We Need To Talk About Service Charge

How the hospitality pay system really works

“My friend told me you can just ask them to remove the service charge. It’s optional. We went to Claridge’s and the service charge was c. £65 on our bill, so we asked them to take it off.”

Me: Was the service bad?

“No? My friend just said you don’t have to pay it.”

This comes up more often than you might think. I get it, if you’ve never worked in hospitality, service charge feels vague and a bit suspicious. It’s optional, right? So what’s the big deal?

Here’s the thing: service charge in the UK isn’t just about “good service.” It’s not a polite thank-you to the person who brought your food. It’s a core part of how the hospitality system works. And in most restaurants - especially independents - it’s built into how staff are paid.

Most people in hospitality 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.

Let’s say a job is advertised at £30,000. That might break down to £20,000 as the base salary and £10,000 via Tronc. If everyone decided to remove the service charge from their bill - even if they had a good experience - it would directly affect how much staff take home.

During lockdown, this system exposed some major cracks. The government’s furlough scheme covered 80% of people’s base salary, but not their Tronc income. So while furlough kept some industries afloat, it left huge gaps in income for hospitality workers. Understandably, there was a lot of anger and confusion.

And it doesn’t stop there. When it comes to things like mortgages, most lenders will only consider your base salary - not Tronc - when assessing what you can borrow. Some will now consider this though, if it’s consistent and well documented.

Here’s an example. Back in 2017, I was asked to open a bakery for someone. The job was advertised at £35k and I thought, great - that sounds fair. But in the small print it said: “base salary £17k,” with the rest made up through Tronc. Because the bakery wasn’t opening for another nine months, that meant I’d be on £17k alone for all that time, with no service charge coming in. I turned it down, obviously.

Hospitality is in a tough spot (we’ve been saying this for years). Costs have soared across the board: energy, ingredients, business rates, rent, wages. Margins are tight. Most independent restaurants are scraping by. But there’s still this expectation that eating out should remain affordable and that any added charge is a bonus, or worse, a scam.

Yes, some restaurants mishandle service charge. Some absorb it into profits or aren’t transparent about how it’s distributed. That absolutely needs fixing. But those cases are not the norm. In the vast majority of independent places, service charge isn’t a bonus, it’s how people pay their rent.

We’ve spent years writing about this on Countertalk.

Will 20% service charge be the norm

The new service charge legislation

Is it time to abolish service charge?

Understanding your payslip in light of the new legislation

We’ve helped restaurants talk to each other about it and answered countless questions from confused staff who say things like:

“I think I get £2.50 p/h in Tronc but my manager just tells me what it is - I don’t really know.”

That’s the problem. The whole system feels opaque. I sometimes wonder if that’s the point - that if it stays confusing enough, no one asks questions.

To be honest, I don’t even think we should call it “service charge.” The name makes you think it’s optional, that it reflects how nice your waiter was. But this isn’t a tip. It’s not a reward for extra effort. It’s an essential part of the pay structure that exists to help keep the business running and staff paid fairly. It’s distributed to pretty much everyone who works in the establishment from the kitchen porter who washes the dishes to the chefs prepping the food, the bartender making the drink, the food runner popping the plate down, the person serving you and more.

Ironically, having service charge separated on your bill actually saves you money. If service were included in menu prices, restaurants would need to raise prices by not just 15% - but 15% plus VAT. That’s because once service is baked into the menu pricing, it becomes taxable. So the customer ends up paying more, and the government takes a slice too.

Here’s what that looks like:

💸 Example: Vat & Service Charge Implication 💸

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Note: When service is included in prices, VAT applies to the full amount, including what would’ve been service charge. That pushes up both the tax bill for the restaurant and the final bill for the customer

***This example has been re worked from my initial example***

Two Ways to Handle Service Charge in the UK

Option 1: Add 12.5% discretionary service charge on top of menu prices

This is the most common model in UK restaurants.

• Menu prices are shown inclusive of VAT (20%)

• A discretionary service charge (usually 12.5%) is added to the bill, not baked into prices

• VAT is not charged on the service charge

• If the service charge is discretionary, HMRC currently allows it to be excluded from National Insurance & PAYE if passed to staff (e.g. via a tronc)

Advantages:

• Lower base prices on the menu

• More transparent for customers (they see what’s for food vs service)

• You don’t pay extra taxes or NI on service charge if it's discretionary and handled correctly

• If using a tronc system, it’s tax-efficient for staff

Considerations:

• Some customers may refuse to pay the service charge

• It can confuse people unfamiliar with the UK system

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Option 2: Bake service charge into menu prices (i.e. all-inclusive pricing)

• Menu prices include food, service, and VAT

• No extra charge appears on the bill, it’s a “one price pays all” model

• But now you pay VAT on both food and the embedded service charge

• AND the whole amount is considered staff wages unless separated via tronc, meaning employer NI applies

Advantages:

• Transparent pricing for customers (no surprise charges)

• Could feel more “premium” or European

Major Drawbacks:

• More VAT because you’re charging VAT on the embedded service

• Employer pays National Insurance on that embedded service charge if it becomes wages

• Costs you more overall

• Staff may receive less in tips unless you increase menu prices significantly

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I don’t think this system is perfect. I don’t think diners should be expected to top up wages. But right now, it’s what we’ve got. Understanding how it works is the least we can do before deciding whether or not to pay it.

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Going out to eat and choosing where you spend your money matters.

Even when I’m trying to explain this to new staff or to friends, I have to take a deep inhale before I get going. I’ve been doing this a lot lately - especially this past week while talking to potential employees in interviews. 99% of them have no clue about the Tronc system, and a few have automatically assumed it’s a way to screw over staff.

People think that restaurants are creaming it - they’re (mostly) not. Unfortunately, the service charge system is what’s in place, and if you try to go against it as an independent, you risk losing everything. The people in government who dictate laws around hospitality have got it quite wrong.

There’s been a change to the legislation around tronc - the Employment (Allocation of Tips) Act 2023 came into force on 1 July 2024. It requires that 100% of tips and service charges taken into a business must go to staff within one month of receiving it. Restaurants used to be able to pool this together and divide it out over a year, which helped smooth incomes over bleak months like January and August. That won’t be allowed anymore.

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 now make up the shortfall.

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We’re trying something new at Gina. I’m still a bit on the fence about it - even after all the research and conversations, because I don’t yet know what it will mean for us. But i’m doing this because I think it’s a fair choice for our employees.

We’re trialling a system called TipJar that integrates with our rota system. All pooled service charge will be divided up and paid to staff weekly. It’s completely independent, the company has no hand in it. We pay TipJar £160/month to run this, and have paid about £800 to onboard and set it up.

There we have it, for now, I hope that was insightful. My closing thoughts…

When you see that service charge, don’t just ask if it’s optional, ask what it means. For most people working in restaurants, it’s not a bonus. It’s not a reward. It’s their rent, their groceries, their bus fare home.

We need more transparency, yes. But we also need more empathy. This industry won’t survive on vibes and love alone. If we want better hospitality, we have to back it -literally. So next time, think twice before asking to take it off. If this made you think, talk about it. Share it. Start the conversation.

Change starts with understanding. Let’s not keep looking the other way.

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P.S. I’ve written this article to the best of my knowledge, after spending a lot of time trying to educate myself and questioning things like “why is it like this?”, “how does that work?”, and often, “surely not?”. I’ve tried to fact-check everything as thoroughly as I can - but if I’ve missed something, please do jump into the comments and let me know. I’ve made this piece completely free to read because I believe this conversation needs to be more open and accessible.