Run a restaurant or cafe and two questions cause more head-scratching than any others: how do I handle tips properly, and which sales carry VAT? Get either wrong and you'll either overpay tax, underpay HMRC, or short-change your team.
This guide walks through both. We'll cover how a tronc works, when tips escape National Insurance, why a cup of coffee is taxed differently to a bag of beans, and how the 1 October 2024 tipping law changes what you must do (and what it doesn't change). There's a fully worked illustrative example with current 2025/26 figures.
It's written for owners and managers of UK restaurants, cafes, pubs and takeaways who want to stay compliant without drowning in jargon.
How are tips taxed in a UK restaurant?
Start with the rule that never changes: all tips are taxable income, so Income Tax is always due on them. What varies is who reports the tip and whether National Insurance is payable.
There are three common routes a tip can take.
- Cash left on the table and kept by the worker. The employee is responsible for declaring it. HMRC usually adjusts their tax code to collect the Income Tax. No National Insurance is due on tips paid directly like this.
- Tips paid through the employer's payroll. If you collect card tips and decide who gets what, you run them through payroll. Income Tax is deducted, and National Insurance is normally due on both the employer and employee side.
- Tips paid through a tronc. A separate arrangement, run by someone other than you, shares the tips out. Income Tax is still deducted, but National Insurance can be avoided if the tronc is set up correctly.
That last route is where the savings sit, so it's worth understanding properly.
What is a tronc and why does it matter?
A tronc is, in HMRC's words, "a special pay arrangement used to distribute tips, gratuities and service charges." The person who runs it is the troncmaster - someone other than the employer who is responsible for deciding how the pooled tips are shared among staff.
The reason troncs exist is tax efficiency. When a genuinely independent troncmaster controls the money and the allocation, the tips can be paid free of National Insurance for both the business and the staff. Income Tax still has to be deducted, so the troncmaster typically runs a separate PAYE scheme for the tronc.
A few practical points HMRC makes clear:
- The troncmaster operates the tronc's PAYE scheme independently of the business's own payroll.
- You must tell HMRC if a tronc exists and who the troncmaster is (unless the arrangement was already in place before 6 April 2004).
- If an owner, director or manager acts as troncmaster and the money runs through the company payroll, the National Insurance advantage is usually lost.
In short, a tronc only delivers the saving if it is genuinely at arm's length from the business.
When do tips avoid National Insurance?
This is the heart of it. HMRC's E24 guidance says a payment that is a gratuity, or in respect of a gratuity, is exempt from National Insurance contributions if it meets either of these two conditions:
- It is not paid, directly or indirectly, to the employee by the employer, and does not represent money previously paid to the employer (for example by customers).
- It is not allocated, directly or indirectly, to the employee by the employer.
If neither condition is met, National Insurance is due. As HMRC puts it: "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 correctly run tronc is the standard way to satisfy condition two. The employer doesn't decide who gets what; an independent troncmaster does.
One important exception. A mandatory service charge, one the customer must pay, is treated differently. HMRC's position is that where a charge is not purely discretionary and there's an obligation to pay it, National Insurance is always due, however the money is later shared out. So the way you describe a service charge on the bill genuinely matters.
For the same reason, remember that tips and service charges paid by customers cannot count towards National Minimum Wage. They sit on top of wages, never instead of them.
How does the 2024 tipping law affect me?
From 1 October 2024, the Employment (Allocation of Tips) Act 2023 and its statutory Code of Practice took effect. The headline rule is simple: employers must pass on 100% of qualifying tips, gratuities and service charges to workers, fairly and transparently, and cannot make deductions (beyond the normal tax handled through payroll or a tronc).
What it changes in practice:
- You must have a written tipping policy and keep records of tips received and how they were allocated.
- Allocation must be fair, and workers can request their tipping record.
- You generally cannot hold back tips to cover card-processing fees or other costs.
What it does not change is just as important. HMRC has confirmed the 2024 legislation "does not affect how they should be assessed for tax and National Insurance contributions." So the tronc and NI rules above still stand. The new law is about fairness and transparency, not a new tax treatment.
How does VAT work on restaurant and cafe food?
Here's the rule that trips up most operators. Plain food is normally zero-rated for VAT, but food supplied "in the course of catering" is standard-rated at 20%. Eating in a restaurant or cafe is catering, so it's standard-rated whatever's on the plate.
For 2025/26 the VAT rates you'll meet are the standard rate of 20%, the reduced rate of 5%, and the zero rate of 0%. There is no special reduced rate for hospitality today; the temporary 5% and 12.5% rates that ran from 15 July 2020 to 31 March 2022 have ended.
The two things that decide the VAT rate are where the food is eaten and whether it is hot.
| Sale | VAT treatment (2025/26) |
|---|---|
| Any food or drink eaten in (catering) | Standard-rated 20% |
| Hot takeaway food | Standard-rated 20% |
| Cold takeaway food (not a standard-rated item in its own right) | Usually zero-rated |
| Hot drinks (tea, coffee, hot chocolate), eat in or takeaway | Standard-rated 20% |
| Cold drinks that are always standard-rated (such as soft drinks) | Standard-rated 20% |
| Confectionery, crisps and similar | Standard-rated 20% |
"Premises" is wider than it sounds. It includes your seating area and, per HMRC, adjacent outdoor tables and shared areas like a food-court seating zone. Sell a sandwich to eat at your pavement tables and that's catering, even though a cold sandwich to go would be zero-rated.
