In the UK, more bars, pubs, and restaurants are now readily embracing tipping. In the dire state of the hospitality sector, it’s survival instinct. And, because most card readers now have a tipping function, it’s easier than ever for customers to discreetly leave a little extra.
But tipping, to Brits, can still be a minefield. We’re famously averse to expressing ourselves, even in money form, which means UK small businesses that accept tip payments need to walk a careful tightrope between rewarding their staff, and not annoying their customers.
There’s also a ton of legalese (and dreaded tax laws) to wade through, plus stricter laws on tips and service charges due this year. We’ll explain why the new laws are being introduced, how tips work behind the scenes, and how to ask for tips without irritating your clientele.
Understanding UK tipping culture
There is no playbook to follow when tipping in the UK. Unlike American tip culture, when, where, and how much you are expected to tip differs from business to business.
For Brits, the practice is generally considered a gesture of appreciation for exceptional service, not a mandatory addition.
Typically, tipping in UK restaurants does not surpass 10-15% (although tip percentages in London are known to be higher) and is usually reserved for high-end restaurants and bars.
Generally, it is less common to tip for a drinks order in the UK. That said, businesses can put a tip jar by the counter to invite customers to tip their baristas and bartenders.
Other firms in the service sector, like beauty salons or couriers, might have similar policies for their staff. Again, tipping in these sectors is usually kept at around the 10% mark.
How are tips distributed in the UK?
Previously, organisations pretty much had free reign on how they doled out tips. The government’s Code of Practice meant that employers simply had to draft a statement that clarified their process for tip distribution to customers and workers.
There are several collection and distribution methods to choose from. For example, for every £1 an employee earns in tips, the business could:
- Allow the worker to keep the entire £1 as their tip
- Add the £1 to a staff box, to be informally shared with the workforce
- Add the £1 to a tronc system, to be formally shared with the workforce
Firms were previously also permitted to help themselves to a percentage of employee tips to cover their overheads, costs, and markup. As long as they told staff this was their policy, it was not illegal (although PR was another problem, as Côte found out the hard way).
However, that won’t be the case for long. In October 2024, a new Employment Act will expressly forbid businesses to withhold tips from staff.
The Employment (Allocation of Tips) Act
Coming this October, the new Employment (Allocation of Tips) Act, which first passed royal assent last May, brings a big change for how employers collect and allocate tips.
The law means that, if they accept them, businesses must pay out 100% of tips, gratuities, and service charges to employees (including agency workers) and keep nothing for themselves.
Employers will still be able to choose how they distribute tips to employees. However, time conditions on when tips are paid out will also be imposed.
Payments collected from tips and service fees will need to appear on employee payslips by the end of the month after the month in which the firm first received the money.
The change will have a big impact on staff and workplaces. Research from three rocks® shows that just one third of hospitality organisations currently give 100% of tips to the workforce, with the rest relying on the income to pay for rising costs and overheads.
Tips vs. service charges: what’s the difference?
Tipping in the UK is often confused with paying a service charge, although there are some subtle differences between the two. Whereas a tip is almost like a gift that the customer freely opts into, service charges are added directly to a bill.
Service charges are usually a similar amount to tips, hovering around the 12.5% mark. They can be either discretionary or mandatory.
As with tips, 100% of service charges must be given to employees once the new Employment (Allocation of Tips) Act comes into force this autumn.
Discretionary service charges
Most high-end restaurants, and even some cheap eats in London, now include an optional service charge on food bills or bar tabs. If voluntary, customers may ask to remove the fee from the bill should they dislike the quality of the service or product they receive.
Mandatory service charges
Mandatory service charges must be clearly communicated to customers before they commit to a purchase. This type of fee is rarer, and is also heavily taxed.
Still, in 2024, mandatory fees may become more routine when the new laws on tipping are introduced, as businesses look for ways to top up the lower income of their employees.
The three rocks® data shows that 52% of firms will introduce a charge of 10% in 2024. That could push the average cost of a pint up to £5.22.
How are service charges and tips taxed?
It seems to be a rule that anything to do with paying tax has to be extremely complicated to understand. Paying tax on tips, as we’ll explain, is unfortunately no different. Here’s a simple breakdown of how it works (these rules won’t change when new tipping laws come in):
Income Tax
This depends on whether the service charge is mandatory or discretionary. Mandatory service charges are treated like employee wages, so Pay As You Earn (PAYE) and National Insurance contributions (NICs) must be deducted from any payments given.
Whether or not staff pay Income Tax on discretionary tips depends on how they are paid.
Scenario 1. Staff are tipped directly and keep all the money.
In this case, employees don’t have to pay tax in a PAYE or NICs. They are required to file for self-assessment to complete their own Income Tax return for HMRC.
