Restaurants face ban on tipping policy

service charge

Under plans announced by Theresa May earlier this month, it will be illegal for restaurants to keep tips from staff. In this article, we look at what this means for the hospitality sector and what your business can do to prepare for the upcoming changes.

The government have announced that there will be a ban on restaurants taking a percentage of tips from their workers. This means workers are now entitled to the full service charge received and restaurants cannot take any of it to cover administrative costs.

What do the changes mean?

Theresa May’s announcement comes after a consultation three years ago found restaurant goers supported tips being given in full to waiting staff.

Currently, restaurants have been following a voluntary code regarding their tipping policy; and they are not legally obligated to pass tips on to workers. These proposed plans aim to change that and force restaurants to pass on all tips and service charge.

This would mean that no more deductions can be made from tips paid on card to cover administrative fees, which many top restaurant chains have become accustomed to doing.

Cash tips would belong directly to the employee. It should be noted that HMRC classes cash tips as taxable income and if staff do not fill out a tax return, then HMRC will estimate the tips based on information from staff or the business. They will then provide a tax code so they can collect tax through Pay As You Earn (PAYE).

How your business can prepare

Though this new legislation has not yet been passed, it is important to understand the impact it could have on your hospitality business should it come into effect.

Leighton Bower, who acts for a wide number of our hospitality sector clients, commented, “If you currently account for a percentage of your tips each month, you should consider how this being removed would impact your operational policies, margins and overall profitability.”

Tronc schemes

It may also be a good time to consider setting up a Tronc scheme if you have not already.

A Tronc is a special pay arrangement used to distribute tips (by cash or card), gratuities and service charges.

The real benefit of Tronc schemes to your business is that you can increase your employees’ take-home pay at no added cost to your business and provide greater incentive and reward for providing a high quality customer service.

That is because, subject to meeting certain conditions, payments made by the Tronc are free of National Insurance Contributions, saving you and your staff a combined total of almost 26% in comparison to distributing the funds outside of a tronc scheme. This means:

  • Employers can benefit from a 13.8% Employers National Insurance saving.
  • Employees who receive payments through a TRONC can benefit from increased take home pay through a 12% Employees National Insurance saving.

“Putting in place a well-structured Tronc scheme will ensure transparency and that your customers know where their tips are going. It will also help you build a highly motivated team, focused on delivering the highest level of customer service”, says Leighton Bower, Partner.

How we can help

If a Tronc scheme sounds right for your business, we can offer specialist advice for setting up and running Tronc schemes.

Will your business need to review its profitability margins due to the changes in billing the reform may incur? Our hospitality accountants can support you in evaluating your margins to ensure your business still runs smoothly.

Contact our hospitality accountants

Contact us to discuss how we can support your business.


This information has been produced by Rouse Partners LLP for general interest. No responsibility for loss occasioned to any person acting or refraining from action as a result of this information is accepted by Rouse Partners LLP. In all cases appropriate advice should be sought before making a decision.

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