UK Statutory Late Payment Interest

The Late Payment of Commercial Debts (Interest) Act 1998

The Late Payment of Commercial Debts (Interest) Act 1998 gives businesses in the United Kingdom a statutory right to charge interest on overdue invoices issued to other businesses. The legislation was introduced to address the widespread problem of large companies forcing small suppliers to wait extended periods for payment.

The Act applies to contracts for the supply of goods or services between businesses (B2B). It does not automatically apply to contracts with individual consumers, although you can include contractual late payment terms in your consumer contracts if you choose to do so.

The right to statutory interest arises automatically from the date a debt becomes overdue. You do not need to include a specific clause in your contract or on your invoice for the right to exist, though it is good practice to notify your customers of your payment terms in advance.

When does interest start accruing?

Interest begins accruing on the day after the payment was due. The payment due date is either the date agreed in your contract, or if no date was agreed, 30 days after whichever is the later of: the date you delivered the invoice, or the date you delivered the goods or completed the services.

For example, if you complete a project on 1 March and send an invoice the same day with 30-day payment terms, the due date is 31 March. If the invoice is not paid, interest starts accruing from 1 April. If you had agreed 14-day terms, the due date would be 15 March and interest would start accruing from 16 March.

How to calculate late payment interest

The statutory interest rate is 8% per year above the Bank of England base rate that was in effect on 31 December in the preceding year for debts that become overdue in the first six months of a year (January to June), or the rate on 30 June for debts that become overdue in the second six months (July to December).

The formula for calculating interest is:

• Interest = Debt amount x (statutory rate / 365) x number of days overdue

As an example, suppose you are owed £5,000 and the debt has been overdue for 45 days, and the Bank of England base rate is 4.75%. The statutory rate would be 12.75% (4.75 + 8). The daily rate would be 12.75 / 365 = 0.03493%. The interest for 45 days would be £5,000 x 0.03493% x 45 = approximately £78.59.

You can check the current Bank of England base rate on the Bank of England website. The base rate changes at Monetary Policy Committee meetings throughout the year.

Fixed debt recovery compensation

In addition to interest, you are entitled to claim a fixed sum as compensation for the administrative cost of recovering the debt. These fixed sums are set out in the Act and apply per invoice:

• £40 for debts under £1,000
• £70 for debts between £1,000 and £9,999
• £100 for debts of £10,000 or more

These sums are claimable as soon as the debt becomes overdue, before you have incurred any actual recovery costs. They are intended to compensate for time spent chasing, not as a penalty. If your actual recovery costs exceed the fixed sum, you can also claim reasonable costs in addition, though this would typically require legal proceedings.

Contractual payment terms vs statutory terms

You are free to agree different payment terms in your contracts. However, the Act protects businesses from being forced to accept terms that are grossly unfair. Under the Business Contract Terms (Assignment of Receivables) Regulations 2018 and the Prompt Payment Code guidance, payment terms of more than 60 days can be challenged if they are not justified by good commercial reason.

Many freelancers and small businesses use 14-day or 30-day payment terms. Shorter payment terms reduce your exposure to late payment and mean you can start charging interest sooner if a customer fails to pay. Including your payment terms clearly on every invoice avoids any ambiguity about when interest starts accruing.

How to charge late payment interest in practice

There is no legal requirement to send a separate interest invoice at the moment the debt becomes overdue. You can wait and send a credit note or supplementary invoice for the accumulated interest once you have decided to pursue it. In practice, many businesses send a polite payment reminder first, and only escalate to claiming interest if reminders are ignored.

If you decide to claim interest, the most effective approach is to write to the debtor setting out: the original invoice amount, the due date, the number of days overdue, the statutory interest rate applied, the calculated interest amount, and the fixed compensation sum. Give the debtor a reasonable period (typically 7 days) to pay the full amount before escalating to formal recovery proceedings.

Tidybill lets you configure a late fee percentage on your account. When invoices become overdue, the late fee is displayed on the invoice, and automated payment reminder emails can be sent on a schedule you define. Using automated reminders significantly reduces the number of invoices that reach the point where you need to claim statutory interest.

For more on UK invoicing, see the VAT invoice requirements guide and the sole trader invoicing guide.