A recent analysis by the Financial Times highlights a paradox in the United Kingdom's cash usage: although cash accounts for only 12 per cent of all transactions, the amount of physical banknotes in circulation has reached a record £86 billion. This figure represents the highest annual increase since the Covid-19 pandemic and raises questions about why so much cash is being held rather than spent.
Banking trade body UK Finance reports that 22 million adult Britons use cash infrequently, less than once per month, while approximately 1.5 million people rely on it daily for transactions. Despite the decline in everyday cash usage—precipitated by the rise of digital payments—the overall holding of banknotes has surged. The Bank of England suggests that this trend may be due to cash being increasingly used as a store of value, particularly during times of economic uncertainty, including pandemics and financial crises. The preference for physical cash mirrors other investment patterns such as the move from equities to gold and money market funds.
Research from 2022 cited by the FT indicated that 60 per cent of UK households were holding more cash since the pandemic's onset, with the median amount saved around £167 per household. Domestic hoarding was estimated to account for £10 billion to £30 billion of the total banknotes in circulation at that time. Since then, the adoption of digital payments has soared, and the presence of bank branches and cash machines has diminished, making access to physical cash more challenging but reinforcing the utility of having some cash as a contingency.
Further compounding this trend, the UK’s cashpoint withdrawals have decreased by £100 million daily compared to pre-pandemic levels, according to Link, which manages the national ATM network. Link’s Director of Strategy, Graham Mott, noted that the traditional surge in cash withdrawals on Fridays for weekend spending has largely disappeared. Additionally, many urban businesses have moved to cashless operations, a shift accelerated during the pandemic to reduce human contact and to save on staffing costs by employing digital payment systems such as tap-and-go cards, self-service checkouts, and QR code payments.
Beyond practical considerations, the Financial Times highlights the role of cash in everyday transactions where digital payments may not be preferred or available. Cash remains popular for tipping in restaurants to ensure service staff receive the full amount, for personal services such as haircuts and beauty treatments, and for paying domestic workers like babysitters, cleaners, and gardeners. The FT observes that some of the increased cash holdings could reflect participation in the hidden economy, which benefits from the anonymity and simplicity of cash.
The cash economy also interacts with tax regulations. Small businesses and sole traders may prefer cash payments to avoid VAT registration thresholds—specifically, the £90,000 turnover point at which 20 per cent VAT must be charged. This financial incentive encourages some traders to keep turnover below the threshold and to accept cash payments that may remain unbanked.
The composition of banknotes in circulation further supports this narrative. The number of £10 notes has declined, while £50 notes have increased by more than 10 per cent over the past year. High-value notes are favoured presumably because they facilitate storing and transferring larger amounts of cash discreetly, though they are increasingly difficult to spend through legitimate channels.
Some smaller high street businesses encourage cash payments to avoid the disproportionate fees charged on card transactions, particularly for low-volume payments. This dynamic sustains the demand for physical money and underscores the ongoing relevance of cash infrastructure in the UK.
Claer Barrett, the FT’s consumer editor who authored the report, summarises these developments as a cash paradox: "The need to keep the UK’s cash infrastructure alive, suggest those hoarding physical money should get out there and spend, spend, spend it."
The analysis offers insight into the evolving role of cash in a digital economy, underpinned by economic behaviours linked to value storage, convenience, tax considerations, and the structural changes in payment systems affecting consumers and businesses across the United Kingdom.
Source: Noah Wire Services