Service charge in UK restaurants: is it optional, and who gets it?

A service charge in a UK restaurant is optional for the customer when the restaurant presents it as discretionary. A compulsory service charge forms part of the price, and consumer law expects it to be included in the prices customers see before they order. Whichever type you use, the money has to go to staff. Since 1 October 2024, the Employment (Allocation of Tips) Act 2023 has required employers in England, Wales and Scotland to pass tips, gratuities and service charges to workers in full, allocated fairly and paid by the end of the following month.

Consumer rules on price display and HMRC rules on VAT and National Insurance apply as well, and for those the way you describe the charge on your menu makes a difference.

Is a service charge optional in UK restaurants?

It depends on how the restaurant presents it. HMRC treats a service charge as voluntary when customers are clearly told it is entirely optional and there is no obligation to pay, so a customer who does not want to pay it can ask for it to be taken off. HMRC's VAT manual also says the menu sets the contract between restaurant and customer, so a charge described as optional on the menu cannot be made compulsory when the bill arrives.

A compulsory service charge is one the customer has to pay to eat there. Under the price transparency rules in the Digital Markets, Competition and Consumers Act 2024, in force since 6 April 2025, mandatory charges must be shown in an invitation to purchase and included in the total price wherever they can reasonably be calculated. The CMA's guidance lists mandatory cover or service charges at a restaurant as examples, and treats a menu, including one reached by QR code, as an invitation to purchase. It adds that showing a charge separately, or describing it as an extra service, does not make it optional.

Who gets the service charge under the Allocation of Tips Act?

Workers do. The Act added Part 2B to the Employment Rights Act 1996, which requires employers to make sure the total of qualifying tips, gratuities and service charges at each place of business is allocated fairly among the workers there. The statutory code of practice confirms this covers service charges added automatically as well as voluntary ones, and agency workers are included.

Qualifying tips include anything paid to the employer, such as card tips and service charges, plus cash tips staff receive where the employer controls or significantly influences how they are shared. A cash tip that a worker receives and keeps, with no employer involvement, falls outside the Act. The amount that counts is what the customer paid, excluding VAT and ignoring deductions made by anyone along the way, such as a payment provider's fee.

The money has to reach workers by the end of the month after the month in which the customer paid. The code says tips should be passed on without deductions except in very limited cases, such as income tax.

The Act extends to England, Wales and Scotland. Northern Ireland has its own employment law and no equivalent statute in force. The Department for the Economy has proposed requiring tips to be passed on in full as part of its Good Jobs employment rights proposals.

How should a restaurant split service charge between staff?

The law requires a fair allocation, which need not mean equal shares. The code gives examples of factors an employer can use, including the type of role, basic pay, hours worked, performance, seniority and length of service. Whatever factors you choose should be clear and objective, and you should check them for indirect discrimination, which can happen without anyone intending it.

A restaurant can hand the allocation to an independent troncmaster. Where the employer reasonably considers the tronc operator independent and it is fair to use the arrangement, the Act treats the employer as having met its duty to allocate fairly. A tronc can also change the National Insurance position, which the section on tax below covers.

What written policy and records does a restaurant need?

Any business where tips are paid on more than an occasional and exceptional basis needs a written policy on how they are dealt with, available to every worker at that place of business. The Act says it must state whether the business requires or encourages customers to pay tips or service charges, and how they are allocated. The code adds that it must be in plain language and should cover how tips are accepted, allocated and distributed.

The same businesses must keep records of all qualifying tips and how they were allocated, for three years from the date each was paid. A worker can make a written request for the records covering a period when they worked there, no more than once every three months, and the employer must provide them within four weeks.

Section 14 of the Employment Rights Act 2025 adds further duties. Employers will have to consult a recognised trade union or workers' representatives, or the workers themselves where there are none, before producing a tipping policy, review the policy at least every three years with the same consultation, and share an anonymised summary of the views expressed. That section is not yet in force. The government is consulting on a revised code of practice until 29 September 2026, and its consultation document says it expects the new requirements and the updated code to take effect in late 2026, subject to Parliament approving the code. Until then, follow the existing code.

What happens if a restaurant keeps the service charge?

A worker can bring a claim at an employment tribunal, normally within 12 months of the failure. If the claim succeeds, the tribunal can make a declaration, order a revised allocation, make recommendations and order compensation for financial loss of up to £5,366, the limit since 6 April 2026. Tribunals must take the code into account where it applies, so it is worth documenting how your policy follows it.

Does service charge attract VAT and National Insurance?

The way you describe the charge decides the tax. HMRC's VAT guidance says tips freely given, and service charges clearly presented as optional, are outside the scope of VAT. A compulsory service charge is part of what the customer pays for the meal, so VAT is due on it at the same rate as the meal.

For National Insurance, HMRC's E24 guidance says contributions are always due when a mandatory service charge is paid out to employees, however it is shared. Voluntary service charges and tips can be free of National Insurance when they are paid through a tronc and the employer does not decide the allocation. Income tax is due on all of them, and none of them count towards National Minimum Wage pay.

In Tiquo's restaurant and bar tools, a percentage service charge can be added to orders automatically, with separate rates for product and service orders in each service area, and guests can be asked to add a tip on the card reader. The end-of-day sales export shows service charges and tips for each trading day, which gives whoever allocates the money a starting figure, while the policy and the allocation decisions stay with your business.

This is general information. Check the statutory code of practice, HMRC's E24 guidance and the CMA's price transparency guidance, or take advice from an employment specialist, before changing how you handle service charge.