a separate arrangement for distributing tips, run by a troncmaster who operates independently of the employer through a separate PAYE scheme.

The reason to bother is National Insurance. Tips paid through the payroll as ordinary earnings attract employer's National Insurance at 15% and employee's at 8%. Tips distributed through a genuinely independent tronc remain subject to income tax but fall outside Class 1 National Insurance, provided the employer does not decide, directly or indirectly, who gets what.

On the same £4,000 a month, that employer's National Insurance is £600 a month, or £7,200 a year, plus £320 a month coming out of the staff's share. For a site of any scale the arithmetic makes the administration worthwhile. For a two-person coffee shop it usually does not.

The condition is the whole thing: independence. If the owner picks the troncmaster's allocations, overrules them, or quietly instructs them, the exemption falls away and HMRC will treat the payments as ordinary earnings. Equally, the tipping legislation does not let an employer hide behind a tronc — if you become aware that a troncmaster is allocating unfairly, you are expected to act.

What is coming next

The Employment Rights Act 2025 adds a duty to consult before writing your first tipping policy, and again at each review at least every three years, along with providing workers an anonymised summary of the feedback received. Those provisions were expected in October 2026 and have been pushed back, with the government now indicating before the end of 2026; a draft updated Code of Practice was published and then withdrawn.

The practical consequence is that a policy written in isolation this autumn will probably need to be re-issued with a consultation behind it. If you are writing yours now, consult anyway. It costs one team meeting, and it converts a compliance document into something the staff have actually had a say in.

The half-day that clears it

Write the policy: what counts as a tip here, how the pot is divided, the factors and their weightings, when it is paid. Show it to the team before you finalise it. Stop every deduction that is not required by law, and reprice the card fee into your margin. Build the weekly allocation record into the payroll routine so it exists without anyone having to remember. Decide on a tronc based on the National Insurance arithmetic rather than on how complicated it sounds, and if you set one up, keep genuinely out of the allocation decisions.

Tips sit uncomfortably close to pay in a way that catches small employers repeatedly — a related set of traps is in the minimum wage traps that catch small employers out. The businesses that handle this well are not the ones with the most generous split. They are the ones whose staff can explain how the split works without asking anybody.

Common questions

Can we still deduct card processing fees from tips?

No. Since 1 October 2024 employers must pass on 100% of qualifying tips, gratuities and service charges, and the only permitted deductions are those required by law, such as income tax. Card processing fees, administration charges, breakages and till shortages all have to be borne by the business instead. On an illustrative site taking £4,000 a month in card tips at a blended processing cost of 1.4%, that is £56 a month, or £672 a year, that used to come out of the pot and is now an operating cost. The right response is to reflect it in your pricing once rather than continue deducting it.

Does fair allocation mean everyone gets exactly the same?

No, and treating it that way causes as many problems as arbitrary splits do. The requirement is that allocation is fair and transparent, having regard to the statutory Code of Practice, not that it is equal. Differentiating by role, hours worked, seniority, whether the role is customer-facing, length of service and performance can all be legitimate factors. What matters is that the factors are set in advance, applied consistently every week, written into the policy and explainable to the person receiving the smaller share. Agency workers who work at your site are included in the allocation, which is a commonly missed obligation.

Do we need a tronc scheme, and what does it save?

It depends on the scale of your tips. Tips paid through payroll as ordinary earnings carry employer's National Insurance at 15% and employee's at 8%. Distribution through a genuinely independent tronc, run by a troncmaster through a separate PAYE scheme, keeps income tax due but takes the payments outside Class 1 National Insurance — provided the employer does not decide, directly or indirectly, who receives what. On £4,000 of monthly tips that is £600 a month of employer's National Insurance saved, plus £320 a month of the staff's own deduction. For very small sites the administration usually outweighs it.

What can a worker do if they think the tips are being split unfairly?

They can bring an employment tribunal claim. Complaints about the written policy or the records must be brought within three months, and complaints about allocation or payment of tips within twelve months. A tribunal can order the employer to comply with the rules, revise a previous allocation, and award up to £5,000 for financial loss the worker has suffered. Workers can also request the records of tips and their allocation, which employers must keep for three years. For a small site the practical risk is less the individual cap than several members of the same team bringing the same claim together.