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Are Tips Taxable in the UK? Tips Law, Tronc and National Insurance in 2026

Every tip a UK worker receives is taxable income, but National Insurance depends on who decides how the tips are shared. A route-by-route table for 2026/27, a worked example on one cafe's £600 week of card tips, and what the Employment (Allocation of Tips) Act 2023 requires of the venue.

Alex Riesenkampff

6 October 2026 · Updated 8 October 2026 · 16 min read · Markdown

Yes. Every tip a worker receives in the UK is taxable income, whether it arrives in cash, on a card machine or as a service charge. What changes from one venue to the next is National Insurance: voluntary tips allocated by the employer carry National Insurance, while an independent tronc can remove it. Mandatory service charges remain subject to National Insurance even through a tronc. For 2026/27, the standard employer rate is 15% above £96 a week of total pay; employees pay 8% between £242 and £967 a week, then 2% above £967 (GOV.UK, Rates and thresholds for employers 2026 to 2027; HMRC E24).

So the tax question is really a question about control. The same £600 of card tips in a small cafe can cost the business about £4,680 a year in employer National Insurance before the Employment Allowance, or nothing, depending on who holds the spreadsheet. That is the same employer National Insurance our cost calculator for a new hire charges on wages, which is why tips are the one part of the pay packet where the route matters more than the amount. A separate law, the Employment (Allocation of Tips) Act 2023, has decided since October 2024 how much of that money must reach staff and how fast. This guide covers both: the tax by route, a worked example, and the duties you carry whichever route you pick. If you have already decided on a tronc and want the setup steps, our guide to setting up a tronc without a consultant covers appointing a troncmaster and registering the scheme.

How each kind of tip is taxed in 2026/27

Income tax applies to every route below, and National Insurance applies to every route except two: cash or direct digital tips the worker keeps without employer involvement, and voluntary tips an independent troncmaster shares out. HMRC's E24 guidance sets the line in one sentence: "In most cases where you pass tips to an employee, you are liable for both employer and employee National Insurance contributions because neither of the 2 conditions are satisfied." A mandatory service charge is the one route where the full 15% employer and 8% employee National Insurance is due even when a tronc pays it out, because HMRC does not treat a compulsory charge as a tip at all (PAYE72080, NIM02941).

Three things in that table catch owners out. First, card tips almost never fall into the cash row, because the money lands in the business's account before it reaches anybody. Second, choosing a tronc does not reduce income tax by a penny. Third, the mandatory service charge row is the most expensive way to collect gratuities: National Insurance on the staff payments and VAT on the charge. The amount that must reach workers excludes VAT (s.27C(7)): a £12 charge including 20% VAT leaves £10 to allocate. GOV.UK's own page for workers puts the tax point plainly: "If the charge is compulsory, it's not a tip so if your employer gives it to you, it's treated in the same way as your wages."

Why the person who splits the tips decides the National Insurance

National Insurance falls away only when the employer has no hand in deciding who receives tips and how much. HMRC's National Insurance Manual is explicit: "If gratuities are paid via an independently run tronc and the employer is not involved in the allocation either directly or indirectly, there is no NICs liability" (NIM02922), which takes the 15% employer and 8% employee rates off every pound shared that way. It defines allocating as "deciding who is to be the recipient of the payment and how much the recipient is to get."

That definition has two halves, and both matter. An employer may decide who can benefit from the tronc, such as front of house only, without breaking independence, as long as the troncmaster decides the amounts (NIM02952). What breaks it is the employer, or someone acting for the employer, setting individual shares. E24 closes the obvious shortcut: "If the employer, business partner or an official of the company (for example, a director) performs the role of troncmaster, they are considered to be making payments as if they were the employer." In a two-partner bistro where one partner runs the tip spreadsheet, there is no tronc in HMRC's eyes.

Who runs the payroll follows the same logic. Under E24, the employer remains responsible for PAYE when it allocates tips, even if an employee handles the task. An independent troncmaster normally needs a separate PAYE scheme and is personally responsible for operating it. The employer must tell HMRC who the troncmaster is.

