Restaurant and café accounting: tips, tronc and VAT

Key takeaways

Since 1 October 2024, employers must pass all qualifying tips, gratuities and service charges to workers without deductions.
Tips must reach workers by the end of the month after the month the customer paid them.
Employers must keep a record of how each tip was dealt with for three years, and answer a worker's written request for records within four weeks.
No National Insurance is due on tips paid out through a tronc if the employer does not decide who gets what, but PAYE income tax still applies.
A compulsory service charge is standard-rated for VAT and always attracts National Insurance; a freely given tip is outside VAT.
Food eaten on the premises and hot takeaway food are standard-rated at 20%; most cold takeaway food is zero-rated.
From 1 April 2026 smaller restaurants in England pay business rates on a 38.2p small business RHL multiplier, replacing the old relief.

Restaurant and café accounting turns on three things most other businesses never deal with: tips law, tronc schemes and the split between standard-rated and zero-rated food. Get those right and the rest is ordinary payroll and bookkeeping. This guide sets out HMRC’s rules as they stand on 6 November 2026.

What does the tips law require?

Since 1 October 2024, the Employment (Allocation of Tips) Act 2023 has required employers to pass all qualifying tips, gratuities and service charges to workers without deductions. The rules now sit in Part 2B of the Employment Rights Act 1996, and the Department for Business and Trade’s statutory code of practice explains how to share them fairly.

Duty	Rule	Section
Pay tips on time	By the end of the month after the tip was paid	s27G
Written tips policy	Required if tips are more than occasional	s27I
Keep records	Three years from the date of the tip	s27J
Answer a worker’s request	Within four weeks	s27J

A worker can ask for records once in any three-month period. Workers can enforce their rights at an employment tribunal, which must take the code into account. Tips do not count towards the National Minimum Wage, so you cannot use them to top up pay.

How are tips taxed?

Tips are always subject to income tax, but whether PAYE and National Insurance apply depends on who handles the money. HMRC’s E24 guidance, updated 18 July 2025, sets out the treatment.

How the tip is paid	PAYE	National Insurance
Cash straight to the worker, no employer involvement	No (tax code adjusted)	None
Paid to the employer and passed on	Yes	Employer and employee
Compulsory service charge	Yes	Always due
Tronc run by an independent troncmaster	Yes, by the troncmaster	None, if the employer does not allocate

HMRC says the 2024 tips law did not change any of these tax rules.

How does a tronc work?

A tronc is a separate arrangement for sharing tips, run by a troncmaster who decides who gets what. The National Insurance saving depends on that independence: if the employer decides, directly or indirectly, who benefits and by how much, National Insurance is due.

To set one up properly:

Appoint a troncmaster. This is often a senior employee, but they must make the allocation decisions, not the owners.
Register a separate PAYE scheme. HMRC treats the troncmaster as personally responsible for running PAYE on tronc payments.
Write the allocation rules down. Put them in your written tips policy so staff can see them.
Keep the employer out of allocation. Do not set the shares or veto payments.
Treat top-ups as pay. If you guarantee a minimum and top it up yourself, National Insurance is due on the top-up.

What VAT do restaurants and cafés charge?

Food and drink eaten on your premises is standard-rated at 20%, and so is hot takeaway food. HMRC’s Notice 709/1, last updated 8 June 2026, sets the tests.

Eat in: standard-rated, including cold food eaten at your tables.
Hot takeaway: standard-rated if the food is hot when handed over and meets one of the notice’s tests, such as being heated to order or kept hot.
Cold takeaway: zero-rated, unless the item is always standard-rated (crisps, sweets, soft drinks, bottled water, alcohol).
Compulsory service charge: standard-rated as part of the bill.
Voluntary tip: outside the scope of VAT, because the customer gives it freely above your charge.

A temporary reduced rate for certain children’s meals ran from 25 June 2026 to 1 September 2026 and has now ended. You must register for VAT once taxable turnover passes the VAT registration threshold of £90,000. Our VAT calculator works out the VAT in a price.

What business rates do restaurants pay in 2026/27?

From 1 April 2026, retail, hospitality and leisure (RHL) properties in England pay on permanently lower multipliers instead of claiming the old RHL relief. The 2026/27 notification sets these rates.

Property	RHL multiplier	Standard equivalent
Rateable value up to £50,999	38.2p	43.2p
Rateable value £51,000 to £499,999	43.0p	48.0p
Rateable value £500,000 and above	50.8p	50.8p

Your council decides whether your premises qualify as RHL, so check your bill. Wales, Scotland and Northern Ireland run their own rates systems.

Bookkeeping checklist for restaurants and cafés

A short monthly routine keeps tips, VAT and payroll in step.

Reconcile card machine settlements to daily takings, separating tips from sales. Compare card machines by fees if you are switching.
Code eat-in, hot takeaway and cold takeaway sales separately in your till so VAT is right.
Record every tip received and how it was paid out, and keep the record for three years.
Run tronc payments through the troncmaster’s PAYE scheme, not the main payroll.
Keep supplier invoices for food and drink; see HMRC’s receipt rules.
Check casual staff hours and holiday pay. Our holiday pay calculator handles irregular hours.

What to do now

Check that your written tips policy exists, is on display and matches what actually happens. If you run a tronc, confirm the troncmaster really decides the shares. Then test your till coding against Notice 709/1 for a week of sales. If you are taking on staff for the first time, read how to take on your first employee.

Frequently asked questions

Can a restaurant keep any of the tips?

No. Since 1 October 2024 employers must pass all qualifying tips, gratuities and service charges to workers without deductions.

Is a service charge subject to VAT?

A compulsory service charge is standard-rated for VAT. A tip the customer chooses to leave on top of the bill is outside VAT.

Do you pay National Insurance on tips through a tronc?

Not if an independent troncmaster decides who gets what and the employer is not involved in allocation. Income tax is still due through the troncmaster’s PAYE scheme.

Is takeaway coffee standard-rated?

Yes, a hot drink sold to take away is standard-rated as hot takeaway food and drink under Notice 709/1.

How long must I keep tips records?

Three years from the date the customer paid the tip.

Sources

Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance on 6 November 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.