The Service Charge Confession

Where it went. Where it goes now. Why nobody's saying either out loud.

The industry is on its knees. You can read why in the £30 meal essay – operating costs, business rates, taxes, the slow bleed of a sector everyone claims to love and no one wants to pay for. Recently, Tom Kerridge, Yotam Ottolenghi and others sat on BBC Newsnight and asked the Government, more or less, for help.

So this feels like the moment to talk about something else that happened, quietly, in the autumn of 2024. A change to the law that wiped thousands off the top line of most restaurants in this country overnight, and which I've not heard a single operator discuss in public since.

Let me get one thing out of the way. We always paid our staff fairly, and I believe most operators do.

Here's how it actually worked, and still does broadly speaking but with a change in the law that has put a huge dent in profitability and thrown pay scales well out of proportion. Almost nobody outside the trade understands the mechanics, so bear with me.

First, the thing people conflate. Service charge revenue is not the tronc. The service charge is what is added to your bill and comes into the business as revenue. The tronc is a separate pot, paid into from that revenue, and then distributed to staff. The two are not the same number and the gap between them is the whole story.

Almost always, when you hire someone in hospitality, you agree an hourly wage. On paper, in the contract, that number is the minimum wage. Verbally, you agree the real number, the figure they actually take home, and you tell them, though almost all already know, that the gap is made up from the tronc, which is funded by service charge. That tronc covered the whole team – front of house and kitchen alike – not just the person who took your order. The same applies to salaried staff: base salary at minimum wage, topped up monthly from the tronc to the figure you shook hands on. The tronc can never be guaranteed, so the understanding is that the agreed number will always be honoured, and in good months, or when sales targets are met, exceeded. Decembers look after a lot of people and managers can also have incentives paid by tronc on top.

That was the model, and broadly still is. Base plus top-up. It worked, it was understood on both sides, and as long as you ran it honestly and raised people in line with how they performed, there was no problem with it. None.

How It's Charged

Service charge has always been a grey area. You add it discretionarily to each bill, usually 10 or 12.5%, and most people pay it without a second thought as long as the service was decent. That is the ubiquitous method in UK cities. Or you leave it off, make that clear on the bill, and give the option to add it by card on the chip and pin machine, with a cash gesture too if it comes, which should always go straight into the server's pocket or a pot for floor staff on any one shift. Or, rarest of all, you make it mandatory and flag it at the point of booking, up to 15% in the places that can get away with it.

The Offenders

There were exceptions, and they ruined it for the rest of us.

A handful of operators, some of the bigger ones, ran it differently, and ran it dishonestly. Where an honest operator's share, if any, came from what was left after the staff were paid, the dishonest one took a cut off the top, before the money ever reached a payroll requirement calculation. A percentage lifted from the service charge pre-tronc distribution and kept; dressed up on the service charge policy document and the management accounts as a card fee or an admin cost, when the percentage taken was far larger than any card or admin cost could ever justify. The customer thought they were tipping the staff but the amount was levied before it reached the tronc pot, and if that tronc pot was insufficiently funded then those staff were going short. That is not a grey area, that's taking money out of a low-paid worker's hand and calling it overheads.

One operator went further still. It charged its waiting staff a percentage of their own sales, levied on what they sold rather than on service charge revenue. So a server could finish a packed shift, having brought thousands through the door, and find they owed the house money for the privilege. The tip wasn't being skimmed at that point – the job itself was incurring an internal tax.

All this brought scrutiny, and rightly so. But the Government's answer was a blunt instrument, drawn up with almost no consultation with the people who actually run restaurants, and it came down on all of us the same. The honest operator and the skimmer, treated as one.

The Maths and the Law

Take a site doing £30k a week gross (VAT included) and charging a discretionary 10% service charge. That's £3k a week in service charge revenue, assuming customers pay it. Call it £160k a year with additional service charge generosity – so around £13k a month or per payroll period.

Before the law change, you worked out what you needed from that £13k pot to fund the wage, salary top-ups, and the incentives for that site, moved that amount into the tronc, and what was left over could be moved to your top line.

Crucially, staff were still receiving exactly what they had agreed when hired. The surplus existed only because service charge receipts exceeded what was needed to fund those commitments – not because anyone was paid less than promised.

