Everything You Need to Know About Transaction Fees
Cash used to be king, but these days there are so many ways customers can pay businesses. From contactless, PIN to e-wallets and even cryptocurrency, a wide range of payment options are available. Such a large selection can be very convenient for customers and remove some of the barriers to a sale. But those transactions need to be processed, and that usually means handling fees for the retailers, which can really add up. As the cost of running a business skyrockets, tax breaks or cost-cutting can go a long way in helping you stay afloat. So the good news is that transaction fees are usually an allowable expense.
What Does Transaction Fee Mean?
A financial transaction fee is a charge levied by financial institutions or payment processors for processing a financial transaction, such as a credit card purchase, bank transfer, or wire transfer. This fee is usually a percentage of the transaction amount or a flat fee per transaction.
The purpose of a financial transaction fee is to cover the costs associated with processing the transaction, such as the cost of maintaining the necessary infrastructure, paying for transaction security, and complying with regulatory requirements. Financial institutions or payment processors may also use transaction fees to generate revenue.
Transaction fees can vary widely depending on the type of transaction, the financial institution or payment processor involved, and other factors. Some fees may be passed on to the consumer, while others may be absorbed by the merchant or other parties involved in the transaction. It's important to understand any transaction fees associated with a financial transaction and factor them into your overall cost when making financial decisions.
What are Transaction Fees?
Every time a business processes an electronic payment, such as card payments in stores or online through its website, the provider charges the merchant a transaction fee. How much this transaction fee varies a bit as each service provider sets their own fees. In general, the fee can range from 0.5% to 5% of the transaction value.
What Types of Transaction Fees are there?
Understanding the different types of transaction fees can help you plan your business expenses better. It makes sense to choose a payment processor that regularly sends you a merchant bank statement detailing all the fees you've paid over the course of the month. Different providers use different fee structures and fees, so check the fine print carefully before signing up for anything!
Interchange fees are paid to the issuing bank. The commercial bank you use (the acquiring bank) then also charges a fee, and the processing company (the card company such as Mastercard, Visa, or Amex) charges a fee as well. The three big subcategories of Interchange Fees are:
Credit card fees: These fees are charged to merchants by the credit card processing company when a customer pays with a credit card. The fees are usually a percentage of the transaction value and may vary depending on the type of card used and the processing company involved.
Debit card fees: These fees are similar to credit card fees, but are charged for transactions made using a debit card. The fees may be lower than credit card fees, but may still vary depending on the type of card and the processing company.
Bank transfer fees: Some banks charge a fee for certain types of bank transfers, such as international transfers or same-day transfers. The fees may depend on the amount being transferred and the country the transfer is being made to.
Many people think that point-of-sale (POS) terminals are only used in shops, but today, thanks to nifty little handheld terminals, card payments can be accepted by anyone from handymen to hairdressers on the go. It's worth doing your homework here as some POS terminal providers may also charge up to £800 a year, although some are free.
Some providers charge a monthly or annual subscription fee instead of a per-transaction fee. Some businesses like this because it makes fees much easier to predict and plan for, although, of course, this depends on the size of the business and the number of transactions.
Some providers charge different rates depending on whether the customer's card is present in the transaction or not. Transactions where the card is not present (e.g. online purchases) are riskier as they are more susceptible to fraud and therefore tend to be subject to higher fees.
If you use an ATM that does not belong to your bank, you may be charged a fee by both the ATM operator and your bank. The fees may vary depending on the ATM operator and the amount being withdrawn.
Foreign Exchange Fees
If you make a transaction in a foreign currency, you may be charged a foreign exchange fee by your bank or credit card company. The fees may be a percentage of the transaction value or a fixed fee and may vary depending on the currency and the financial institution involved.
If you go into an overdraft on your bank account, you may be charged an overdraft fee by your bank. The fee may be a percentage of the overdraft amount or a fixed fee, and may also be subject to interest charges.
What are the Advantages of Transaction Costs?
Transaction costs have three major benefits, including:
They Enable Companies to Make Better Economic Decisions
Transaction costs enable companies to make better economic decisions. This is because it is easier for them to compare the pros and cons of different options. When a company pays transaction costs, that money is essentially gone, so the company needs to be able to weigh the value of the benefits against the cost of losing that money. If it doesn't work in their favour, they don't do it, which means they don't waste time or resources on something that doesn't give them a return on investment. This helps maximize their profits.
They Help Determine an Industry Structure and Competitive Advantage
Businesses can use these types of transaction costs to determine their industry structure and competitive advantage in a variety of ways. For example, you can use it to determine how much effort is required to reach agreements with other parties before doing business with them. They can also use them to determine what type of arrangements are most beneficial to them (such as long-term versus short-term). You can also use transaction costs to determine what type of agreement is most beneficial to other parties (e.g. exclusive or non-exclusive).
They Help Companies to Reduce their Risks When Investing in New Markets
Transaction costs reduce the risk that a company will make an investment that does not pay off. Without transaction costs, companies would not be able to fully assess the risks involved in an investment before committing to investment. Transaction costs also affect the information available about potential partners and suppliers in new markets. This can make it difficult for companies to accurately assess whether these markets are worth investing in. By increasing transparency about potential partners and suppliers, transaction costs enable companies to make more informed decisions about where to invest their resources.
