Is cash discount pricing legal? Navigating payment surcharges

It's something we've all come across: a shop or restaurant where we're charged a little extra if we want to pay by card. Maybe, as a small business owner, you're tempted to do the same, but is it legal? Let's take a closer look at the legislation behind cash discounts and card surcharges.

The pricing question small businesses can’t afford to get wrong

Small business owners often groan when a customer whips out their card to pay, especially when their bill is a small amount. All card payments have a processing fee attached to them, and that can eat into your profits. 

Cash, on the other hand, has no fees or costs. It's also money in your hand right away, while you may have to wait days or even weeks to access the funds from card payments. As such, you might be tempted to offer a lower price for cash payments as a way to incentivise customers.

Here's the crucial question: Is it legal to charge for card payments? Get this wrong, and you could face a hefty fine. Well, this is actually a complicated legal area. Essentially, it's legal to offer a discount to customers who pay in cash. However, it's illegal to implement a surcharge on card payments. As with many legal matters, it's all about the details.

Cash discount vs surcharge: what's the difference?

If you're scratching your head right now, don't worry. Yes, it's possible and legal to set a different price for cash vs card, but you'll need to do it correctly.

The difference comes down to two concepts: surcharge and discount. Basically, a surcharge raises the listed price, while a discount lowers it.

To understand these ideas, imagine you're selling a product for £5. That's the listed price. Now, if you apply a £1 surcharge, it will cost £6. If you apply a £1 discount, it will cost £4.

From a customer's point of view, a surcharge means they'll be paying more than they expected. A discount means they'll be paying less (and, let's be honest, is a lot more welcome).

What UK law says about payment surcharges

There are some essential laws you need to know about in order to ensure payment surcharge compliance. The first is the Payment Services Directive (PSD2). This was first introduced as legislation across the European Economic Area. After Brexit, the UK withdrew from the EEA, but the Payment Services Regulations 2017, which implemented PSD2 in the UK, remain in effect.

According to PSD2, businesses cannot add card surcharges for most consumer payments. This law covers Mastercard, Visa, and nearly all consumer credit and debit cards. Technically, PSD2 has an exception for commercial credit or debit cards, but this is unlikely to have an effect in practice for the average small business.

However, the Payment Services Regulations 2017Opens in new window confirm that businesses can offer a cash discount. There are a few things that business owners must do to ensure they are acting legally:

• The discount must be a genuine discount and not merely a way to disguise an illegal surcharge.

• Discounts should be clearly, truthfully advertised and applied at the point of sale.

• When a cash discount is offered, the VAT should be calculated on the discounted price.

How to follow cash discount programme rules (and stay compliant)

Want to offer a cash discount in your business? Then, just make sure you follow the correct cash discount programme rules. Here's what you need to do:

Make sure your listed price is correct

Remember, a discount lowers the listed price. A surcharge raises it. That means, in order to ensure your cash discount is legal, your listed price should be the standard, higher price that you would charge a customer paying with a card.

Clearly advertise the cash discount in advance

A cash discount shouldn't be introduced in conversation at the till. Instead, you need to advertise it clearly. A printed sign reading "Cash Discount 5%" or similar, prominently displayed inside your shop, will comply with the law. You might want to display this in a few different locations to ensure customers don't miss it.

Apply the discount at the point of sale or in your invoices

Finally, you must legally apply the discount at the point of sale. If you're charging via invoice rather than selling something in a shop or restaurant, you will need to apply the discount to the invoice.

The discount should be clearly laid out on the receipt or invoice so anyone who sees it can quickly read and understand. Remember, you will need to apply VAT to the discounted price.

How to be compliant with cash discounts: a real-life example

Imagine you're running a small café and offering a 5% discount for customers who pay in cash. Here's what you could do:

• Advertise clearly. In a café, there are two very common places to advertise discounts. If you have counter service, make a sign to go on the counter. Use printed menus? Ensure you mention the discount on the menu. For best results, do both.

• At the same time, make sure your menu lists the full, undiscounted prices. Remember, you legally have to display the prices that your card-using customers will pay.

• When a customer pays, you can reiterate the discount again. Mention it when calculating the total: "That's £10, so with your cash discount, it'll be £9.50."

• Give a receipt which clearly shows the full price, the cash discount, and the final discounted price.

Why risky pricing tactics aren't worth it

Let's be clear: a cash discount is not a way to avoid illegal surcharges. Businesses that present an unfairly high price and then offer a "cash discount" are in breach of the law and can face significant fines.

Remember to follow the guidelines mentioned above. You cannot surprise customers with a sudden card fee at the checkout, and you must always be transparent with your pricing and discounting.

If you try to apply a surcharge at the point of sale, you're running a big risk. You never know when you'll come across a customer who actually knows the law and who is willing to report your business. Customers can request a refund of any unlawful surcharge, and businesses that do not follow the law can be fined.

How SumUp helps you stay compliant and confident

Still confused by pricing? You're not alone. This is a tricky area, which is why using trusted tools from the SumUp ecosystem can help.

When you take payments with your SumUp products, you'll have a clear interface with transparent pricing. There are no hidden fees involved, and it's easy to apply discounts, which are then clearly reflected on the receipt.

Businesses which use SumUp Invoices will also find things easy. There's a simple process to apply cash discounts, which are shown clearly and help you stay compliant.

Finally, if you want to avoid the entire sticky area of discounts and surcharges, just forget all about it. Use SumUp card readers to take payments. SumUp's flat-rate pricing starts at just 1.69%. That means there's no need for you to pass on high fees to your customers, leading to greater satisfaction. With SumUp, staying compliant doesn't mean sacrificing profitability.

Tips for fair and transparent pricing

Don't forget the basic things you need to do to stay on the right side of the law:

• Make sure everything is clear. Remember that your listed prices must be undiscounted, and advertise your cash discounts clearly and prominently.

• Apply cash discounts automatically and consistently. Decide how much you will discount, and stick to it.

• Write everything down. Receipts and invoices must show the original price, the discount, and the final price. All information should be written; don't rely on verbal explanations.

• If in doubt, just charge the same price for both cash and card payments. This will keep all customers happy, and it means you also get to enjoy the benefits of card payments, like speed and convenience.

Remember, although charging more for card payments may seem like a quick fix, it's illegal in the UK. With SumUp’s low fees and compliant tools like SumUp Invoices, you can encourage the right behaviour and still play by the rules.