Tipping Explained

Tipping Explained - What does everyone want?

For many restaurateurs, deciding on a tipping policy can be a difficult task. How should your restaurant share tips to meet the expectations of all parties? What are the rules governing tips anyway?

Restaurant Customers - Your customers want to reward good service but are sometimes confused about how the system works. When dining out, they want great food and a relaxing environment to enjoy it in. Tipping is a way for customers to thank your staff for making their experience a memorable one. They expect their waiter to get this reward; alternative tipping systems can be frustrating.

Restaurant Employees - Your staff want to be rewarded for the extra effort they put in to provide an excellent dining experience. This is as true for staff members responsible for table service as it is for staff members responsible for food preparation. If extra effort towards creating a relaxing, high-quality experience is rewarded, then there is an incentive to keep standards high and your customers happy.

Restaurant Management - The restaurateur needs to balance the desire for customers to reward the employees that directly serve them, with the need to reward the ‘behind the scenes’ staff that equally contribute to a high-standard dining experience. The tax system can also complicate how this tipping system can operate.

So, your customer wants good service, your staff want to be rewarded for effort, and you want everyone to be happy. Which tipping system is best? "https://www.iGRATM.com"

Should you directly charge customers for service rather than encourage tipping? There’s confusion over service charge for customers; is it a ‘normal’ tip or a charge that ends up with management? The customer doesn’t know where the money they choose to leave ultimately ends up.

Customers value transparency, so give it to them. The success of your system comes down to how you collect and distribute the tips that customers leave.

Your restaurant could collect tips, pool them, and then share them out based on the number of hours worked. This avoids penalising employees who work in the kitchen or at non-peak times, but might demotivate some employees who feel that their individual efforts aren’t rewarded.

Another option is the ‘keep what you get’ system. Your most enthusiastic staff appreciate that they get fully rewarded for providing great service, but not all your team members can work busy hours and feel unfairly treated.


Some restaurants now split out ‘service and kitchen’ charges. The premise is that customers can tip the kitchen for food and wait-staff for service. But there’s little precedent for this and it can simply confuse customers and annoy your staff.

It is agreed that your customers want to be sure that they are rewarding good service; at the same time, your employees want to be sure that their hard work is recognised, and don’t want to feel that their earnings potential is restricted. 

We already looked at what customers, staff, and management want from tipping. This is what you need know about the tax implications.

Tips can be Taxing

The added complication for determining your tipping system is how staff tips are treated in terms of tax.

There are a number tax rules that have been outlined by HMRC. Tips must be administered by restaurants ‘at arms length’. Otherwise, the money given by customers becomes taxable as income for your business.

The key points to consider on how tips are treated by the taxman are: 
-    Income tax is due on all tips regardless of how they are administered -    If tips are collected by the restaurant, then income tax should be deducted via PAYE -    If the restaurant management decides on how tips are distributed, then national insurance is due -    A compulsory service charge is not considered a tip by HMRC, so it’s treated in the same way as ordinary wages

This information is available on the HMRC website.

What to do about tipping?

There’s no correct answer on how you should administer the tipping system at your restaurant. Your business is unique. It’s clear, however, that you can’t just ignore the issue. Otherwise, either your service, staff motivation, or both will suffer.

Do nothing and you default to the status-quo of waiters keeping all of their tips: Tax is easier as declaring tips is the responsibility of your employees, but will this system demotivate staff who work in the kitchen or have shifts at less busy times?

How to split your restaurant's tips isn’t easy. Every business is different and there isn’t a blanket answer that applies in all cases. Get it right and you’ll have a happy and motivated staff, as well as customers who get to enjoy great service - and are happy to reward it. 

"Some tips are placed into a pool system known as a tronc, it is an arrangement for the pooling and distribution to employees of the tips, gratuities and/or service charges. If a tronc exists in the UK, the responsibility for deducting pay-as-you-earn taxes from the distribution may lie with the troncmaster rather than the employer. Income from tipping cannot be counted when assessing whether a wage or salary meets the national minimum wage.

With the appropriate tip system in place "iGRATM App", your restaurant will benefit in the long run."