In the UK service charge is a core part of how hospitality works, and it is built into how staff are paid.
They are paid through two systems:
- the first is their base salary - taxed, NI’d, and pensioned like any other job.
- The second is what’s called Tronc, which is the pooled service charge. This is distributed among staff, usually by an independent ‘tronc master’ (not the employer), and it’s often a significant portion of someone’s income.
Tronc income is taxed but isn’t subject to employer National Insurance contributions, and it’s not pensionable.
The business doesn’t have to pay VAT on service charge / tip income so if service charge would be incorporated to the final bill without separation, the final bill for the customer would be more due to tax obligations.
For example, in 2017 I was employed as a sous chef (second chef in the kitchen after the head chef). My annual base salary was £20,000 and tronc was £11,500 (+ discretionary bonus that was around £1500 / year). Tronc was not guaranteed and was entirely separate from the base salary. If I would have applied for a mortgage, the bank would have only considered my base salary ignoring more than third of my takings.
During lockdown (I didn’t work there by then) furlough was paid based on the ‘base salary’. This was a huge problem for a lot of hospitality workers in 2020. This was the time when pretty much every worker realised what the ‘base salary’ means in their contract.
In 2023 there has been a change to the Employment (Allocation of Tips) Act that required 100% of tips and service charges to go to the staff. Until it came into effect in July 2024 if a company haven’t made enough service charge to cover the tronc part of the salary they had the right to pay less.
The change was to avoid mishandling tips in general. Some companies didn’t pay them out in full, and they built the tips into their profits. The new law also says that employers can’t rely on Tronc to meet pay guarantees. If an employee has a guaranteed salary and their Tronc doesn’t meet it because takings are lower, the company must make up the shortfall.
Service charge on the final bill can be ‘mandatory’ or ‘discretionary’. With the latter you have the right to ask your server to remove it from the final bill if you don’t want to pay it. From the business point of view, it will be almost always ‘discretionary’ because if it’s ‘mandatory’ they would have to pay NI on it.
In the UK there is no cap on how much service charge hospitality businesses add to the final bill but they are typically between 10%-20% of the total amount.
Sources Club Gina and gov.uk
Leave a comment