Margins in hospitality were always thin; now they are on a diet. Wages are rising, energy is still expensive, and diners are watching their bills. From April 2025, the National Living Wage for workers aged 21 and over rises to £12.71 an hour in April 2026, which hits staff-heavy businesses like restaurants and bars hardest. (HMRC, 2025).
At the same time, prices in restaurants and hotels are still rising faster than general inflation – 3.8% year-on-year in October 2025 (ONS, 2025) – which makes guests more price-sensitive and more likely to skip that extra drink or dessert.
Autumn Budget 2025 has kept the main VAT rate at 20% and frozen income tax and NIC rates, but with thresholds still fixed and VAT receipts forecast at around £180.4 billion in 2025–26, HMRC will be keen to protect every pound (OBR, 2025).
So where does that leave hospitality owners? You cannot change VAT rates or wage policy, but you can tighten your VAT records, get on top of tips and troncs, and use a practical payroll checklist to keep labour costs honest without burning out your team. That is what we focus on here.
Get VAT and service charges working for you
The VAT rules have not got kinder to hospitality. You still charge 20% on most hot food and drink sold to eat in or take away, and there was no new reduced rate in the Autumn Budget. If anything, the combination of frozen thresholds and higher receipts forecasts means more scrutiny for high-cash, high-VAT sectors.
Start with the basics: are you sure your VAT coding in the till and accounting system is right? Mis-coding one popular menu item at the wrong VAT rate for a year can quietly wipe out thousands of pounds of profit, or create a nasty assessment later. A short systems review often pays for itself.
Think about:
- Service charges: Decide whether they are truly discretionary, how they appear on bills, and whether VAT is being applied correctly. Small changes in bill layout can avoid misunderstandings with guests and staff.
- Staff meals and discounts: Make sure staff food, shift drinks and friends-and-family discounts are treated consistently. This is an area VAT inspectors like, because records are often weak.
- Till Z-reads and cash reconciliations: Pull Z-reads into your accounts, reconcile against card settlements and cash banking, and investigate regular differences. That protects against both mistakes and theft.
If you are unsure, we can review your VAT set-up and link it properly to your bookkeeping and payroll systems so your numbers line up end to end. Find out how we support hospitality businesses.
Tips, troncs and payroll – stop the leaks
Tips and service charges are great for staff morale, but they are a compliance minefield if you cut corners. The Employment (Allocation of Tips) Act 2023 is now fully in force, and updated government guidance makes clear how tips, gratuities and service charges should be taxed and treated for National Insurance, National Minimum Wage and VAT purposes.
Common pressure points we see:
- Tronc schemes: Decide whether you need an independent troncmaster, get a written tronc constitution and check which payments go through PAYE. Done properly, a tronc can save employer NI; done badly, it creates back-dated liabilities.
- Card tips vs cash tips: Make sure your policy is clear on who owns which tips and how they are distributed. If the business has control or significant influence, the Tipping Act rules apply.
- Minimum wage checks: You cannot use tips or service charges to top up staff to the legal minimum. With the NLW now at £12.21, tight rota planning and accurate clock-in data matter more than ever.
This is exactly where a good payroll checklist earns its keep. Mapping tips, troncs and service charges through the payroll – including who is on PAYE, how often you run the tronc, and how it appears on payslips – gives you evidence if HMRC ever asks questions.
If you would like a reality check on your current arrangements, we can review your policies, payslips and tronc paperwork and suggest practical tweaks. Talk to us about your tips and tronc set-up.
Building a practical payroll checklist for your hospitality team
A hospitality payroll is never simple – split shifts, zero-hours contracts, casual staff, tronc, staff meals and often multiple venues. That makes a clear, repeatable payroll checklist essential. It reduces errors, keeps you legal and makes gross profit more predictable.
A starting point for your monthly payroll checklist:
- Rota planning: Finalise rotas in advance so you can forecast labour percentage against expected sales, not guess after the fact.
- Time and attendance: Use proper clock-in data rather than handwritten timesheets. If staff can see their hours in real time, disputes fall away.
- Minimum wage review: Run a report each pay period to check every worker is above the current National Living Wage or National Minimum Wage for their age group.
- Tips and tronc entries: Record tips and tronc separately from base pay, in line with your tronc rules and HMRC guidance. That makes end-of-year reporting far easier.
- Holiday pay: Make sure casual and variable-hours staff receive the right holiday pay based on their actual average earnings, including eligible overtime and tronc where required.
- Authorisation: Have one person prepare payroll and a different person sign off payments. That simple check reduces both fraud and mistakes.
Once you have a standard payroll checklist, automate as much of it as possible. Rota software feeding into payroll, integrated POS data, and consistent staff records let us run exception reports rather than rebuild payroll from scratch every month.
Controlling labour and stock without killing service
Labour and stock are where hospitality margins live or die. The aim is not to squeeze staff until they leave, but to match your spend to genuine demand and cut quiet-time waste.
Some practical levers:
- Shift design: Use shorter, smarter shifts, especially on weekdays. You may be able to cut one person from early or late slots without hurting service, if the rota follows actual footfall.
- Menu engineering: Focus on dishes with strong margin and steady demand. If a menu item is slow, high waste and low margin, it is a candidate to drop or reprice.
- Portion control: Clear specs and portioning tools reduce both food cost and staff stress – people know what “normal” looks like.
- Stock routines: Simple daily or weekly mini-counts on high-value items give early warnings of shrinkage, sloppy portioning or over-ordering.
The insolvency statistics show how tight things are. Government data confirm over 2,000 company insolvencies a month across England and Wales in mid-2025, with hospitality consistently over-represented (Insolvency Service, 2025)
If you get your payroll checklist, stock controls and VAT reporting right, you give your business a far better chance of staying off those lists.
Keeping onside with HMRC – and giving yourself breathing space
Autumn Budget 2025 brought some relief on business rates for hospitality properties, but no cut in VAT, no National Insurance changes and higher wage costs locked in for 2025–26. The Office for Budget Responsibility expects VAT alone to raise about £180 billion in 2025–26, so we can assume HMRC will stay sharp on sectors where lots of VAT and PAYE flow through the tills.
Against that backdrop, a solid payroll checklist is not a nice-to-have. It is part of your defence. It helps you:
- Prove staff are paid at or above the legal minimum and receive tips fairly.
- Show that tronc, PAYE and VAT on service charges are handled in line with HMRC guidance.
- Keep gross profit and labour percentage visible every week, not just at year end.
We know that most owners did not get into hospitality to stare at spreadsheets. Our job is to turn your POS, payroll and accounting data into simple reports that tell you whether this week’s rota, menus and prices are working – and where to tweak them.
If you would like help building or reviewing your hospitality payroll checklist, VAT processes and management reporting, we would be happy to talk it through. Get in touch with our team and we will walk you through a practical payroll checklist and reporting set-up tailored to your venue.
