Service charges in the UK: everything you need to know

While tipping has been standard practice for a long time, service charges are becoming increasingly common in the UK and are popping up on bills in settings like restaurants more than ever before.

Some customers are likely to challenge staff on added service charges, so it’s important for business owners and management to have a clear understanding of the service charge they are imposing in preparation for such discussions.

It’s also important that business owners understand the difference between service charges and tips within their operation. This article will explore that separation, and also look at the different types of service charge, the rules around whether customers can refuse to pay it, and the tax implications involved.

What is a service charge?

A service charge is a fee collected by a business to pay for the services, admin, or processing costs associated with the main service being used by the customer – industries that charge them include restaurants, travel and tourism, banking, and property.

The charge is usually added at the time of transaction and is paid directly to the company, rather than its service staff – this is where service charges differ to tips, which are paid to the employees instead.

What are the types of service charge?

There are two most common types of service charge – discretionary and compulsory:

• Compulsory service charge: This must be stated to the customer in advance of the service being given, and the customer can only refuse to pay it if the service was very poor.
• Discretionary service charge: This can be added to a bill after the service, but the customer can decide not to pay it regardless of whether the service was good or bad.

Let’s use hospitality as an example. In a restaurant, service charges are imposed on food bills and are either a discretionary or compulsory fee.

Customers are within their rights to decline either – but for a compulsory service charge, the customer would have to show that they received poor service to get this removed from the bill. This could be demonstrated by speaking about their experience to the manager, for example.

For a discretionary service charge, a customer simply has to ask to have it removed from the bill before paying. A server may ask why this is, or they may simply do it without question – there is no right or wrong approach.

Asking the customer for their reasoning could provide the business with vital feedback to help improve their service going forwards – but it can also create an uncomfortable situation for staff.

How do industries other than hospitality use service charges?

It’s not just restaurants that use service charges. In the banking sector, monthly service charges may apply to certain types of bank accounts, or for making a guaranteed same-day bank transfer to another bank.

The provider or servicer of a block of flats will charge renters or flat owners within the block a service charge, too – the service charge period is often a year, but payments may be due every three or six months.

This charge tends to be used to maintain the common spaces within the building, including painting walls, fitting new carpets in stairwells, and maintaining lifts. In more luxury apartment blocks, the charge will also go towards maintaining facilities like gyms and swimming pools.

Both of these scenarios are examples of a compulsory service charge that the customer is aware of before committing to the service.

How much should a service charge be?

Service charges differ depending on the industry. When it comes to property, data from The Property Institute found that in 2024, the average service charge cost was £3,634 per leaseholder. This represents a 41% increase since 2019 – and the main drivers for this rise are inflation, the cost of building insurance, and the new Building Safety Act.

Older leases tend to have a fixed service charge regardless of the actual costs to the landlord – but most service charges now are based on the actual or estimated cost of services.

In UK restaurants, service charges tend to range from 10% to 12.5%, and it is up to the business owner to decide which percentage to enforce – remember, many restaurants don’t have service charges at all.

Do customers have to pay service charges?

Having an additional cost added to your bill can feel frustrating for customers – especially if they can’t see where this is being used or why it’s being charged.

Earlier this year, the BBC reported on residents from two housing blocks in east London who are refusing to pay their soaring service charge – in 2023, it rose by 36.6%. One resident says he says he gets “no service” for the charge of more than £2,750 a year, with leaks and disrepair throughout his building.

While no conclusion has come into play for these people, refusing to pay a service charge can lead to tenants being evicted. This is tricky because, despite tenants agreeing to a service charge when they commit to a property, there is no cap on these charges, so they can be increased at any time.

So, while discretionary service charges can be refused by customers, it is certainly a trickier scenario for compulsory ones. As mentioned, customers must be able to prove they have received a poor service in order to remove compulsory service charges.

In a restaurant setting, that tends to be an easier process – but, understandably, this is significantly more difficult when it comes to service charges on homes and with banks. The onus is on the customer to fight their corner and demonstrate their point of view – and they aren’t always successful.

Read more: What is a tronc scheme?

How are service charges taxed?

If a business imposes a mandatory service charge for customers and those fees are paid out to employees, National Insurance contributions are due on the payments. Employers must deduct both income tax and NIC through payroll.

Standard rate VAT must also be paid on mandatory service charges, and PAYE and National Insurance must be deducted on any payments to employees.

It’s important to note that service charges paid by customers do not count towards national minimum wage pay – however, service charges can count towards national minimum wage pay if they were paid by the employer to the worker through the employer’s payroll.

Final thoughts

Adding service charges to your business offering is a smart method of increasing income. However, business owners must be prepared to face challenges from customers – particularly if they don’t receive good service. Imposing service charges could be further motivation to ensure your company is offering the best experience possible to customers to avoid these awkward conversations.

Kirstie Pickering - business journalist

Kirstie is a freelance journalist writing in the tech, startup and business spaces for publications including Sifted, TNW, UKTN, The Business Magazine and Maddyness UK. She also works closely with agencies such as CEW Communications to develop content for their startup and scaleup clients.