Tipping draft code scrapped: what it means for your business

If you run a hospitality business, hairdressers, or anywhere else that gets tips from customers, it’s your responsibility to make sure staff get everything they’re owed. 

The government’s sudden withdrawal of its draft tipping code in July 2026 has left many small business owners unsure of where they stand.

Here’s what you need to know – and what you should be doing right now.

What is the Employment (Allocation of Tips) Act 2023? 

Also known as the Tipping Act, this law makes sure all tips and service charges go to hospitality staff or any employees who have been given tips by customers. 

The issue was first raised back in 2016, after widespread media coverage of unfair tipping practices. The Tipping Act came into force on 1 October 2024, filling a gap in the law by covering card payments – an important update for an increasingly cashless society. Cash tips were already protected, but card tips were not.

Many hospitality workers earn the national minimum wage or living wage, so tips make a real difference to their take-home pay.

What do employers now need to do with tips?

The withdrawal of the draft code doesn’t change your existing legal obligations. Employers must still:

• pass on all tips to workers without any deductions
• pay these tips to employees within one calendar month
• keep a record of all tips – workers will have the right to request to see this as it will allow them to bring credible claims to an Employment Tribunal
• create a written policy on tips – this will let staff know whether you encourage tips, and how they’re managed and distributed

You’re also not allowed to alter an employee’s salary or hourly rate – earnings from tipping won’t count towards earning the national minimum wage. Tips must be allocated fairly between all workers, including those on zero-hour contracts – though the Employment Rights Bill will be scrapping these types of contracts entirely (which have now been outlawed by the Employment Rights Act).

Under the legislation, if an employer breaks the rules they could be taken to an employment tribunal. This could mean compensation and fines, so it’s important that you’re on top of what you need to do to comply with the laws.

How to divide tips

Employers don’t necessarily have to distribute tips evenly between all workers. However, they do need to be distributed fairly and you need to create a written policy explaining how you do this. 

Some of the things you’ll need to consider when creating your policy for distributing tips are:

• differences in role (e.g. front of house workers may be more deserving of tips than those working behind the scenes)
• performance at an individual or team level
• length of time working with the employer or level of seniority
• customer intention (e.g. if a customer wants to tip a specific employee who served them)

There are several collection and distribution methods to choose from. For example, if an employee is tipped £10, you could:

• let the worker to keep the entire £10 as their tip
• add the £10 to a staff box, to be informally shared with the workforce
• add the £10 to a tronc system, to be formally shared with the workforce (this is particularly useful if you’re dealing with card tips)

However you choose to deal with tips, you’ll need to make sure you communicate this properly to employees using your tips policy. This could be done during induction –  you could provide a physical copy at this time and also display it on staff notice boards.

It’s a good idea to review and update this policy regularly. As employment laws evolve and your business practices change, keeping your policy current makes sure there’s ongoing compliance and transparency with your team.

What is a tronc – and how can it help your business?

A tronc is a system sometimes used to pay employees their share of tips and service charges in the hospitality sector. A ‘troncmaster’ will be in charge of deciding how the money is divided. This can be a member of staff other than the owner (or anyone else with hiring and firing authority), or even an external accountancy firm or payroll business. 

Using a tronc can help your business manage your tax implications when it comes to tips and gratuities. It’s helpful as a tronc on a payroll can mean the tips are excluded from National Insurance contributions (NICs), whereas if you manage the sharing out of tips yourself, you’ll be responsible for NICs as well as income tax.

Are tips subject to tax and National Insurance?

All tips are subject to income tax, but whether they’re also subject to National Insurance contributions depends on how they are handled.

• tips given directly to employees by customers (for example, cash tips not processed through the employer) must be declared by employees themselves. They’re also responsible for reporting these earnings to HMRC and paying both income tax and NICs
• tips distributed through payroll are subject to both income tax and NICs, just like regular wages
• tips shared via a tronc system (managed independently by a troncmaster, not the employer) are subject to income tax but aren’t subject to NICs (only if the tronc operates independently of the employer)

For all types of tips, accurate records must be kept to ensure compliance.

Tips and employment claims 

The Tipping Act adds “qualifying tips, gratuities and service charges” to the definition of wages. This means an employer can be open to a claim for unlawful deductions from wages if they don’t handle tip distribution fairly. 

Employees can also make a claim if they believe that employers haven’t been keeping correct records or don’t have a clear enough tipping policy. 

Frequently asked questions

What happened to the UK tipping draft code in 2026?

The government withdrew its draft revised Code of Practice on tipping in July 2026. The code had proposed making staff consultation a legal requirement when creating or updating a tipping policy. Following criticism from trade union Unite, ministers pulled the draft.

Does the Tipping Act still apply after the draft code was scrapped?

Yes, the Employment (Allocation of Tips) Act 2023 remains fully in force. Employers must still pass 100% of tips to workers without deductions, distribute tips fairly, keep records, and maintain a written tipping policy. The withdrawal only affects the proposed updates – not the existing law.

What happens if I don’t comply with the Tipping Act?

Workers can bring a claim to an Employment Tribunal for unlawful deductions from wages. They can also make a claim if you haven’t kept correct records or don’t have a clear enough tipping policy. Non-compliance could result in compensation and fines.

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