Mandatory service charges sit outside all of this. HMRC's PAYE manual lists, among the cases where National Insurance is due, a customer who pays "a mandatory service charge and the employer passes some or all of these charges onto employees, either directly or by using a tronc." It adds: "Regardless of who pays the charges to the employees the employer, not the troncmaster, is responsible for the NICs". E24 section 6 also makes the employer responsible for PAYE when mandatory service charges are distributed through a tronc. Routing a compulsory 12.5% through one leaves both responsibilities with the employer.

A worked example: one cafe's £600 week of card tips

A cafe in England with five staff and £600 a week of card tips owes about £4,680 a year in employer National Insurance on those tips before the Employment Allowance if it shares them out itself, and nothing if an independent troncmaster does. The staff side adds about £2,069 a year taken from their tips. Allocated through the employer's payroll, the cafe's £600 week costs £90 in employer National Insurance and £39.78 in employee National Insurance; through an independent tronc, both figures are £0, and the income tax is the same either way.

The assumptions, so you can swap in your own:

• Three full-time baristas work 35 hours at the £12.71 National Living Wage (£444.85 a week each), and two part-timers work 15 hours (£190.65 a week each).
• Tips are shared by hours worked, which the statutory Code of Practice lists as a fair factor. That is £4.44 an hour: £155.56 a week for each full-timer and £66.67 for each part-timer.
• Every worker is on the standard employer NI rate and already earns more than the £96 employer threshold from wages alone. Employer National Insurance therefore applies to every pound of tips at 15%: £90 a week.
• The full-timers are already above the £242 employee threshold, so 8% of their tips goes in National Insurance: £37.33 a week between them. Each part-timer's wage plus tips reaches £257.32, so only the £15.32 above £242 is charged: £1.23 each.
• Income tax at the 20% basic rate for England takes £31.11 a week from each full-timer's tips under every route, tronc included.

The Employment Allowance changes the employer's cash cost. This cafe's wages alone generate about £9,640 a year of employer National Insurance, so £860 of the £10,500 allowance is still unused before tips. Running the tips through payroll would lift the bill to about £14,320, and the cafe would pay roughly £3,820 of it in cash after the allowance, against £4,680 without it. Our guide to who can claim the Employment Allowance covers the single-director exclusion and the month the credit usually runs out. Where the allowance already absorbs your whole bill with room to spare, a tronc's employer saving can be close to zero, while your staff still keep the 8%.

What the Employment (Allocation of Tips) Act 2023 requires of you

The Tips Act sets how much of the money reaches staff and when, and it applies whichever tax route you use. It has covered England, Wales and Scotland since 1 October 2024, and it reaches card tips, tip jars the employer controls, and service charges "however described". Employers must pass qualifying tips to workers in full, allocate them fairly, and pay them "no later than the end of the month following the month in which the tip, gratuity or service charge was paid by the customer" (Employment Rights Act 1996, s.27G). A tip left on a Saturday in March has to be in the worker's pay by 30 April.

Card fees are the deduction owners most often assume is allowed, and it is not. The Act measures a tip as "the actual amount paid by the customer", with any deductions disregarded (s.27C(6)). The Act's explanatory notes spell out that this covers "any amount deducted (for example) by way of bank, payroll or administrative charges: the intention being that the whole amount paid by customers is available for allocation to workers." If your processor charges 1.5% on a £10 tip, the business pays the 15p. Our UK card fee calculator shows what that adds up to at your volume.

For a VAT-bearing service charge, s.27C(7) excludes the VAT portion from the amount to allocate; this is separate from the ban on card-fee deductions. The rest of the duties, as the Act and the statutory Code of Practice set them out:

Tips paid straight to staff, in cash or through an app that bypasses the employer, fall outside the Act when the employer has no control or involvement. The Code says: "If a worker receives and keeps a cash tip, with no employer control or involvement, the tip is out of scope for the Tipping Act and this code". Collect the jar and split it at the end of a shift, though, and the Code says you are likely to have exercised control, which brings the cash back under the Act; HMRC's PAYE manual likewise puts tips from a common box that the employer passes on through PAYE and National Insurance.

