Passing on Tips and Service Charges

From 1 October 2024, UK employers must pass 100% of qualifying tips and service charges to staff in a fair and transparent manner under the Employment (Allocation) of Tips Act 2023. Businesses must have a written policy and recordkeeping system if they control or distribute tips, or they risk facing employment tribunal claims.

From October 2024, the rules around how businesses handle tips and service charges have changed significantly. The Employment (Allocation) of Tips Act 2023 now requires that all qualifying tips, service charges and gratuities received by an employer are distributed fairly and transparently to staff, ensuring that workers receive the full benefit of what customers intend for them.

This legislation affects a wide range of sectors—restaurants, salons, hotels, and other service-based businesses—where tipping is common. For example, a beauty salon that receives payments directly from clients for treatments and allows staff to keep their own tips is not affected, provided those tips are given directly to employees without employer involvement. In this case, such tips fall outside the scope of the new law.

However, where an employer collects tips or adds a discretionary service charge, they now have a legal duty to allocate and distribute 100% of those payments fairly among all eligible staff, including employees, workers, and agency staff. Employers must also create a written policy explaining how tips are shared and make this available to all workers.

In addition, the employer must:

Distribute tips fairly by the end of the month following the month in which the tip was received.

Maintain clear records of tips received and distributed for at least three years.

Engage staff in developing a transparent allocation process.

If a business does not handle tips at all (for example, if clients tip staff directly), it should still prepare a tips policy exemption statement. This confirms that the business is not required to maintain a written policy because it does not control or distribute any tips. The statement must also explain why the law does not apply, helping maintain transparency and compliance with the statutory Code of Practice.

Failure to comply could expose employers to employment tribunal claims, reputational damage, and potential financial penalties. Therefore, all affected businesses—especially those introducing or managing a service charge—should review their practices, update their staff policies, and ensure they meet the new standards of fairness and transparency.

Get in touch with Naail & Co Chartered Certified Accountants & Tax Advisors for tailored advice on employment compliance, payroll management, and tax-efficient staff remuneration structures under the new tips legislation.