When is takeaway food standard-rated?
Cold takeaway food is usually zero-rated. Hot takeaway food is standard-rated. HMRC treats food as hot, and therefore standard-rated, if it is above the surrounding air temperature when supplied and meets at least one of five tests: it has been heated so it can be eaten hot, it has been heated to order, it is kept hot after heating, it is supplied in heat-retaining packaging, or it is advertised or marketed as being hot.
So a hot pasty kept under a heat lamp is standard-rated; the same pasty sold cold from a shelf is zero-rated.
If you sell a mixed deal to take away, such as a cold sandwich (zero-rated) with a hot coffee (standard-rated) for one price, you have a mixed supply and must split the VAT between the two parts. Good bookkeeping and a well-set-up till make this routine rather than a year-end nightmare.
Once your taxable turnover passes the VAT registration threshold of £90,000 in any rolling 12 months, you must register for VAT, so this stops being optional fast in hospitality.
Is there VAT on a service charge or tip?
It depends entirely on whether the customer had a choice.
- A genuine, freely given tip is outside the scope of VAT. As HMRC puts it, if the customer freely gives an amount above your total charge, no VAT is due on it. This holds whether it's cash, added to a card payment, or later shared among staff.
- A discretionary (voluntary) service charge the customer can decline is also outside the scope of VAT.
- A mandatory service charge the customer must pay is part of your supply, so it follows the VAT treatment of what was supplied. For a restaurant meal, that means standard-rated at 20%.
Notice the pattern: a mandatory service charge is both VATable and liable to National Insurance, while a genuine voluntary tip is neither. How you word the bill drives the tax outcome, so it pays to get it right.
Worked example: the cost of getting tronc wrong
Illustrative example. The Copper Spoon is a fictional cafe-bistro. Over a year it collects £30,000 of discretionary card tips and wants to share all of it with staff (in line with the 2024 tipping rules). We compare two ways of paying it out, using 2025/26 rates. Figures are rounded and simplified to show the principle.
Route A - paid through the employer's payroll. Because the employer collects and allocates the tips, neither National Insurance exemption condition is met, so NI is due.
- Employer's (secondary) National Insurance at 15% on £30,000 = £4,500. This is a cost on top of the tips.
- Employees pay employee National Insurance at 8% (for earnings between the Primary Threshold and Upper Earnings Limit) on their share, so £30,000 x 8% = £2,400 is taken from staff.
- Income Tax at the basic rate of 20% also applies, as it would on any route.
Route B - paid through an independent tronc. A genuine troncmaster controls allocation, so condition two is met and National Insurance is not due.
- Employer's National Insurance: £0 (saving of £4,500 versus Route A).
- Employee National Insurance: £0 (staff keep £2,400 more between them).
- Income Tax at 20% still applies, deducted through the tronc's PAYE scheme.
Same £30,000 of tips, same fairness, very different outcome. Route B saves the business £4,500 in employer NI and leaves staff £2,400 better off, a combined £6,900 difference, purely from structuring the payout correctly. The figures scale with your tip volume, so for a busy site the annual difference is real money.
To see how a tronc payout lands in someone's take-home pay, our payslip calculator lets you model the Income Tax and National Insurance on different pay structures.
Want hospitality accounting sorted properly?
Tronc setup, VAT on a mixed menu, and the 2024 tipping rules are exactly the sort of thing that's cheap to get right at the start and expensive to fix later. Zmartly works with restaurants, cafes and hotels across the UK, and our tax advisory team can set up a compliant tronc and review your VAT coding so nothing slips through. Book a free 20-minute call with a Zmartly accountant and we'll tell you exactly where you stand.
Frequently asked questions
Do staff pay tax on tips in the UK?
Yes. All tips are taxable income, so Income Tax is always due. Whether National Insurance applies depends on how the tips are paid out: tips left directly for a worker, or paid through a properly run independent tronc, can avoid National Insurance, while tips the employer collects and allocates through payroll usually attract it.
Does a tronc save National Insurance?
It can. If an independent troncmaster (not the employer) controls how pooled tips are allocated, the payments are exempt from National Insurance for both the business and the staff. Income Tax is still deducted, normally through a separate PAYE scheme run by the troncmaster.
Is there VAT on a service charge?
A genuine voluntary tip and a discretionary service charge the customer can decline are outside the scope of VAT. A mandatory service charge the customer must pay is part of your supply and follows the VAT rate of what was sold, so it is standard-rated at 20% on a restaurant meal.
Is takeaway food VAT free?
Cold takeaway food is usually zero-rated, as long as it is not an item that is always standard-rated such as crisps, confectionery or soft drinks. Hot takeaway food is standard-rated at 20%, and anything eaten on the premises is standard-rated because it counts as catering.
Did the 2024 tipping law change how tips are taxed?
No. From 1 October 2024 employers must pass on all qualifying tips fairly and keep records, but HMRC has confirmed the law does not change how tips are assessed for tax and National Insurance. The existing tronc and NI rules still apply.
When does a restaurant need to register for VAT?
When taxable turnover exceeds £90,000 in any rolling 12-month period (the current registration threshold), you must register for VAT. Given typical hospitality turnover, most established restaurants and cafes are VAT-registered.
