In this guide, we'll walk you through everything you need to know about BACS payments and how they compare to other forms of payment. We also have all the data to BACS these claims up. Let's break it all down.
0
min read
If you have ever run payroll or transferred money to a supplier in the UK, then chances are you might be familiar with the Bankers Automated Clearing System, often referred to as BACS. BACS payments are one of the most common ways to transfer between bank accounts in the UK, similar to the ACH system across the pond. Despite being widely used, many businesses still have questions about the way it works, how much it costs, and how to optimize it for their own cash flow strategies.
BACS, short for Bankers’ Automated Clearing Services, is a UK payment system that lets businesses send money directly from one bank account to another. It's widely used for different types of scheduled payments like payroll, supplier invoices, pensions, and dividends. BACS is not built for instant transfers, but is considered a go-to solution for predictable, recurring payments. BACS helps streamline cash flow and reduce admin by automating bulk payments across multiple recipients.
The system has its genesis in 1968, when it was launched to replace the slow, manual process of writing and posting cheques. It introduced one of the first large-scale electronic payment systems in the world, transforming how UK banks handled transactions. In the 1980s, it moved to full computerisation with BACSTEL, followed by BACSTEL-IP in the early 2000s, which brought internet-based payment submission.
There are two main types of BACS transactions:
A typical BACS payment will take about three working days to clear from the time it's initiated. Again, it's not instant, but follows a reliable process so the sender and the receiver can have a reliable ballpark of when their funds might arrive.
Here’s how the timing works:
It's important to note that when we refer to working days, we mean business days, which are, in most cases, cut off at 5 pm Monday to Friday. That means a payment submitted on a Thursday won’t arrive on a weekend; it will clear the following Monday at the earliest.
Remember, in banking, cut-off times matter. If you miss your bank’s daily cut-off time (often 5 pm), your payment will be treated as if it were submitted the next working day, delaying the whole cycle by 24 hours.
Here’s a simple breakdown:
This three-day timeline makes BACS ideal for planned, recurring payments like payroll or supplier remittances. However, for urgent transfers, businesses often opt for Faster Payments or CHAPS, which offer same-day or near-instant processing (most likely at a higher cost).
If you’re scheduling a payment that needs to hit a recipient’s account by a specific date, like a payroll or supplier payment deadline, it might be a good idea to submit it a day earlier than you think you need to. That buffer gives you room for unexpected delays, system outages, missed cut-offs, or whatever else might cause a slight delay.
There are two main ways to make your BACS payment, which are as follows:
Not all businesses can obtain a SUN directly; some use a Bureau Service, which acts on their behalf.
There are a few different payment methods that are used by businesses in the United Kingdom. Below are the three primary types and how they compare to BACS
What do most businesses choose to set up their recurring and important transfers using BACS? The answer to this is simple: cost. As long as they can be relied upon, businesses will always choose price as the most important option for reliable scheduled payments. Unlike CHAPS, which incurs high fees for every transaction, BACS is either free or carries a very small per-transaction fee, depending on how you access the system.
Here’s a breakdown of common methods and associated costs:
Why transfer costs matter: For small and medium enterprises (SMEs), avoiding transaction costs can make a huge difference in annual expenses, especially for companies running hundreds or thousands of monthly payments. BACS is especially cost-effective for payroll, pensions, supplier invoices, and direct credits that don’t need instant settlement. By contrast, CHAPS can cost £20–£35 per transaction, which makes it really expensive and a bit impractical for anything but high-value or time-sensitive payments.
{{iwoca-pay-cta="/components"}}
Unlike Faster Payments or CHAPS, BACS payments cannot be cancelled or recalled once they’ve entered the processing cycle. This is because BACS works in a batch file system, where payment instructions are grouped and processed together. Once submitted and past the cut-off time, these files are locked into the system and can't be individually altered or revoked.
That being said, if you identify a mistake early, before the daily cut-off time (usually around 5 pm), you might still have a window to stop the file. Some banks allow file cancellation on Day 1, especially if you use their business banking portal or BACS-approved software. But once Day 2 begins, cancellation becomes virtually impossible.
If you’re on the receiving end of a Direct Debit made via BACS and the payment was taken in error (e.g., wrong amount or wrong date), the Direct Debit Guarantee allows you to request an immediate refund through your bank. This only applies to inbound Direct Debit transactions, not outbound Direct Credits like payroll or supplier payments.
BACS may be inexpensive and predictable, but its three-day settlement cycle means it’s not a “set-and-forget” payment method. Businesses using BACS heavily must plan for both the timing of the debit from their account and the timing of the credit to their payee.
Because there’s a delay between submission and fund transfer, your available balance today might not reflect your true cash position if you’ve submitted a BACS file for £50,000 in payroll. Businesses must factor in future dated BACS runs to avoid cash shortfalls.
If your clients pay you via BACS, it’s important to recognise that a payment initiated on Monday may not land in your account until Wednesday. This affects aged receivables and can skew your internal reporting if not accounted for correctly. One way to make things work a bit more seamlessly is if you try to encourage clients to submit BACS payments early, especially near quarter-end or financial close dates.
Suppliers and employees care about when funds arrive, not when they were sent. If payday is the 30th, but you submit on the 29th, your team may be waiting an extra two business days, which can have a negative effect on morale and supplier relationships.
Some businesses stagger outgoing BACS payments to avoid large same-day debits. For example, payroll on Monday, supplier batch on Tuesday, pension contribution on Wednesday. This smooths out outgoing cash demands and keeps working capital healthier throughout the week.
{{find-out-iwocapay-cta="/components"}}
For businesses processing bulk or regular payments, integrating BACS with your accounting, HR, or ERP system offers major efficiency gains.
Automated BACS file generation
Systems like Xero, QuickBooks, Sage, and Oracle NetSuite can automatically generate the correctly formatted BACS file, ready to submit to your bank or bureau. This integration eliminates manual data entry errors and makes everything more consistent.
Approval workflows
Integrated systems allow you to build multi-user workflows, for example, an accountant drafts the payment file, a manager approves it, and the finance team submits it. This improves compliance, reduces fraud risk, and makes everything more streamlined.
Audit trails and reconciliation
When BACS runs are linked to invoices and payroll records in your software, reconciliation becomes much easier. You can match payments to expense lines, flag anomalies, and maintain a clean audit trail.
Time savings and reduced error risk
Manual payment processes are prone to typos, duplicates, or missed transactions. BACS integration reduces admin burden while enhancing control. It’s particularly helpful for:
BACS isn't the flashiest payment method, but thousands of UK businesses use it as the engine behind payroll. It's a workhorse more than a racehorse, which in the long term is probably more important. When used correctly and efficiently, BACS supports smooth operations, steady cash flow, and strong vendor relationships; all while keeping costs surprisingly low.
The key is knowing when BACS makes sense (predictable, scheduled payments) and when alternatives like Faster Payments or CHAPS are better suited. If you can add in the right mix of accounting integrations, approval workflows, and timing strategies, BACS becomes a very valuable and very powerful tool. So, in essence, treat BACS as the foundation of your most important accounting transfers, such as payroll, and if you properly leverage tech and automation, you should see some improvements in the short term.
