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What is Legal Tender?

When is a £5 note not a £5 note? When do a hundred pennies not equal £1?

These questions can be answered with the definitions of legal tender. It’s relatively common knowledge that the range of notes issued by Scottish and Northern Irish banks are not legal tender – as anyone who’s tried to spend them in England will testify – but what else is excluded? And why might you need to know?

It’s true that on a daily basis, the technical definition is unlikely to affect you. Given its complexity, this might be fortunate – but it can, and sometimes does, raise its head.

“Legal tender has a very narrow technical meaning in relation to the settlement of debt. If a debtor pays in legal tender the exact amount he/she owes under the terms of a contract (and in accordance with its terms), or pays this amount into court, he/she has good defence in law if he/she is sued for non-payment of the debt.  However, in our ordinary day to day transactions, the term “legal tender” in its purest sense need not govern a note or coins acceptability in transactions.”[1]

In 2012, an Essex care home manager was ordered by a judge to pay a total of £1,118.62 after he tried to settle an £804 debt to his accountant with five crates of mostly 1p and 2p coins[2].

This is because most denominations of coin are only legal tender up to a certain amount – and for 1p and 2p this is only 20p. The highest value you can settle with 5p and 10p is £5, up to £10 for 20p, 25p crowns and 50p, but £1 and £2 coins are legal tender to any value – alongside the rarer £5 crown and commemorative £20.[3]

Bank of England notes can of course be used as legal tender for any value, but notes issued from the seven Scottish and Northern Irish issuing banks, or the array of British crown dependencies and territories around the world, are different – not classed as legal tender, but accepted in varying degrees depending on location.

Scottish and Northern Irish banknotes can be used as payment for goods and services and will be accepted by clearing banks and building societies – however many other businesses outside their own territories refuse to accept them.  The Bank of England states:

“The acceptability of a Scottish or Northern Ireland note as a means of payment is essentially a matter for agreement between the parties involved. If both parties are in agreement, Scottish and Northern Ireland notes can be used in England and Wales.”[4]

Any issuing bank has to hold assets in a Bank of England account to support banknote production.  These banknotes are technically legal currency rather than legal tender and are classed as promissory notes – a promise in writing to pay a sum on demand, backed with physical deposits at the central Bank.

Banks from the Crown dependenciesthe Bailiwicks of Jersey and Guernsey and the Isle of Man – issue their own design notes and coins.  They hold a currency union agreement with the UK, which does not require an account held with the Bank of England.  Whilst notes could be accepted as payment by retailers on the mainland, the vast majority will not accept them – however they can again be exchanged for Bank of England notes at banks and post offices.

Finally, the three British Overseas Territories which issue their own currency – Gibraltar, Saint Helena and the Falkland Islands – can neither issue promissory notes nor claim a currency union. These notes cannot be used anywhere outside the area of origin.

So, in the purest sense, a £5 note is only a £5 note when it has been issued by the Bank of England.

And a hundred pennies? As the care home manager now knows, a hundred pennies can never equal £1.


[1] The Bank of England