Service charge in the UK: the law, the tax and who gets the money

A service charge is an amount added to the bill by the business, usually 12.5% in UK restaurants, in recognition of service. It is different from a tip, which the customer chooses to give, and from a cover charge, which pays for the table rather than the service.

A discretionary service charge is not mandatory. You can ask for it to be taken off the bill and the business should remove it. A charge is only binding if it was disclosed clearly before the order was placed, so that it formed part of the agreement — uncommon in restaurants, more usual for large group bookings and private events, where it should be stated in the booking terms.

A gratuity and a tip are the same thing: money given voluntarily. A service charge is added by the business. The legal origin differs, but since October 2024 the distribution rules are the same for both where they qualify: they must be passed on to workers in full and shared fairly.

Cash tips handed directly to an individual and kept by them are outside the tronc and are that person's responsibility to declare.

The Employment (Allocation of Tips) Act 2024 and its statutory Code of Practice took effect on 1 October 2024. In outline:

• Qualifying tips and service charge must be passed to workers in full.
• No deductions — including card processing fees and administration costs.
• Allocation must be fair across everyone contributing to the customer experience.
• Payment must be made by the end of the month following the month of receipt.
• A written tipping policy must be available to staff.
• Records must be kept and workers can request their own.
• Workers can bring an employment tribunal claim where the rules are breached.

The full timeline is on the Tips Act 2024 page.

Amounts received by staff are taxable income and go through PAYE. Where distribution is handled by an independent troncmaster, the payments sit outside employer secondary Class 1 National Insurance — currently 15% — and generally outside employee National Insurance. If the employer decides the split, that relief does not apply.

For VAT, a genuinely discretionary service charge is outside the scope. A compulsory charge is part of the price of the supply and attracts VAT at the standard rate.

• A written tipping policy staff can read.
• Allocation rules that cover kitchen as well as front of house.
• An independent troncmaster making the allocation decision.
• Distribution within the statutory timescale, with nothing deducted.
• Records retained and available on request.

A free tronc audit checks all five against how your business actually operates.

Is service charge mandatory in the UK?

No. A discretionary service charge — the usual 12.5% added to a restaurant bill — can be removed on request. A charge is only compulsory if it was made clear before you ordered and formed part of the contract, which is rare in UK hospitality.

Is a service charge a tip?

Legally they are different things: a tip is given voluntarily to staff, a service charge is added to the bill by the business. Since 1 October 2024 both are treated the same way for distribution purposes — qualifying tips and service charge must be passed on to workers in full and allocated fairly.

Does service charge go to staff?

It must, where it is a qualifying tip under the Employment (Allocation of Tips) Act 2024. Employers cannot keep any portion and cannot deduct card processing fees or administration costs before distributing.

Can a restaurant keep the service charge?

No. Since the Act took effect, withholding any part of a qualifying service charge is unlawful, and workers can bring a tribunal claim over it.

Do I have to pay the service charge if the service was poor?

Not where it is discretionary. You can ask for it to be removed, and the business should do so. Staff pay should never be reduced to cover a removed service charge.

Is service charge taxable?

Yes. Amounts received by staff are taxable income under PAYE. Where they are distributed through an independent tronc, they fall outside employer National Insurance, currently 15%, and generally outside employee National Insurance.

Is VAT charged on service charge?

A genuinely discretionary service charge is outside the scope of VAT. A compulsory service charge forms part of the price of the meal and is subject to VAT at the standard rate.