Depending on the operator that could be anything between 10 and 40% of surplus service charge to cover breakages, uniforms, staff meals, drinks and events, and so on, or just to prop up margin through the down months. Quite a significant amount of revenue to fall back on during quieter periods or the industry slump we now find ourselves in.

And here's the part people get wrong and a lot of operators don't actually realise. There was actually no law enforcing any of it. The entirety of service charge revenue was the business's to retain if it wanted. What kept the tronc honest was the commercial obligation to pay your staff what you'd agreed, and the significant tax benefit of doing so through tronc funds.

Money paid out through tronc escaped National Insurance (NI), both the employer's and the employee's, on one condition: the allocation had to be run by a troncmaster. That troncmaster could be an in-house manager, an outside consultant, or someone in your payroll processor or accountants, as long as the scheme was set up properly with HMRC and they genuinely administered it each payroll. They set the mechanics based on your pay structures, wrote the policy and ran the compliance. Revenue was fed into the spreadsheet and payroll ran the rest. Only the money actually designated as tronc carried the tax exemption. The discipline was fiscal, not legal. The attraction was that paying staff through tronc meant neither employer nor employee paid National Insurance on those payments, the employer saving being 13.8% at the time and 15% today.

The Employment (Allocation of Tips) Act came into force in October 2024. From that point, every penny of service charge had to reach staff. Any surplus could no longer be retained any longer than the end of the following month.

And for operators across the sector, that surplus had been part of the margin. That is the confession, such as it is – not a secret, just rarely said out loud. Staff were paid what they'd been promised; the surplus existed only because receipts exceeded what those commitments required. The law took it, and with all the other macroeconomic factors hitting home at the same time, the timing could not have been worse.

What It Did To Us

A lot of operators went into damage limitation mode by calling the service charge something else or by dropping the service charge percentage and moving the difference onto the menu prices. All that achieved, at the precise moment customers were becoming more alert than ever to every pound spent, was to make us look more expensive or to prompt questions on what the new spurious line on the bill was.

Then from October 2024 to the following April we spent triple the time on payroll. Every month became a balancing act between what the tronc owed and what service charge had brought in. More often than not you were sitting on a surplus that now, by law, had to go out, so you learned to carry December's surplus into January to cover the quiet weeks and stay compliant. Admin we never used to do, for an outcome which dented our ability to operate profitably.

And then the awkward part which was equally damaging.

The surplus went to the staff. People who had been perfectly content with what they earned watched the number climb, some of them by a lot, and human nature being what it is, contentment soon refocused on comparison. Across the sector a junior on a minimum-plus-tronc package could find themselves several pounds an hour better off for the same work, almost overnight. It shredded the pay scales operators had built their businesses on. You could now have a junior taking home the same as a manager purely because of the size of the tronc and the way in which operators were reallocating the surplus funds to incentivise those actually selling to tables more than those overseeing, solely in order to offload the tronc cash. How do you think the managers felt about this? You spend years building a structure where progression means something, and a change in the law flattens it in a quarter.

Then in April 2025 the minimum wage went up again, and we did the whole thing over. With service charge revenue still requiring full distribution, everyone got yet another bump. Great for the employee, not so good when you're trying to stay afloat in a down market.

Is Anyone Watching

Is any of this being policed under the current Government? I doubt it. I think they have other things on their minds.

Which leaves the obvious question, the one nobody in the trade wants to ask out loud. The operators in the press lately pushing service charge to 15%, or quietly swapping it for a brand charge or an admin fee worded just so – what exactly are they doing with a tronc pot bigger than it has ever been? The same money, relabelled, parked somewhere the Act itself cannot reach. No National Insurance on it. No VAT, if they've kept it discretionary. Though it is worth saying: HMRC and employment tribunals look at substance over form. Simply renaming a charge does not automatically preserve either the VAT treatment or the NIC position. The operators leaning on the relabel are taking a legal risk they may not have fully evaluated. Ping Pong tried it – swapping service charge for a 15% brand charge just as the law landed, they took the reputational hit, and closed all four remaining sites in July 2025. The relabel became the story. The story cost the footfall.

The law was meant to make this fairer but for the honest operator it removed a cushion we used to absorb exactly the kind of shocks Kerridge and Ottolenghi were describing on Newsnight. For the operators willing to game it, it left the door it was meant to close standing open, with a different sign on it.

Nobody talks about it. I thought someone should.

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