If you let shoppers split payments with PayPal, your cost of accepting that sale quietly went up. As of 1 October 2026, PayPal’s domestic Pay Later transaction fee for sellers rose to 3.90% + a fixed fee (£0.30 per transaction in the UK). That is a full percentage point above the 2.90% + £0.30 that most “buy now, pay later” orders used to cost — a roughly 30% increase in what PayPal keeps on a typical basket.
Here is the part that catches people out: this fee is charged to you, the seller — not the customer. Below we break down exactly who pays, what it costs in real money, and the practical moves that keep the increase from eating your margin.
What actually changed on 1 October 2026
PayPal updated its UK merchant fee schedule so that payments received through a Pay Later method (Pay in 3, Pay in 4, and Pay Monthly) are billed at a dedicated rate instead of the old general commercial-transaction rate. The headline numbers:
| Payment type (UK, domestic) | Before 1 Oct 2026 | From 1 Oct 2026 |
|---|---|---|
| PayPal Pay Later (Pay in 3 / Pay in 4 / Pay Monthly) | 2.90% + £0.30 | 3.90% + £0.30 |
| Standard PayPal Checkout / commercial transactions | 2.90% + £0.30 | 2.90% + £0.30 |
| Payment Links / invoicing via Pay Later | 2.90% + £0.30 | 3.90% + £0.30 |
PayPal also introduced an optional tiered (volume-based) rate plan alongside the change. Higher-volume sellers can apply to be billed on a sliding scale rather than the flat 3.90%, which we cover below.
US sellers, read this: the 3.90% figure is PayPal’s UK Pay Later rate. In the US, PayPal Pay Later orders are generally processed at your standard PayPal Checkout rate (3.49% + $0.49 as of the October 2026 US schedule), with no separate Pay Later surcharge to the merchant. Rates change often, so always confirm against the fee schedule tied to your own account country before you price anything.
Who actually pays the fee?
The merchant absorbs it. When a customer chooses Pay Later at checkout, PayPal pays you the full order amount up front (minus the fee) and then collects the instalments from the shopper itself. Three things follow from that:
- You get paid in full, now. You are not waiting on instalments — PayPal fronts the money and takes on the repayment risk.
- The buyer pays no extra for interest-free plans. Pay in 3/Pay in 4 are interest-free to the shopper. Longer Pay Monthly plans may carry interest for the buyer, but that interest goes to PayPal — it does not offset your 3.90% fee.
- You usually can’t pass the fee on. PayPal’s acceptable-use terms (and card-scheme rules) prohibit surcharging customers specifically for choosing PayPal or Pay Later. So the increase lands on your margin unless you plan for it.
Worked examples: what the jump costs
The extra 1.00 percentage point sounds small until you run real baskets:
| Order value | Old fee (2.90% + £0.30) | New fee (3.90% + £0.30) | Extra you lose |
|---|---|---|---|
| £40 | £1.46 | £1.86 | £0.40 |
| £80 | £2.62 | £3.42 | £0.80 |
| £250 | £7.55 | £10.05 | £2.50 |
| £600 | £17.70 | £23.70 | £6.00 |
Say you sell 300 Pay Later orders a month at an £80 average. The increase adds £240 a month — about £2,880 a year — straight off the bottom line, for exactly the same sales. On thin-margin products, that can be the difference between a profitable SKU and a break-even one.
How to avoid getting squeezed
1. Apply for the tiered-rate plan
If you process meaningful Pay Later volume, ask PayPal to move you onto the optional volume-based plan announced with this change. Flat 3.90% is the default; a tiered rate can be materially cheaper once monthly volume climbs. It is opt-in — PayPal will not switch you automatically.
2. Build the fee into your prices, not a surcharge
You can’t legally add a “Pay Later fee” at checkout, but you can price it into your margin. If Pay Later is, say, 40% of your orders, a blended fee of roughly 3.5% across all sales covers it. Set your prices to that blended cost rather than your cheapest payment method.
3. Don’t push Pay Later on low-margin items
Promote Pay Later where it lifts average order value (higher-ticket goods), not on £10 add-ons where the 3.90% + £0.30 is a brutal percentage. You’re not banned from offering it — just be deliberate about where you feature it.
4. Benchmark against alternatives
Klarna, Clearpay and in-house card instalments have their own merchant rates. If a competing BNPL provider is cheaper for your basket size and converts as well, splitting volume (or switching) is a legitimate lever. Compare the all-in cost, not just the headline percentage.
5. Reconcile your statements
Pull your PayPal transaction report after the change and confirm Pay Later orders are being charged correctly — and that you weren’t quietly moved onto a plan that doesn’t suit you. Fee errors are easier to dispute when you catch them in the same billing cycle.
Frequently Asked Questions
Does the customer pay the 3.90% Pay Later fee?
No. The 3.90% + fixed fee is a merchant processing fee — the seller pays it. Interest-free Pay in 3/Pay in 4 plans cost the shopper nothing extra, and PayPal’s rules generally forbid you from surcharging customers for choosing Pay Later.
Can I just turn off PayPal Pay Later to avoid the fee?
You can disable Pay Later presentment in your PayPal account settings, but think twice. BNPL options typically raise conversion and average order value, so removing them often costs more in lost sales than the fee saves. A better first step is applying for the tiered rate and pricing the fee into your margins.
Are US sellers affected by the 3.90% rate?
Not by that specific number — 3.90% + fixed is PayPal’s UK Pay Later rate. US merchants generally pay their standard PayPal Checkout rate (3.49% + $0.49 as of the October 2026 US schedule) on Pay Later orders. Always check the fee schedule for your own account’s country, as PayPal updates these regularly.
When exactly did the new fee take effect?
1 October 2026, per PayPal’s updated UK merchant fee schedule and policy update notice. It applies to domestic Pay Later transactions received from that date forward.
The bottom line
PayPal’s Pay Later fee going from 2.90% to 3.90% + fixed isn’t a reason to panic — but it is a reason to act. The sellers who get squeezed are the ones who let the default flat rate ride and never reprice. The sellers who don’t apply for the tiered plan, blend the fee into their pricing, and keep Pay Later where it earns its keep. Spend ten minutes in your PayPal fee settings this week, and you’ll likely claw back most of the increase.
WalletWisp is an independent, informational resource and does not provide financial, tax, or legal advice. Fees and policies change — always confirm current rates in your PayPal account’s fee schedule before making decisions.
