How will the October Tipping Act legislation affect my business?

Change is coming to the way tips are handled in the UK. Payments expert Mark Ronayne explains what salons need to do.

A new law around tipping is set to come into effect from October 1, 2024. The Tipping Act was originally scheduled to take effect from July 1 but implementation was later delayed to October and confirmed by the new Labour government.

According to Government statistics, 80% of UK tipping is now occurring on cards, so if a salon doesn’t have a suitable card system to receive tips then your team may be missing out on 80% of potential tips, which can equate to up to 25% of their earnings.

The new Tipping Act introduces three significant changes for your salon team:

1. 100% of qualifying tips or service charges left by customers must be paid directly to employees. Employers cannot deduct any charges for admin or transactions.
2. The allocation of tips must be transparent and fair, with a clear written policy provided to employees.
3. Employers must withhold and pay taxes (PAYE and Employer and Employee National Insurance) on all tips received.

You might wonder how to ensure fair distribution of tips. A new code of practice for distributing tips fairly has been developed, which offers practical guidance.

Who do tips go to in a salon?

Typically, tips left by a client go directly to the service provider(s) who carried out the service. Salon owners must have a transparent policy on how tips are collected and allocated, with changes communicated to employees.

It’s important to note that this only applies to tips that are employer-received. This usually includes tips paid by card but also includes a cash tip jar or cashback from the till.

The new legislation means that you need to decide on a set tipping policy – this can either be taking no tips (which probably won’t go down well with your team or clients), running your tipping distribution via your payroll (though be aware that this will incur additional costs to you with NI payments and extra admin), set up an independent tronc (this involves lots of admin and can mean up to two months before the tips are passed on) or you can use a software system (such as the new Phorest Tips) that helps streamline the process, so tips are paid directly to your employees’ accounts upon receipt.

This means tips are non-qualifying, saving your business time and money, and ensuring your employees get the most tips possible, as quickly as possible.

It’s also good to remember that it’s down to your employee to report their tips to HMRC to stay compliant with income tax laws. If your business accepts tips, then you need to acknowledge that change is coming but hopefully this has helped you understand the issue a little better.