How does PayPal work: the UK guide for businesses

Key takeaways

• PayPal is a digital wallet and payment intermediary regulated by the FCA as an Electronic Money Institution — it lets you pay and receive money online without sharing bank or card details with individual merchants.

• UK merchants pay a base fee of 2.9% + 30p per domestic transaction, but international sales can push the effective cost beyond 8% once cross-border surcharges and currency conversion markups stack up.

• PayPal works well as a starting point for UK businesses, but international sellers hit a cost ceiling fast — PayPal applies a 3–4% FX margin on top of cross-border surcharges, while Airwallex charges from 1% + 20p with FX margins of just 0.5–1%, offers like-for-like settlement in 23+ currencies, and can cut total foreign exchange costs by up to 80% compared to the PayPal model.

Tens of millions of UK consumers have a PayPal account. For most, it's a familiar face at checkout — something set up years ago and rarely thought about. But, familiarity isn't the same as understanding, and that gap matters more when you're the business on the other side of the payment.

If you're a scaling business, you should be aware of just how PayPal works. Whilst the headline fee might look simple enough, you need to be aware of cross-border charges, currency conversion margins, refund penalties and credit products that can meaningfully affect what you keep.

This guide explains how PayPal works in the UK, what it actually costs, how its credit products function, and when it makes sense to consider alternatives.

What is PayPal?

PayPal is a digital wallet and payment intermediary that lets you pay and receive money online without sharing bank or card details with individual merchants.

How does PayPal work?

PayPal is an Electronic Money Institution (EMI), not a bank. That distinction matters in practice.

When you link a bank account or card to PayPal, the platform stores those details securely and uses them to fund payments. The merchant never sees your card number or sort code — only that a payment arrived from PayPal. That intermediary model is the core of what PayPal does.

Here's how a PayPal payment moves:

1. You select PayPal at checkout and log in

2. PayPal pulls funds from your linked account, card, or existing balance

3. PayPal sends the payment to the merchant's PayPal account

4. The merchant never receives or stores your financial details

PayPal is an EMI rather than a licensed bank, which means that money held in your PayPal balance is "safeguarded", kept separate from PayPal's own funds, but it isn't covered by the Financial Services Compensation Scheme (FSCS). If PayPal were to fail, you'd be a creditor rather than an insured depositor.

For small, regularly cleared balances this is rarely a concern. For larger sums sitting idle, it's worth understanding.

How to set up a PayPal account in the UK

Getting started takes around five minutes:

1. Go to paypal.com and choose a personal or business account

2. Enter your email address and create a password

3. Add your mobile number for two-step verification

4. Link a UK bank account or debit/credit card

5. Confirm your email via the verification link

6. For business accounts: provide company details and VAT number where applicable

7. Complete identity verification to unlock higher payment and withdrawal limits

Do you need a bank account for PayPal?

No, but it depends what you're using PayPal for. A debit or credit card is enough to make payments online and send money to other PayPal users. For basic consumer use, a bank account isn't a requirement.

But, if you're accepting payments as a business, you'll need one. Funds land in your PayPal balance first. Without a linked bank account, you can't withdraw them, they stay inside PayPal's ecosystem.

That matters because PayPal isn't a bank. Balances held there aren't FSCS-protected. Leaving revenue sitting in a PayPal account carries more risk than moving it into a regulated UK current account.

How do you use PayPal to pay online?

For consumers, PayPal's value is speed and security. Most major UK retailers offer it at checkout. You select PayPal, log in or authenticate via the app, and the payment processes — your card details never leave PayPal's systems.

PayPal also supports QR code payments in physical stores and peer-to-peer transfers through the app, useful for splitting bills or sending money to contacts.

The Section 75 gap:

There's a consumer protection issue that catches many UK users off guard. Under Section 75 of the Consumer Credit Act, paying for something between £100 and £30,000 on a credit card means your card issuer shares liability with the merchant if something goes wrong.

When you route a credit card payment through PayPal, that protection can disappear. UK courts and the Financial Ombudsman Service have historically treated the payment to PayPal as the end of the credit transaction — the card issuer's liability doesn't extend to the underlying purchase. You'd be relying on PayPal's own Buyer Protection, which carries different terms and fewer statutory rights.

For significant purchases where Section 75 matters, paying directly with a credit card is the safer approach.

The inactivity fee:

If your PayPal account holds a balance and you don't log in for 12 consecutive months, PayPal can deduct up to £9 as an inactivity charge. Small, but easy to miss if you use PayPal sporadically.

What does PayPal cost UK businesses?

For UK merchants, the base fee is 2.9% + 30p per transaction — applied uniformly whether the customer pays by debit card, credit card, or from their existing PayPal balance.

That fixed 30p component can hit hard for businesses with low average order values. A seller charging £2.00 for a digital download pays close to 18% in effective fees. A business selling a £100 item pays around 3.2%.

Refunds and chargebacks:

Since 2020, PayPal retains all original transaction fees when a merchant issues a refund. Return a £1,000 order and you lose £29.30 in processing fees — even though no lasting sale occurred. Each disputed transaction also carries a non-refundable £14 chargeback fee, whether you win the dispute or not.