How Can I Reduce My Transaction Fees?
It may not always be possible to avoid transaction fees in the UK, but here are some tips that may help reduce or eliminate some fees:
1. Negotiate Lower Credit Card Processing Fees
Check regularly to see if there are any competitors offering lower rates per transaction. Yes, you need a reliable provider that lets you easily take customer payments. But you also want to do this at the lowest cost, so shop around.
2. Upgrade to a Better POS System
Consider whether your current POS system is actually fit for purpose. Some may take longer to process transactions than others. Others are faster but not particularly intuitive for customer use. Some are just too clunky and take up too much space on your counter. The trick is to find a fast, efficient, reliable, and secure POS system at the best price.
3. Optimize Your Sales (Both Online and Offline)
Do you have both a physical store and an online web presence? If so, you could be wasting money having a separate payment processing system for each of them. It's worth looking for a POS system that you can use for both. This will really help streamline things and potentially save you a ton of money as well.
4. Choose a Bank Account with No or Low Fees
Some banks offer accounts with no monthly fees or transaction fees. Look for banks that offer fee-free banking or lower fees for certain types of transactions.
5. Use Your Own Bank's ATMs
To avoid ATM fees, use ATMs that belong to your own bank. This is usually free, but some banks may charge a fee if you go over a certain number of withdrawals per month.
6. Use a Debit Card Instead Of A Credit Card
Debit card transaction fees are usually lower than credit card transaction fees. If possible, use a debit card for transactions to avoid higher fees.
7. Make Larger Transactions Less Frequently
If you make multiple small transactions, you may end up paying more in fees. Try to consolidate your transactions into larger amounts to reduce the number of transactions and therefore the fees.
8. Transfer Money Online
Some banks may charge a fee for in-branch or telephone transfers, but online transfers are often free. Check with your bank to see if online transfers are available and how to set them up.
9. Avoid Using Foreign Currency
If possible, try to use your own currency when making transactions to avoid foreign exchange fees. If you must use foreign currency, compare the fees charged by different financial institutions to find the best deal.
Remember to always read the terms and conditions of your financial institution or payment processor to understand any transaction fees that may apply to your transactions.
Can You Claim Transaction Fees on Taxes in the UK?
In the UK, you may be able to claim some transaction fees as allowable expenses for tax purposes if they are incurred wholly and exclusively for the purposes of your business. This means that the fees must be directly related to your business activities and not for personal use.
For example, if you are a self-employed contractor and you incur bank charges for receiving payment from a client, you may be able to claim these charges as a business expense on your tax return. Similarly, if you are a landlord and you pay bank charges for receiving rental payments from tenants, you may also be able to claim these as allowable expenses.
However, if the transaction fees are incurred for personal use or are not related to your business activities, you cannot claim them as allowable expenses.
It's important to keep accurate records of any transaction fees that you incur for your business, including receipts and bank statements so that you can support your claim if required by HM Revenue & Customs (HMRC). It's also advisable to seek the advice of a tax professional if you are unsure whether a particular expense is allowable for tax purposes.
Can You Claim International Transaction Fees On Tax?
If you incur international transaction fees for business purposes, you may be able to claim them as allowable expenses for tax purposes in the UK. The same rules apply to domestic transaction fees - the fees must be incurred wholly and exclusively for the purposes of your business.
For example, if you run an e-commerce business and you pay international transaction fees to receive payments from customers outside the UK, you may be able to claim these fees as allowable expenses.
However, if the fees are incurred for personal use or are not related to your business activities, you cannot claim them as allowable expenses.
It's important to keep accurate records of any international transaction fees that you incur for your business, including receipts and bank statements so that you can support your claim if required by HM Revenue & Customs (HMRC). It's also advisable to seek the advice of a tax professional if you are unsure whether a particular expense is allowable for tax purposes.
Are Paypal Fees Tax Deductible in the UK?
PayPal fees may be tax deductible in the UK if they are incurred wholly and exclusively for the purposes of your business. This means that if you use PayPal to receive payments for goods or services sold through your business, you may be able to claim the fees as a business expense for tax purposes.
It's important to keep accurate records of any PayPal fees that you incur for your business, including receipts and transaction details so that you can support your claim if required by HM Revenue & Customs (HMRC).
It's also worth noting that not all PayPal fees are tax deductible. For example, fees for personal transfers, currency conversions, or payments for personal goods or services are not deductible as they are not related to your business activities.
If you are unsure whether a particular PayPal fee is tax deductible or not, it's advisable to seek the advice of a tax professional who can help you determine the eligibility of the fee for a tax deduction.
What Else Can I Claim as a Business Expense?
It's important to claim all of your allowable business expenses so you don't pay more tax than you have to. The highlight here is that only purely operational expenses can be claimed for tax purposes. In addition to transaction fees, this can include staff wages, capital allowances, office expenses, travel, insurance, marketing, and business fees, to name a few.
Not all Business Expenses are Reimbursable
These include entertainment expenses (e.g., customer dinners or employee parties), depreciation of assets, and non-essential home renovations. Don't forget to keep all your business expense records for at least 6 years in case HMRC needs to see them.
When it comes to business expenses, many people turn to a trusted accountant because it can be something of a grey area. Learn more about our online accounting services for small businesses. Request an instant quote online or call us on 07985689912.