What is a Direct Debit?
A complete guide to Direct Debits for consumers in the UK
In the UK, around 70% of regular bills are paid by Direct Debit*. But what does Direct Debit mean, and how does it work? This payment system is a way for customers to give consent for a business to withdraw funds from their account on a regular basis. On this page, we look at the process in detail, exploring its pros and cons and what Direct Debit means for your money.
Direct Debit definition: A payment method where a customer gives authorisation for a company to withdraw funds from their bank account automatically on set dates
How it works: Customers give their permission via a Direct Debit mandate, then the business collects payments directly from their current account at regular intervals
What it’s for: Direct Debit is mainly used for recurring payments, including household bills and subscriptions
What is a Direct Debit in banking?
In simple terms, a Direct Debit is a way to make payments for subscriptions and household bills. It automates the payments, so you don’t have to remember to transfer the money each time. When you pay by Direct Debit, your bank or building society is notified that you’re happy for the business providing the service to take money from your account at regular intervals (often monthly).
How do Direct Debits work?
The basic definition of Direct Debit is an instruction (also known as a mandate) that you give to your bank, but you don’t do this directly. All you have to do is fill out the mandate form. The company then proceeds to collect money from your bank account on the given dates. Payments are processed through Bacs, which is a secure way of transferring funds between banks.
The process is as follows:
You sign up for a service by Direct Debit, providing your bank sort code and account number.
You give authorisation by signing a Direct Debit instruction.
The business (or their Direct Debit bureau) passes your instruction on to your bank.
Your bank checks and approves the instruction and allows the business to collect funds.
You’ll receive advance notice of how much will be taken from your account and when.
Payments are taken automatically from your account on the agreed dates.
The amount the company collects may change from month to month, such as an electricity bill that varies depending on usage, or it can be a fixed sum for something like a streaming subscription service.
What can you pay for by Direct Debit?
The most common example of a Direct Debit is for recurring payments. These can include:
- Household bills (electricity, gas, water)
- Mobile phone contracts
- TV and streaming services
- Gym memberships or magazine subscriptions
- Insurance payments
- Vehicle tax
- Council tax
- Charity donations
In some cases, you can also use Direct Debit to break up the cost of bigger purchases. That way, smaller chunks of money come out of your account each month.
What is the difference between a Direct Debit and standing order?
They might seem similar, but there is one fundamental difference: who controls the payments. With Direct Debit, the customer doesn’t have to set up anything themselves. Instead, the business being paid manages the transfer amounts and schedule. The customer simply has to agree to it.
With a standing order, on the other hand, the customer is in control. It’s still a way of automating payments, but you get to decide how regularly and how much you want to transfer. Standing orders can be useful for paying monthly rent to a landlord or transferring money to a savings account each month. You can usually set them up with your bank or through online banking.
There’s also a method known as a Continuous Payment Authority, but this is slightly different, as the business can take payments directly from your debit or credit card rather than your bank account.
Direct Debit | Standing order | |
Who sets it up? | The company or service provider | You (the customer) |
Who controls it? | The company- you simply give permission | You have full control over amount and frequency |
Payment amount | Set by the company (may very) | Set by you (fixed) |
Common uses | Household bills, subscriptions, memberships | Rent, savings transfers, regular donations |
Setup method | The company requests your authorisation | You set it up through your bank or app |
What are the advantages and disadvantages of Direct Debits?
Since their introduction in the 1960s, Direct Debits have become an established and trusted method used by many people in the UK to pay their regular bills. Although it can save time and money, this convenience can sometimes leave consumers feeling less in control of their money.
Advantages
Everything happens automatically. Once the Direct Debit is set up, you don’t have to log in and make a transfer each month.
Because Direct Debit payments are guaranteed to be made each month, it helps customers avoid missed or late payments and extra fees.
Customers are protected by the Direct Debit Guarantee, which means they can get a refund if a payment is taken by mistake.
Disadvantages
You usually have no choice over the exact day the money leaves your account, which can make it harder to budget your money each month.
If the funds in your account are too low, the Direct Debit payment might fail and you could end up with an overdraft.
Because it’s all automatic, it can be easy to lose track of the Direct Debits you have set up on your account. Plus, with research showing over 13 million people accidentally took out a subscription in the year to March 2024**, cancelling unused subscriptions can be an effective way to save money.
Is Direct Debit safe?
Yes, Direct Debit is considered a safe method of payment. Businesses undergo a strict vetting process by banks before they are allowed to use Direct Debit as a way of collecting money from customers.
Customers receive further protections thanks to the Direct Debit Guarantee. Every time you agree to payment by Direct Debit, your bank or building society follows this guarantee to protect you. Among its rules, any changes to payment schedules must only be made with advanced notice.
How do you set up a Direct Debit payment?
Although the Direct Debit is an instruction to your bank, the whole process takes place through the business being paid:
Contact the company you want to pay (e.g. your subscription provider).
Provide your bank details (name, address, account number, sort code, and bank name).
Fill out and sign the Direct Debit mandate form they give you.
The company will send the instruction to your bank to arrange the payments.
Once set up, the company will automatically take payments on the dates it specifies.
How long do Direct Debits take to set up?
It can take up to 10 working days for a Direct Debit to become active. The exact time largely depends on the business itself and how quickly it processes your details and sends the mandate to your bank.
Can you set up a Direct Debit online?
Yes, when you fill out the Direct Debit mandate form, you can typically do this online, over the phone, or in writing.
Can Direct Debits be taken from a savings account?
No, a Direct Debit cannot be taken from a savings account or ISA. Direct Debit payments usually need to be linked to a current account, as that is typically the account used for day-to-day payments and has the fewest access restrictions.
What that means is that you can leave your savings untouched in a separate account and earn interest. If you want better returns on your money, Raisin UK makes it easy to compare and open high-interest savings accounts from a wide selection of banks and building societies, all in one place.
If you’re ready to see how you can make your money work harder for you, find out more today!
FAQs on Direct Debits
If a Direct Debit payment fails, your bank will probably contact you by text or email to let you know, giving you the chance to add funds. Not all banks offer this, so it’s worth checking this when you open an account. You may find that the bank tries to take the payment twice: once in the early morning and again in the afternoon. If it still can’t go through, the business you’re trying to pay will be informed and might contact you. You may end up having to pay a fee or interest if the payment isn’t made at all.
Banks won’t charge for setting up or making Direct Debit payments, but there are two potential fees to be aware of:
If you don’t have enough money in your account, your bank might refuse the payment and charge a fee. This can still be charged even if you top up your funds after being notified of the refused payment.
- If the payment does go through and your account goes overdrawn, you could face an overdraft charge.
This really depends on your particular bank, as each one has different procedures. Most banks and building societies will process the transaction before around 7am on the given date. If it falls on a bank holiday or weekend, the payment will be processed on the following working day.
You can cancel a Direct Debit at any time by contacting your bank or building society, or logging into your mobile banking app. It’s often a good idea to let the business know too, so that they can update their records and arrange another way of collecting the money, if needed. That way, you won’t be charged extra or have your service interrupted.
*https://www.ukfinance.org.uk/system/files/2024-07/Summary%20UK%20Payment%20Markets%202024.pdf