Do you get tips at work? Important changes you should know

The new Labour government has been in place for over 100 days now, and various things are beginning to change. 

One of the key areas that is being addressed is worker’s rights. A new law dealing with tips at work – The Employment (Allocation of Tips) Act – was launched on 1st October 2024. And many more changes are planned over the next couple of years under a new Employment Rights Bill.

In this article we explore the new changes to the way tips are paid and managed, and will also take a look ahead at what will be covered by the Employment Rights Bill.

How is the tipping system changing?

The new tipping legislation applies across all industries, but is expected to be of particular benefit to around three million staff working in restaurants, cafes, bars, pubs, hairdressers, and as taxi drivers.

The main aim of the new tipping legislation is to ensure that 100% of tips reach service staff, and that tips are allocated between staff in a fair way. All tips must be paid in full to employees by the end of the next calendar month after being received.

The legislation covers both establishment service charges and also cash tips. It also includes a “Code of Practice on fair and transparent distribution of tips”, which requires employers to have clear tipping policies and keep records of how many tips are given. Employees have the right to see these policies and records.

It is anticipated that the new tipping rules will boost wages by putting £200 million back into the pockets of workers for whom the tips are intended.

Examples of current bad practice with tipping

Tipping practice varies greatly between different establishments, but the most common ways tips are badly handled are:

• Tips are not passed onto staff

This can apply either when a service charge is added to the bill and not all of it gets passed onto staff, or staff don’t get to keep their own tips – particularly when paid by card.

• Tips are shared unequally between staff

Some employers have a system – known as a tronc – for collecting customer tips and holding them in a common fund. If managed well, this can be a good way to handle tips, but in some cases tips are then shared unfairly between staff.

• Tips are taken from staff even if no tip has been received

Some chain restaurant establishments have been reported as deducting a portion of worker’s wages to cover tips, even if the server has not actually received that level of tip. 

The new tipping legislation is designed to put an end to the above unfair practices and ensure that every worker receives the tips to which they are entitled.

What to do if your employer does not pass on tips

Under the new legislation, it is now illegal for businesses not to pass on 100% of tips and service charges to their staff. If an employer breaks the law and does not do this, a worker will be able to bring a claim to an employment tribunal. 

Employment tribunals will be able to award workers up to £5,000 to compensate them for any financial losses suffered because of their employer’s failure to pass on tips.

You can find more information about employment tribunals on the Gov UK website here.

Paying tax on tips

One aspect to be aware of is that you need to pay tax on your tips. This has always been the case, but could be more applicable now if the value of your tips has greatly increased.

In some cases you may also have to pay National Insurance.

Whether you have to pay tax and/or National Insurance on your tips will depend on how they are paid to you. Let’s look at three cases:

• Service charge

A service charge, for example in a restaurant, is added to the bill before it’s given to the customer. If the charge is compulsory, it’s not regarded as a tip so if your employer gives it to you, it’s treated as part of your wages. 

However, if it’s an optional service charge, it is regarded as a tip and you will pay tax and National Insurance in the same way as for other tips as mentioned below.

• Tips given by your employer

If a tip is passed onto you as part of your pay packet – either direct from customers or via a tronc system – your employer will deduct tax and National Insurance from your wages. So you do not need to report these tips to HM Revenue and Customs (HMRC). 

• Tips given directly to you by a customer

If you receive tips directly from a customer – whether in cash or electronically – and keep these tips then you need to report them to HMRC yourself. You can do this either:

• on your Self Assessment tax return if you already fill one in;
• through your personal tax account online;
• by calling HMRC.

If the value of the tips affects your tax code, HMRC will change your tax code and your employer will then deduct any tax you owe on tips when you get paid. You will not need to pay National Insurance.

 What the Employment Rights Bill will change

It’s still early days for the Employment Rights Bill. It is likely to become law during 2025, but many of the rights will not come into force until 2026.

The aim of the Employment Rights Bill is to end unfair employment practices and help boost pay and productivity to deliver economic growth. According to Sir Keir Starmer, it is “the biggest upgrade to workers’ rights in a generation, and a significant step towards delivering this government’s plan to make work pay.”  

Some of the changes being planned under the Employment Rights Bill are for employers to:

• Consider any flexible working requests made from day one, and agree to any reasonable request;
• Give workers protection from unfair dismissal from their very first day in a new job. However, employers will still be able to operate probation periods of up to nine months when they can be sacked without a full process;
• Give workers on zero hours contracts the right to a guaranteed hours contract if they work regular hours over a defined period.  
• Provide Statutory Sick Pay (SSP) from the first day of illness rather than the fourth day, and remove the £123 per week minimum earnings limit for SSP;
• Offer parental and bereavement leave from day one; 
• Adhere to stronger dismissal protections for pregnant women and new mothers. 

Along with the Employment Rights Bill, a new Fair Work Agency is to be established to enforce rights such as holiday pay and support employers looking for guidance on how to comply with the law.

We hope that the above information is helpful now if you work in a sector where tipping exists. And also that it provides an overview of further changes to come to workers rights. We hope that all of these changes will enable you and your family to become more comfortable financially and bring you more protection and security in your place of work.

Meanwhile, if you are sorting out finances and are considering a personal loan for any reason, remember that Loans 2 Go offers online loans that may be able to help. 

Do visit us here again soon for more financial and lifestyle tips from Loans 2 Go.