Restaurant service charge in the UK: law, VAT and staff share

A restaurant service charge is legal in the UK, whether it is optional or compulsory, as long as you are clear about which it is before the customer orders. A compulsory charge counts as part of your price under consumer law, carries VAT and National Insurance, and every penny must go to staff under the Tips Act. An optional charge must be genuinely optional, which is also what HMRC looks for. This guide connects the four rules that apply: consumer pricing law, VAT, National Insurance and tipping law.

Optional or compulsory: the definitions that matter

The two kinds of charge are treated differently by HMRC, so the wording on your menu decides the tax. HMRC's guidance on tips, service charges and troncs (E24) defines them like this:

• A voluntary service charge is one that is "clearly presented to the customer as an entirely optional payment". The literature the customer sees must say so, and what staff tell customers must match.
• A mandatory service charge is one where the payment is not purely discretionary and there is an obligation to pay.
• A tip or gratuity is an "uncalled for and spontaneous payment", including an amount a customer writes on an open card slip or adds on the payment terminal.

The Code of Practice on tips covers both: it applies to "tips, gratuities and service charges (including both automatically added and other voluntary service charges)". Our tronc and Tips Act guide covers allocation, policy and record-keeping in detail.

What consumer law requires you to show

Pricing transparency is now enforced by the Competition and Markets Authority under the Digital Markets, Competition and Consumers Act 2024 (DMCC Act). The consumer rules came into force on 6 April 2025, under the Commencement No. 2 Regulations.

Section 230 says an invitation to purchase omits material information if it leaves out the total price, and that the total price "includes any fees, taxes, charges or other payments that the consumer will necessarily incur". The CMA's guidance on price transparency (CMA209) applies this to restaurants directly:

• A menu, including a QR code menu, is an invitation to purchase.
• A charge is mandatory if the customer cannot buy the product without paying it. Presenting it separately, or calling it an extra service, does not make it optional.
• The guidance lists "mandatory cover or service charges at a restaurant" as an example of a mandatory charge.
• Where the total cannot reasonably be worked out in advance, you must give the information needed to calculate it, with "as much prominence as" the rest of the price.

For a menu where the customer chooses the dishes, a percentage service charge cannot be added into each price on the card. Our reading of the guidance is that you then need a statement of the percentage, shown as prominently as the prices, before the customer orders. Where the charge can be calculated in advance, for example a set menu at £45 per person with 12.5% service on top, show the total (£50.63) and not just the £45. This applies on your website, booking page and any quote, not just on the printed menu.

The penalties are real. For breaches the CMA can fine up to £300,000 or, if higher, 10% of turnover under its direct enforcement powers.

The government has also said how it sees automatic charges on bills. In its response to the tipping consultation, it said "it should always be clear on the bill, or in communication with staff, whether any tip automatically added to the bill is optional or mandatory", and that if it is optional "there should be no pressure to agree it".

Menu, bill and booking page wording

If the charge is optional, say so in plain words and honour it:

A discretionary service charge of 12.5% will be added to your bill. It is entirely optional, and you are welcome to ask us to remove it or change it. All of it is shared between our team.

If the charge is compulsory, put it where the prices are:

A service charge of 12.5% is added to every bill. This is compulsory and is shared between our whole team. Prices include VAT. Service charge is calculated on your total bill.

For a large-party booking page or a set menu, show the full amount:

Set menu £45 per person. A compulsory 12.5% service charge applies, so the total is £50.63 per person.

Three habits that cause trouble: calling a charge "optional" on the menu while staff tell guests it is not (HMRC says the two must be consistent), making a pre-filled tip hard to change, and showing the charge only on the final bill, which is the pattern the drip pricing rules target.

If you use TablePort, tips and the tip pool are reconciled at the close-out screen. Whatever system you use, check that it records tips and any service charge as separate lines, because you need that split for your tipping records and your VAT return. See the POS page.

VAT and National Insurance: what a charge really costs you

VAT Notice 709/1 says: "If you make a service charge, it's standard-rated. But if the customer freely gives a tip above your total charge, no VAT is due on the tip." HMRC's E24 guidance adds that a compulsory charge forms part of the consideration for the meal. A genuinely optional charge is not consideration, so it is outside the scope of VAT, even if it appears on the invoice.

Employer National Insurance is 15% above £5,000 a year per employee for 2026/27. Here is what a compulsory 12.5% charge costs on a £1,000 VAT-inclusive bill, if you are VAT-registered, the charge is VAT-inclusive, you fund the VAT yourself and you pay all of it to staff:

That is about 32% of the charge. These are illustrations, and the true NIC cost depends on each employee's earnings and any Employment Allowance. Neither the Code nor HMRC's guidance sets out how the VAT on a charge should be funded when the whole charge goes to staff, so agree it with your accountant and write it into your tipping policy. A genuinely optional charge or a tip carries no VAT, and no NIC if an independent troncmaster allocates it.

Staff share: the Tips Act

Under the Employment (Allocation of Tips) Act 2023, which has applied since 1 October 2024, service charges are in scope. You must allocate them fairly between workers, pay them out by the end of the month after the customer paid, have a written policy, and keep records for three years. The government has confirmed that tips must be passed on without deductions, including card payment charges.

The Code's glossary defines a service charge as "an amount added to the customer's bill before it is presented to the customer", and says a charge the customer is clearly told is purely discretionary is a voluntary service charge. A draft revised Code, which was out for consultation until 29 September 2026, says employers should not rebrand a service charge to avoid these rules, though "some genuine non-service charges" can be permissible. Do not relabel a service charge as an "admin fee" or "venue fee" without taking advice: the CMA treats mandatory charges as part of the price whatever they are called.

Sharing must also be by site. The government's non-statutory guidance says employers cannot pool tips across different branches.

Can customers refuse to pay it?

It depends on what you told them.

• Optional charge: yes. If a guest asks you to remove it, take it off. Anything else makes it a mandatory charge in practice, with a different tax treatment and a consumer-law problem.
• Compulsory charge, shown clearly before ordering: it is part of the price the guest agreed to pay, so refusing it is refusing part of the bill. Many restaurants still waive it when there is a genuine service complaint, which is a commercial choice.
• Compulsory charge that was not shown clearly: this is where you are exposed to DMCC action and to complaints, and a guest may well have a good case for disputing it.

Large parties and private hire

The same rules apply. For a group booking, state the charge before the deposit is taken, in the booking confirmation and in any quote. A private hire quote should show the total including the charge, because the price is known in advance. Keep a record of the wording the guest accepted. The restaurant deposit policy guide covers the deposit side.

Checklist

1. Decide if the charge is optional or compulsory, and say which on the menu, website and bill.
2. Show the percentage with the same prominence as your prices, before ordering.
3. For set menus and quotes, show the total including the charge.
4. Treat a compulsory charge as standard-rated for VAT, and plan for NIC.
5. Pay out 100% to staff, under a written policy, within the Tips Act deadline.
6. Keep each branch's pot separate, and keep records for three years.
7. Train staff to give the same answer as the menu.

This guide is general information, not legal or tax advice, so speak to a solicitor or accountant about your specific situation.