Tips left for restaurant staff do not always reach them
Employers are to be banned from using tips and service charges to "top up" staff pay to meet the minimum wage, under government plans.
The changes, set to come into force next year, will benefit those working in industries such as restaurants, where tipping is commonplace.
Firms are currently allowed to divert service charges into takings.
Unions have welcomed the move, saying that not allowing employees to have tips in addition to pay is an "abuse".
The national minimum wage, currently £5.52, rises to £5.73 on 1 October.
Business Secretary John Hutton said there needed to be more transparency in tipping.
Waiters and waitresses across the country have been hungry for the tips loophole to be closed and the announcement today will satisfy their appetites
He called on employers to make it clear how tips were distributed so that customers knew where their money was going and whether or not the establishment operated a fair tipping policy.
"Hundreds of thousands of people in the UK have jobs in sectors where tipping is commonplace," Mr Hutton said.
"When people leave a tip, in a restaurant or elsewhere, they expect it to go to service staff and as consumers, we've got a right to know if that actually happens.
"This is an issue of fairness and common sense, and it's one many people clearly care a lot about."
Unions, which have argued that the current law is unfair, have welcomed the move.
UK restaurants are accused of not being upfront about staff tips
"Waiters and waitresses across the country have been hungry for the tips loophole to be closed and the announcement today will satisfy their appetites," said Derek Simpson, joint leader of the Unite union.
"It is great news that unscrupulous employers will no longer be able to use the tips left for staff to subsidise low wages."
The union intends to introduce a Fair Tips logo in bars and restaurants across the UK - showing that staff receive at least the minimum wage as well as all tips.
TUC General Secretary Brendan Barber said that presently "unscrupulous" employers could "cheat" workers out of tips that were meant for them.
The quicker this is ended completely the better
GMB General Secretary
"The government is right to make sure that workers can keep their tips and that the responsibility to pay the minimum wage rests squarely with employers," he said.
"This is a welcome example of the government responding to the concerns of hard-pressed, vulnerable workers.''
GMB General Secretary Paul Kenny said its members in the hotel and catering industry had fought a 10-year campaign to end tips being counted towards their pay.
"Far too many rogue employers have been using tips to make up the national minimum wage," he said.
"The quicker this is ended completely the better."