Withholding Tips from Staff Is Now Unlawful

Recent changes in the law mean that employers can no longer withhold tips, gratuities, or service charges that are intended for staff.

These rules apply regardless of whether tips are paid in cash, added to card payments, or included as a service charge.

Ban on Employers Withholding Tips Comes into Force

A new law that stops employers from withholding tips from people working in the hospitality, leisure and services sectors has come into force. The Employment (Allocation of Tips) Act 2023 received Royal Assent on 2 May 2023.

The Bill makes it unlawful for businesses to hold back service charges from their employees, ensuring staff receive the tips they have earned. The measures are expected to come into force in about a year, following a consultation and secondary legislation.

This means that more than 2 million workers will have their tips protected. HMRC has estimated that this new law will mean an estimated £200 million a year will go back into the pockets of hard-working staff by retaining tips that would otherwise have been deducted.

A new statutory Code of Practice will also be developed in order to provide businesses with advice on how tips should be distributed among staff. This Code is being developed and will be subject to formal consultation later this year.

Workers will also be given a new right to request more information relating to their employer’s tipping record, which will help them to bring forward a credible claim to an employment tribunal.

The Business and Trade Minister said:

‘As people face rising living costs, it is not right for employers to withhold tips from their hard-working employees. Whether you are pulling pints or delivering a pizza, this new law will ensure that staff receive a fair day’s pay for a fair day’s work – and it means customers can be confident their money is going to those who deserve it.’

What Has Changed?

Under current legislation, tips and service charges that are paid by customers must be passed on to staff in full, subject to limited and clearly defined exceptions.

Employers are no longer permitted to retain any portion of tips for business costs or profit.

Who Does This Apply To?

The rules apply across sectors where tipping is common, including hospitality, leisure, and personal services.

They apply whether tips are distributed directly, pooled and shared, or processed through payroll.

How Tips Must Be Handled

Employers are expected to have a fair and transparent system for allocating tips to staff.

This includes:

• Passing on tips and service charges in full
• Clearly explaining how tips are allocated
• Keeping records of how tips are distributed

Tips, Payroll and Tax Treatment

How tips are paid can affect whether they are processed through payroll and how tax applies.

Some tips may be subject to PAYE depending on how they are collected and distributed, while others may be taxed differently when paid directly by customers.

Why Compliance Matters

Failing to pass on tips correctly can expose employers to legal challenges and enforcement action.

Clear processes and proper records help demonstrate compliance and avoid disputes with staff.

HMRC and Government Guidance on Tips

Government guidance explains employers’ obligations around tips, gratuities, and service charges on
GOV.UK.

Are Your Tipping Arrangements Lawful?

Whether your current approach to tips is compliant will depend on how tips are collected, allocated, and recorded in practice. For businesses in Farringdon and nearby areas such as Clerkenwell and Smithfield, CIGMA Accounting can review your arrangements and help confirm they align with HMRC requirements.