Service charge calculator: VAT, tips and tronc
A service charge on a bill raises three questions at once: is there VAT on it, how much of it has to reach your staff, and does it go through PAYE and National Insurance? Put in one bill below and the calculator answers all three from HMRC’s guidance and the tipping law.
A service charge on one bill
- Service charge
- £10.00
- VAT on it
- £0.00 Outside the scope of VAT (VAT Notice 700 section 8.14).
- Has to reach staff
- £10.00 All of it, without deductions apart from tax, by the end of the month after it was paid.
- PAYE and National Insurance
- Paid out or shared by you: PAYE through your payroll, and Class 1 National Insurance for you and the employee (E24, sections 5 and 7).
Cash tips customers hand straight to staff, which they keep with no involvement from you, are outside your PAYE; the employee pays the tax on them. None of these payments counts towards the minimum wage.
General information from HMRC’s published guidance and the law (checked 12 October 2026), not tax advice. Whether a charge is genuinely optional, and anything else unusual, is one for your accountant.
How it decides
- VAT. A compulsory service charge is part of what the customer pays for the meal and follows its VAT rate, so 20% on food eaten in. An optional service charge, or a tip freely given on top of the bill, is outside the scope of VAT (VAT Notice 700, section 8.14). HMRC’s test for optional is that it is “clearly presented to the customer as an entirely optional payment” (E24, section 3).
- What reaches staff. Tips and service charges must be passed on without deductions, apart from tax, by the end of the month after the month the customer paid. The VAT part of a payment is not a tip in law, so on a compulsory charge the amount to pass on is the charge less its VAT (Employment Rights Act 1996, sections 27C(7) and 27G).
- PAYE and National Insurance. On a compulsory service charge, National Insurance is always due, however it is shared out. On optional tips and service charges it depends on who decides the shares: if you pay them out or decide who gets what, PAYE and Class 1 National Insurance apply; if an independent troncmaster shares them with no say from you, the troncmaster runs PAYE and no National Insurance is due (HMRC E24, sections 3 to 7).
- The minimum wage. None of these payments counts towards minimum wage pay.
The calculator does not work out a National Insurance amount: that depends on each person’s pay for the whole year. It also does not decide whether a charge is genuinely optional, or how indirect influence over a tronc, top-ups and agency staff are treated. Those are for your accountant.
More in our guides to service charges and tips, the tipping law and the minimum wage.
Sources
- HMRC, VAT guide (VAT Notice 700), last updated 25 June 2026: section 8.14, service charges and tips.
- HMRC, Tips, gratuities, service charges and troncs (E24), 18 July 2025: sections 3 to 7 and 10, examples 8, 10, 11 and 13.
- legislation.gov.uk, Employment Rights Act 1996, section 27C and section 27G, inserted by the Employment (Allocation of Tips) Act 2023: the VAT part of a payment, and the deadline for paying out.
- Department for Business and Trade, Code of practice on fair and transparent distribution of tips, 29 July 2024: passing tips on without deductions.
This calculator is general information, not tax or legal advice. For your own business, ask HMRC or your accountant.