The aggregate account model:

PayPal operates on an aggregate model — your business sits under PayPal's master merchant account rather than holding a dedicated merchant facility. This gets you live quickly, but means PayPal can place holds on funds or restrict accounts with less notice than a traditional acquirer. That risk tends to grow with transaction volumes or in higher-risk business categories.

What happens to your fees when you sell internationally?

This is where the true cost of PayPal becomes clearest for growing businesses. International transactions layer multiple charges that can push your effective fee well beyond the headline rate.

Here's how those fees compound on a £100 international sale:

A UK business selling to a US or EU customer can quietly absorb 7.7–8.7% of that transaction in fees — with no single line item to flag it clearly.

PayPal also forces conversion: if a customer pays in USD, PayPal automatically converts it to GBP using a rate that includes a 3–4% margin above the interbank rate. You see the GBP amount; the conversion cost is already taken.

For businesses running modest international volumes, the simplicity may be worth it. For any UK seller regularly trading with EU or US customers, those compounding percentages erode margins fast.

How does PayPal Credit work?

PayPal Credit is a regulated credit product — a revolving digital credit line linked to your PayPal account. Apply once; if approved, use it at any retailer that accepts PayPal.

The headline offer is 0% interest for four months on purchases of £99 or more. After the promotional period ends, the standard variable rate applies to any remaining balance.

Key terms before applying:

• Promotional rate: 0% for four months on eligible purchases of £99 or more

• Post-promotional APR: Typically 21.9%–23.9% variable

• Minimum monthly repayment: The higher of £5 or 2% of the outstanding balance

• Credit check: A hard enquiry on application, leaving a footprint on your credit report

The regulated status is the critical distinction. PayPal Credit is governed by the Consumer Credit Act, giving you statutory rights that don't apply to PayPal's unregulated BNPL product.

How does PayPal Pay in 3 work?

Pay in 3 splits your purchase — between £30 and £2,000 — into three equal payments. The first comes out immediately, the second a month later, the third a month after that. No interest is charged at any stage.

But, Pay in 3 is not regulated under the Consumer Credit Act in the same way as PayPal Credit. That changes the nature of your protections.

How the two products compare:

The soft check for Pay in 3 won't affect your score at application. But missed payments are reported to credit reference agencies — a detail that's easy to overlook in a frictionless checkout flow.

When should UK businesses consider alternatives to PayPal?

PayPal's strength is brand recognition. That trust can support checkout conversion — particularly for first-time customers who might hesitate with an unfamiliar payment option.

For early-stage UK businesses or those selling primarily to domestic customers, the fast onboarding and broad acceptance often outweigh the fee structure. But the aggregate model and layered international costs create a clear ceiling.

Once you start selling internationally at meaningful volumes, forced currency conversion and a 3–4% FX margin start cutting into what you actually keep. At that point, the business case for multi-currency infrastructure changes significantly.

Platforms like Airwallex charge from 1% + 20p with FX margins of 0.5–1%, and allow you to hold and settle in 23+ currencies without forced conversion. Rather than converting USD to GBP the moment it arrives, you can hold USD, pay USD suppliers directly, and convert only when the timing and rate suit your business. Businesses processing significant international volumes can save up to 80% on total FX costs compared to the PayPal model.

For a detailed side-by-side, see our guide on PayPal business fees or explore PayPal alternatives for UK businesses.

Taking control of your payment costs

PayPal does a lot well. It offers fast setup, a trusted checkout experience, and credit products that can lift average order values. For consumers and UK-focused SMBs, it remains a practical starting point.

But the fee structure — especially the layered international costs — means it can become one of the more expensive ways to accept payments as you grow. Understanding what you're actually paying, rather than anchoring to the headline 2.9% + 30p, is the difference between managing payment costs and being managed by them.

If you regularly sell to international customers and want to reduce FX costs without disrupting your checkout, exploring Global Accounts and multi-currency settlement is one of the most direct ways to unlock better margins.

Open an Airwallex account to see how the fees compare against your actual transaction mix.

Frequently Asked Questions (FAQs)

Is PayPal safe to use in the UK?

Yes, for most everyday use. PayPal is FCA-regulated as an Electronic Money Institution and uses encryption alongside two-factor authentication. The key caveat is that money in your PayPal balance isn't covered by the FSCS — it's safeguarded but not government-guaranteed in the way a bank deposit would be.

What is the difference between PayPal Credit and Pay in 3?

PayPal Credit is a regulated revolving credit line offering 0% interest for four months on purchases of £99 or more, with a variable APR of 21.9–23.9% thereafter. It requires a hard credit check. Pay in 3 splits purchases of £30–£2,000 into three interest-free instalments using only a soft credit check — but it's an unregulated product, so the statutory consumer protections differ.

Does PayPal charge fees for receiving money as a UK business?

Yes. The standard domestic rate is 2.9% + 30p per transaction. International transactions attract an additional cross-border surcharge of around 1.5%, plus a currency conversion margin of 3–4% above the interbank rate. The cumulative effective cost on an international transaction can exceed 8%.

Could I lose Section 75 protection when paying through PayPal?

Potentially, yes. When you fund a PayPal payment using a credit card, the credit chain between your card issuer and the merchant can be broken. UK courts and the Financial Ombudsman have historically treated PayPal as the end of the credit transaction, meaning Section 75 may not extend to the underlying purchase. For significant purchases, paying directly with your credit card is the safer approach.