What is cashback on a credit card?
Written by
Emily Tye
Reviewed by
Amy LancashireCashback on a credit card is a reward that gives you back a small percentage of what you spend. Every time you make an eligible purchase, the card earns you a little money back, usually credited to your account each month or once a year. Say your card pays 1% cashback and you spend £1,000 in a month: you'd get £10 back.
One thing to clear up first: "cashback" can mean two different things. On a credit card it usually means the reward described above. It can also mean getting cash out at a shop till when you pay, which is a separate thing and works very differently on a credit card. We cover both below.
How does credit card cashback work?
When you spend on a cashback credit card, the provider tracks your eligible purchases and returns a percentage of the value to you. Cashback cards are a common type of credit card, but the exact rate and rules depend on the card. Here's how the reward is usually structured.
Flat-rate cashback
A flat rate pays you the same percentage on everything you buy. If the rate is 0.5%, you earn 0.5% whether you're buying petrol, groceries or a new sofa. It's simple and predictable.
Tiered or category cashback
Some cards pay more once your total spending passes a set amount in a year. For example, a card might pay 0.5% on your first £10,000 of spending in a year and a higher rate above that.
Other cards pay a higher rate on certain types of spending, such as supermarkets, fuel or travel, and a lower rate on everything else. These are sometimes called category cards. Both tiered and category cards can beat a flat rate if your spending fits the structure, but they take more attention to get the most from.
Introductory cashback rates
Some cards offer a boosted rate for an introductory period, often the first few months, before dropping to the standard rate. The higher rate is usually capped, so there's a limit on how much you can earn while the offer runs.
Cashback caps and limits
Cashback is often capped. A card might limit how much you can earn each month or each year, or only pay cashback up to a certain level of spending. Always check the cap, because it sets the most you can realistically earn.
How and when is cashback paid?
How you receive your cashback depends on the provider. The most common methods are:
As a statement credit, which reduces your balance
As a payment into your bank account
Occasionally as vouchers for selected retailers
Some cards pay your cashback every month, others once a year. One thing to watch: cashback paid as a statement credit lowers your balance, but it doesn't replace your monthly payment. You still need to make at least the minimum payment on a credit card by your repayment date to avoid charges.
What purchases don't earn cashback?
Not everything you do with your card counts as eligible spending. Cashback usually doesn't apply to:
Cash withdrawals from a cash machine
Gambling transactions, such as betting or buying casino chips
These are normally excluded, so it's worth checking your card's terms before assuming a transaction will earn you anything.
Can I get cashback from a credit card at the till?
This is where the two meanings of cashback part ways. Getting cash out at a shop till is not the same as earning cashback rewards, and on a credit card it works very differently.
In most UK shops, cashback at the till is only offered on debit cards, not credit cards. That's one of the practical differences between credit and debit cards.
If your credit card does let you take out cash, whether at a till or a cash machine, it's treated as a cash advance rather than a purchase. That usually means a fee, and depending on your provider, interest may start building from the day you take the cash out, with no interest-free period.
So while earning cashback rewards can be worthwhile, taking cash out on a credit card is one of the more expensive ways to use it. Our guide on withdrawing cash from a credit card explains the costs in full.
Is credit card cashback taxable?
For most people, no. If you're an ordinary customer earning cashback on your personal spending, HMRC treats it as a rebate on money you've already spent, not as income, so there's no tax to pay on it. This is set out in HMRC's Statement of Practice 4 (1997), which st
ates that ordinary retail customers 'will not be liable to Income or Capital Gains Tax' on the cashbacks they receive.
The picture can differ if you receive cashback through a business or trade rather than on personal spending, in which case it may count as taxable business income. If your situation goes beyond everyday personal use, it's worth checking with HMRC or an accountant.
Is a cashback credit card worth it?
A cashback card can be worth it if you pay your balance off in full every month. This is because cashback rates are small, usually a fraction of what you spend, so it doesn't take much interest to wipe out what you earn.
A few things to weigh up:
Interest: if you carry a balance, the interest you pay will almost always be more than the cashback you earn. It helps to understand how credit card interest works before you rely on cashback.
APR: reward and cashback cards sometimes come with a higher APR than plainer cards, so make sure you understand what the APR means on a credit card before you apply.
Fees: some cashback cards charge an annual fee, which eats into your earnings. Weigh the fee against how much cashback you'd realistically earn, and check the credit card fees first.
Caps: the cap limits your upside, so work out the most you could earn at your level of spending.
The honest answer: cashback rewards you for spending you'd do anyway, but it's typically only worth chasing if you clear your balance each month and the cashback beats any annual fee. If you tend to carry a balance, a lower-interest card may serve you better than a cashback one.
FAQs
There are a range of financial products available that may suit your needs. We encourage you to research your options carefully and consider seeking independent financial advice before making any decisions. This blog is for informational purposes only and does not constitute financial advice.