Getting it wrong is a tribunal matter. A worker has 12 months to bring a claim about how tips were allocated or paid, and since 1 October 2026 six months, up from three, for a complaint about the written policy, records or information requests. A tribunal can order the venue to revise allocations or pay workers, and can award compensation for financial loss of up to £5,366 per claim since 6 April 2026 (s.27M). Ciara Walsh, co-founder of the tronc management software JustTip, set out the commonest misreading in Startups.co.uk's guide to the draft revised code. "A lot of owners assume that once tips go into a tronc, the liability goes with them. Under the Act, and now this draft Code, that is only true if the tronc really is independent and well run, with the employer staying involved where necessary, checking in on the arrangement rather than walking away from it entirely."

What changes next, and what has not changed yet

Nothing about the tax treatment of tips has changed for 2026/27, and the next change to the Tips Act is a consultation duty that is not yet in force. Section 14 of the Employment Rights Act 2025 will require employers to consult workers before writing or reviewing a tipping policy, and to review it at least every three years, but it has no commencement date; Acas says the tipping changes "will come into effect by the end of 2026". GOV.UK's September 2026 timeline also lists strengthening tipping law among the measures due by then.

Two other open questions are worth tracking. The Employment Appeal Tribunal has yet to rule on the Palanki case, where a first-instance tribunal counted tronc payments run through the employer's payroll toward a waiter's holiday pay; our tronc setup guide covers the facts, and our holiday pay guide for irregular-hours staff covers the calculation it would feed. And the worker side is pushing for more than consultation. Sharon Graham, general secretary of Unite, said in July 2026: "Workers should have control over their own tips pure and simple. Most customers assume they do anyway. Giving managers control, even letting them keep a slice for themselves, is clearly unfair."

Which route to choose for your venue

For most independent venues taking card tips every week, the right default is discretionary tips, shared by an independent troncmaster from the staff, with a written policy the team helped write. That route removes 15% employer and 8% employee National Insurance from every pound of tips, keeps VAT off them, and puts the allocation decision with someone other than you, which is also the version staff are most likely to trust. It costs a second PAYE scheme and a few hours a month of somebody's time.

The exception is the small venue where the numbers are too thin to bother. Put your figures into the calculator above. If the Employment Allowance absorbs the employer side and few of your staff earn above £242 a week, a tronc might save a few hundred pounds a year. A simple, objective formula run through your own payroll is legal and cheaper to administer. A bakery with £60 a week in tips and two Saturday staff is in this position. A busy bar with £2,000 a week is not.

What not to do, whichever route you choose:

• Do not make the service charge mandatory to tidy up the paperwork. It adds National Insurance, adds VAT, and gives no relief from the Tips Act.
• Do not appoint yourself, a partner or a director as troncmaster. HMRC treats their payments as yours.
• Do not take card fees, breakages or shortages out of the pot. The Act counts the amount the customer paid.
• Do not lean on tips to make the wage legal. Tips never count toward the National Minimum Wage, so set pay on its own merits; our wage benchmarks by role cover what a fair base looks like.

The harder trade-off is fairness between front of house and kitchen, which no tax rule settles. The Code allows role, hours and seniority as factors, so a points system that includes the kitchen at a lower weighting is lawful, and so is an equal split. Talk about it before you fix it. Peter Davies, managing director of WMT Troncmaster Services, was quoted by the Morning Advertiser in October 2025 on why the law's demand for fairness and transparency still divides opinion: "The problem is those two words are vague and subjective." His advice was blunt: "Anyone who is not talking to their staff is sooner or later going to bubble up a problem."

Revisit the decision if your weekly tips double, if your Employment Allowance stops covering the wage bill, if a member of staff challenges an allocation, or when the Employment Appeal Tribunal rules on Palanki. Each of those changes either the money a tronc saves or the risk of running tips through your own payroll. For the full cost of an hour of staff around those tips, including the thresholds used in this example, see what an hour of staff really costs in 2026.