A complete guide to tip sharing: what works best for staff?

Tipping is a great way for employees to top up their wages. How should business owners approach the sharing of tips within their workforce?

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Tipping employees in cash or by card is a way for customers to show their appreciation for the service they’ve received, but how these tips are distributed to a team can be a tricky topic.

The Employment (Allocation of Tips) Act 2023 comes into force in the UK on October 1 2024, putting in place a new set of rules on how business owners must handle tips. But what is the best approach to tip sharing?

This article will explore what tip sharing and tip pooling is, looking at the different approaches, the pros and cons of each, and the essential rules to follow.

What is tip sharing?

Tip sharing refers to how a business distributes tips to its workforce – usually via percentages that vary depending on job roles. When the new legislation comes into force in October, employers will have a legal obligation to pay all tips, gratuities, and service charges to the employees that earn them.

In addition, employees also have the right to request transparency on how much their company has earned in tips and how they have then been distributed. This is particularly important now card payments are used more than cash.

However, it is still up to business owners to decide how tips are shared. When this decision is made, creating a clear tip sharing policy that outlines this, and sharing the policy with employees, is essential.

What is tip pooling?

Is there a difference between tip sharing and tip pooling? Yes, and it’s subtle. While tip sharing is based on percentages that vary, tip pooling is most commonly based on an equal distribution of pooled tips – but it’s important to note that this isn’t always the case.

For example, business owners who undertake equal tip pooling – the most common method – will put all tips in one ‘pot’ and split them equally amongst employees.

What are the different tip sharing methods?

Tip sharing and the way employers approach it is a contentious topic – and opinions tend to differ within the same company depending on a person’s job role. There are three different ways to approach tip sharing:

  • Staff simply keeping their own tips
  • Role or shift-based tip sharing
  • Equal tip pooling

The former is self explanatory – workers simply keep 100% of the tips they receive from customers for themselves.

The latter options involve putting all tips received in a ‘pot’ and then distributing the tips to staff on a weekly or monthly basis. There are a few common approaches to this:

  • Tips can be divided equally amongst all staff – this is the most common type of tip pooling
  • Tips are separated by job department – like bar staff and waiting staff – or by the amount of shifts worked
  • A hybrid pool, in which staff who are tipped directly keep a higher percentage of the tip (usually 30-50%), and contribute the rest of the tip sum to a pool to be shared

What are the benefits of each tip sharing method?

The positives of enabling staff to keep their own tips include staff retention and motivation to work hard, as providing a good service to their customers could equate to more tips and therefore a bigger pay packet. This is great for morale for front of house staff, and retention is an added bonus for employers who have struggled to fill such roles in recent years.

A benefit of equal tip pooling means everyone within the company receives a tip on top of their wage which, again, is a huge boost for morale. It also encourages team members to work harder because they have a heightened sense of responsibility on a team level.

Tip sharing based on a role or number of shifts worked can make logical sense to some – the more you work, the more you can get paid as there are increased opportunities to get tips. In addition, tip percentages based on a role equates to higher sums for more experienced staff or those who are client-facing compensates the hard work put in in each scenario.

In a hybrid tip pooling system, employees retain a certain percentage of the total tips they earn and share the rest with their team. This enables hard working employees to hold on to the majority of their tips earned.

What are the downsides of each approach?

Staff keeping their own tips can be seen as the easiest way to handle tipping – but others will argue it lacks fairness.

In a restaurant scenario, for example, kitchen staff are preparing the food that is served to customers. Waiting staff are customer facing and therefore receive tips directly – but what about the kitchen staff who created the dishes? They wouldn’t receive any form of tip with this method.

Another issue is that the employee who finalises a customer’s bill and consequently receives the tip may not be the person who served the customer throughout their visit.

While tip sharing and pooling could be considered more fair, there is an administrative add-on for employers – you need to assign a troncmaster, who will be responsible for tip management. As someone who handles money and pays staff, the troncmaster must report to HMRC, must be independent of your business’s recruitment team, and must be capable of doing the job well.

There are pros and cons to each approach to tip sharing, and it is up to employers to decide which method they feel is best.

Why should I use a tronc scheme?

While there is an administrative burden, using a troncmaster means that tips are excluded from National Insurance tax, so employees will only have to pay income tax on their tips, rather than both income tax and NICs.

What are the rules of tip sharing and pooling?

The Employment (Allocation of Tips) Act 2023, informally known as the Tipping Act, comes fully into force on October 1 2024, meaning employers will need to adhere to new legal requirements for how they allocate and pay tips.

The new law states that employers must:

  • Allocate tips in a fair and transparent way
  • Pay tips to employees within one month of the end of the month in which they were received
  • Maintain records of all tips distributed and make them available to employees
  • Have a written policy on allocating tips that is accessible for all employees to read

Under the new legislation, business owners are required to follow a statutory code of practice that calls for complete transparency in how they handle and divide tips among their employees.

This is law and not open to interpretation, so it’s important to have a clear understanding of what it entails before implementing your own strategy for tip sharing or pooling.

The code of practice covers transparency, fairness and addressing problems. Key points include:

  • An employer should ensure they have fair processes in place for resolving issues and responding to queries from workers who have not received the share of tips they expected.
  • A tipping record must include details of all qualifying tips received by the employer at the place of business, and the amount allocated to each worker. This record must be maintained for a period of three years beginning with the date on which the tip was paid.
  • Employers should use a clear and objective set of factors to determine the allocation and distribution of tips. The choice of factors should be fair and reasonable given the circumstances and the nature of the individual business.

You can view the full code of practice on the UK government website here.

As mentioned, if you choose to pool tips altogether to then share equally, you will need a troncmaster to report to HMRC – you do not need a troncmaster if you choose to share tips unevenly, such as different percentages depending on role or shift numbers.

The troncmaster can be anyone in the business other than the employer or a business partner – it usually falls upon a senior member of the team, like a manager.

Remember, income tax is due on all tips, but they are not liable for Class 1 NI under a tronc scheme. Tips paid directly to the recipient via cash are also not liable for NI. When tips are shared without a tronc scheme, they are liable for NI.

Final thoughts

As long as it remains in line with the latest legislation, each company’s approach to tip sharing is up to them to decide. It can be a tricky topic to navigate, and employers may want to consult with their staff or senior management on their thoughts and feedback before implementing a policy.

Mid shot of Kirstie Pickering freelance journalist.
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.

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