Salon Tips and the Tipping Act 2023: Tax, Tronc and Payroll

Since 1 October 2024, salons have not been allowed to keep a penny of their staff's tips. The Employment (Allocation of Tips) Act 2023, usually just called the Tipping Act, makes you pass on 100% of qualifying tips to your team, with no deductions beyond tax.

That sounds simple. In practice it forces three questions a lot of salon owners have never had to answer. How do you allocate card tips fairly? Who pays the tax and National Insurance? And do you need a tronc?

This guide is for owners of hair salons, barbershops, nail bars and beauty clinics with employed staff. It walks through what the Tipping Act actually requires, how tips are taxed through PAYE, when National Insurance bites, and how a tronc can change that. If you want this set up properly, that is the kind of payroll work we handle for hairdressers and beauty businesses.

What does the Tipping Act 2023 mean for salons?

The Tipping Act and its statutory Code of Practice came into force on 1 October 2024. If your salon receives tips and exercises control or significant influence over how they are shared, four duties now apply to you.

First, you must pass on the full amount of qualifying tips to your workers, with no deductions except those required by law, such as Income Tax. You cannot top-slice a "card processing" cut or an admin fee out of the tip pot.

Second, you must distribute tips fairly and transparently. The Code sets out the principle of fairness and expects you to use clear, objective criteria, without unlawful discrimination.

Third, the money has to reach staff quickly. Tips must be distributed by the end of the month following the month in which the customer paid them. A tip left in March must be paid out by the end of April.

Fourth, you must have a written tipping policy and keep records. Where you receive tips on more than an occasional basis, you need a written policy your staff can see, and you must keep records of the tips received and how they were allocated for three years. A worker can ask for their own tipping record, and they can take a complaint to an employment tribunal if you get it wrong.

Which tips are covered, and which are not?

The Act draws a line between two kinds of tip, and the line matters because it decides what falls inside these rules.

Employer-received tips are the ones you collect and control. In a salon that is overwhelmingly card and contactless tips added at the till, plus any service charge. These are squarely within the Tipping Act, so all the duties above apply.

Worker-received tips are cash tips a client hands straight to the stylist, where you have no control or involvement at all. These sit outside the Act's allocation rules, because the money never reaches you and you never decide who gets it.

That distinction has all but reversed for many salons. As clients move to card, more of the tip flows through your system, which pulls more of it inside the Tipping Act and your payroll. The Code also makes clear that eligible agency workers, for example a chair-renter placed through an agency, are entitled to a fair share of qualifying tips too, so do not assume only your PAYE employees count.

A quick word on the cash that does still come in. Even a worker-received cash tip is taxable income for the person who keeps it (see the next section). It is just that you, as the employer, are not responsible for allocating it or running it through your books.

How are salon tips taxed?

All tips are taxable. The only question is who accounts for the Income Tax, and that depends on how the tip reaches the worker.

When the tip comes through you, the answer is PAYE. HMRC's position is plain: PAYE must be operated on all tips paid by an employer to an employee. So card tips you collect and share out are taxed through your payroll in the normal way, and the Income Tax is deducted when staff are paid.

When a stylist pockets a cash tip directly, you are out of the loop, but the worker is not. They have to report those tips to HMRC themselves, through Self Assessment or their personal tax account, and HMRC usually collects the tax by adjusting their tax code. In practice this is the part salon staff most often miss, and it is worth flagging to your team.

So there are really two streams. Card and pooled tips run through PAYE and your records. Direct cash tips are the individual worker's responsibility to declare. Both are taxed; only the mechanism differs.

When does National Insurance apply to tips?

This is where salons trip up, because National Insurance does not follow Income Tax mechanically. Whether NIC is due turns on who controls the money.

The general rule from HMRC's E24 guidance is that a tip escapes National Insurance only if two conditions are both met: the payment is not paid, directly or indirectly, to the employee by the employer, and it is not allocated, directly or indirectly, to the employee by the employer. If you collect the card tips and decide who gets what, neither condition is met, so both employer and employee Class 1 National Insurance are due on the way out.