Scenario 2. The tips pass through the employer first.
All Income Tax liabilities on the tips are deducted by the employer before the employee receives the money through PAYE. In this scenario, the employer will also pay NICs on all tip money.
Scenario 3. The tips pass through a tronc system (TS) first
A tronc scheme (TS) is a special arrangement set up for paying out tips. It is managed by a specialised troncmaster. Because tips and gratuities paid into the tronc scheme don’t pass through the employer, Income Tax is deducted but not National Insurance.
Value Added Tax (VAT)
Generally, tips and discretionary service charges are considered outside the scope of VAT, regardless of:
- Whether the charges are included on the bill
- The payment type (cash, debit card, or gift voucher)
- Whether the charges are paid to employees
Again, mandatory service charges are subject to the standard VAT rate, which is set at 20%.
Why is tipping important in a tight labour market?
Service-based sectors tend to have very low wages for employees. This is especially true for hospitality, where profit margins are thin. Here, the majority of entry-level workers can expect to earn the National Living Wage (or the National Minimum Wage for those aged under 21).
Because of this, many employees in the industry rely on tips and service charges to top up their payslip. Indeed, the highest-paid restaurant jobs in the UK today have a tronc system in place, to make sure that staff earn tips worth almost double their actual hourly rate.
Raising salaries is not really an option for cash-strapped small businesses and chains. A Startups survey found that nearly one in five hospitality firms would not be able to meet pay expectations in 2024, the highest percentage of any industry.
That’s why encouraging tips is a smart recruitment tactic. Anything firms can do to boost staff wages – without hurting their own profits – should be considered. Especially when labour shortages have already contributed to the closure of over 3,000 London pubs and bars.
Tipping and the cost of living crisis
At the same time that organisations want to support their staff, extreme tipping measures (such as implementing mandatory service charges) could also have a negative impact on the customer experience; especially given the cost of living crisis.
With prices rising across every sector, customers are unwilling enough to part with their hard-earned cash during a poor economy. Expecting them to also shell out for a tip may be asking them to bite off more than they can chew, jeopardising their lifetime value.
Last year, SumUp, one of our top-rated merchant providers, found that the average value of tips given to cafés, restaurants, and hairdressers in the UK had fallen from £4.65 to £2.85.
Tips for transparent tipping
The government’s Code of Practice lists three ‘principles of transparency’ for coaxing out extra spend, without giving customers a nasty shock when their bill arrives. While they are likely to change come October, the advice given below is still helpful for SMEs:
- Clearly display the business’ policy relating to mandatory and discretionary service charges, tips, gratuities, and cover charges. Make this information accessible to read
- Have a process in place to deal with requests from customers about how and to whom all service charges, tips, gratuities, and cover charges are distributed
- Inform all workers about the distribution and breakdown of service charges, tips, and gratuities. Ensure that workers understand and can confidently explain the policy
Another good rule of thumb is to avoid ‘double dipping’. Don’t confront customers with a jangling tip jar if a service charge has already been added to their bill (and vice versa).
Card vs. cash: which is better for tipping?
You might now be wondering: when did tipping become so complicated? One contributing factor is the rise of online banking, which is slowly transforming the UK into a cashless society. Just 19% of purchases were made with cash in 2023.
It seems the age-old tipping practice of leaving a fiver on your table has been replaced by contactless and card payments. So how has this impacted businesses? Are tips drying up?
Thankfully, no. Modern card machines now offer the option to add a tip directly to the bill, which has helped smooth the transition from a cash-based tipping culture. Here are the benefits and drawbacks to the switch:
- Tips percentages can be pre-set, to encourage greater spending
- Customers can also tailor the percentage to their own preference
- Eliminates time spent handling and counting cash
- Makes tipping more convenient for modern customers, who prefer card payments
- Facilitates a faster, and more equitable distribution of tips through tronc
- Stops staff losing cash tips, and makes it easier for employers to calculate amounts
- Tips can be distributed instantly among employees
- Customers might prefer the anonymity of tipping in cash
- Might require upfront costs for new card machine hardware
- Credit card fees mean companies might incur extra charges to process tips
Don’t discount cash yet, however. As with any service offering, personalisation is paramount to keep every buyer on board. Firms should offer a wide range of payment methods when it comes to tipping, to guarantee they meet every possible customer need and preference.
That’s really what tipping in the UK comes down to: choice. Customers want to know they can choose to tip, and that when they do, they know exactly where it is going.
By using smart payment technologies, adopting transparent policies, and adapting to the new laws on tipping, businesses can optimise their tipping process to get the most out of customers; while ensuring those customers still feel firmly in control.
