Processing fees

Processing fees are the per-transaction or percentage-based charges that a payment processor deducts before settling funds to your bank. Stripe, for example, charges 1.4% + 20p for standard UK Visa and Mastercard transactions, deducting the fee from gross receipts and transferring only the net amount. Because the fee never passes through your bank account as a separate line, it is easy to miss entirely.

Why the distinction matters in Xero

Simply matching the net payout to your sales invoices understates income and leaves the fee unrecorded. The correct treatment is to post the full gross sale to revenue, then record the processing fee separately against a dedicated expense code — commonly “Merchant fees” or “Payment processing charges” in your chart of accounts. Say a customer pays £500.00 and Stripe settles £492.50 after a £7.50 fee: Xero should show £500.00 income and £7.50 as a bank charge, not £492.50 income with no fee at all.

Over a VAT quarter, unrecorded fees accumulate quickly. A business processing £30,000 of card sales per month at 1.5% average rate is absorbing roughly £450 in fees monthly — close to £5,400 a year — that should be visible in management accounts and correctly attributed for Corporation Tax purposes.