Two points catch salon owners out.

A direct cash tip the worker keeps does not attract National Insurance at all, because you neither pay it nor allocate it.

A mandatory service charge is the opposite. National Insurance is always due on a compulsory service charge, regardless of how it is shared out, because it is part of what the customer must pay for the service. Genuinely voluntary tips are treated differently. Few salons run a mandatory service charge, but if yours does, treat it as fully NIC-able.

The practical upshot is that simply pooling card tips and paying them out yourself can pull every tip into employer's National Insurance at 15% for 2026/27, on top of the employee's. That is precisely the cost a properly run tronc is designed to avoid.

What is a tronc, and does my salon need one?

A tronc is a separate arrangement for sharing tips, run by a person called the troncmaster who is independent of the employer's own pay decisions. It is the standard, HMRC-recognised way hospitality and salon businesses handle pooled tips.

The attraction is the National Insurance treatment. Where an independent troncmaster allocates money that did not come to the workers via the employer, and the employer does not determine, directly or indirectly, how that money is shared, the payments can fall outside National Insurance entirely. Income Tax still applies, but it is operated through the tronc's own PAYE scheme rather than your main payroll.

That independence is the whole point, and it is easy to lose. If you, as the owner, decide the split, or instruct the troncmaster how to divide the pot, the National Insurance exemption falls away and HMRC can treat the tips as ordinary pay. The troncmaster has to genuinely make the allocation decisions.

A few things worth knowing before you set one up:

• The troncmaster is personally responsible for operating the tronc's PAYE scheme and can be held responsible for any failure to deduct the right tax.
• The troncmaster should not be the business owner or a controlling director if you want the National Insurance advantage to hold, because that breaks the independence.
• A tronc does not switch off the Tipping Act. You still owe the duties of fairness, prompt payment, a written policy and three-year records. The tronc is how you distribute; the Act governs that you distribute fairly.

A tronc is not compulsory. A small salon with modest card tips might reasonably run them through payroll and accept the National Insurance cost for simplicity. But once card tips are a meaningful slice of staff pay, the NIC saving from a properly independent tronc usually justifies the admin, and it gives you a clean, defensible system for the fairness rules at the same time.

Do tips count towards the minimum wage?

No. Since 1 October 2009, tips, gratuities and service charges do not count towards National Minimum Wage or National Living Wage pay. You cannot use the tip pot to top a stylist up to the legal hourly minimum.

This matters more than it used to. From April 2026 the National Living Wage for workers aged 21 and over is £12.71 an hour. That floor has to be met from contractual pay alone, before a single tip is added. Tips sit entirely on top.

It is a common and expensive misunderstanding in salons that lean on tipping. If you have been treating tips as part of the headline rate, you may have a minimum wage underpayment regardless of how generous the tips are. Worth checking your rates against the April 2026 figures.

Illustrative example: card tips through a salon tronc

Illustrative example. Imagine Bloom Hair is a six-chair salon that runs as a limited company. In a typical month, clients leave £1,200 in card tips at the till. The salon appoints its senior stylist, Priya, as an independent troncmaster, and she allocates the pot among the team using a points system based on hours worked, with no instruction from the owner.

Because the tronc is genuinely independent and the owner does not determine the split, the £1,200 is shared out through the tronc's PAYE scheme. Income Tax is deducted from each stylist's share, but no employer or employee National Insurance is due on it.

Compare that to pooling the same £1,200 through the salon's own payroll, where the owner decides the allocation. There, both conditions for the NIC exemption fail, so employer's National Insurance at 15% for 2026/27 would apply, around £180 on that month's tips, plus the employees' own National Insurance deducted from their shares. Over a year, on £14,400 of card tips, that is roughly £2,160 of employer's NIC the independent tronc avoids.

These figures are illustrative. Your own position depends on your staff's earnings levels, your tipping volumes and whether the tronc is genuinely run at arm's length from you.

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