UK Late Payment Interest on Invoices: Your Complete Guide

Every year in the UK, late payments drain an estimated £11 billion from the economy and force around 14,000 businesses to close, according to research published by the UK's Small Business Commissioner. With approximately £26 billion in overdue invoices outstanding at any given time, chasing unpaid bills is not just frustrating — it is a structural threat to cash flow and business survival.

The law is on your side. Under the Late Payment of Commercial Debts (Interest) Act 1998, UK businesses have the statutory right to charge interest at 8% above the Bank of England base rate on overdue commercial invoices. With the current base rate at 4.5%, that gives you a total statutory interest rate of 12.5% per year. On top of interest, you can claim fixed compensation on every late invoice: £40 for debts up to £999.99, £70 for debts between £1,000 and £9,999.99, and £100 for debts of £10,000 or more.

These rights apply automatically to business-to-business (B2B) commercial transactions — you do not need a special contract clause to invoke them, and your customer does not need to agree. Consumer debts fall outside the Act's scope, but if you supply goods or services to another business, sole trader, or public authority, the statutory framework covers you.

This guide covers everything you need to act on those rights — from the step-by-step calculation to the exact wording for your invoices.

Your Rights Under the Late Payment of Commercial Debts Act 1998

The Act applies to commercial transactions — contracts for goods or services between businesses. The key question is whether your specific situation qualifies. Covered transactions include:

Limited companies trading with other limited companies
Sole traders and freelancers supplying other businesses
Partnerships invoicing commercial clients
Businesses supplying public sector bodies (local authorities, NHS trusts, government departments)

The Act does not apply to consumer debts. If you sell directly to individual consumers rather than businesses, different rules govern late payment.

When the Clock Starts Ticking

If your contract specifies payment terms (for example, "payment due within 14 days of invoice"), interest begins accruing the day after that deadline passes.

If no payment terms were agreed, the Act implies a default period of 30 calendar days. The 30-day clock starts from whichever date is later:

The date the goods or services were delivered, or
The date the customer received the invoice

So if you completed the work on 1 March but didn't send the invoice until 10 March, the 30-day period runs from 10 March. Payment would be due by 9 April, and interest starts accruing from 10 April.

The 60-Day Cap on Payment Terms

Businesses can agree payment terms longer than the default 30 days — 45 or 60 days is common in certain industries. However, the Act places a practical limit: payment terms exceeding 60 days must not be grossly unfair to the supplier.

If a larger company imposes 90- or 120-day terms on a smaller supplier, the supplier can challenge those terms under the Act. In practice, most B2B payment terms fall at either 30 or 60 days. Terms beyond 60 days attract scrutiny, and courts can strike down arrangements designed to exploit a supplier's weaker bargaining position.

You Don't Need Late Payment Terms on Your Invoices to Claim

A common misconception: many business owners believe they can only charge late payment interest if their invoices explicitly state it. That is not the case. The Late Payment of Commercial Debts Act creates an automatic statutory entitlement. Even if your invoices say nothing about interest or late fees, you still have the legal right to claim.

That said, including late payment wording on your invoices is strongly recommended — it sets expectations, encourages prompt payment, and strengthens your position if a dispute reaches court. The specific wording to use is covered later in this guide.

How Interest Accrues

Once the payment deadline passes, interest accrues daily on the outstanding amount. It continues to accumulate every day the debt remains unpaid, right up until the date the customer settles the invoice in full. There is no requirement to send a formal demand or warning letter before the right to interest kicks in — the entitlement arises automatically the day after the agreed (or implied) due date.

How to Calculate Late Payment Interest on a UK Invoice

The statutory interest formula is straightforward. Once you know the three variables, you can calculate the exact amount owed on any overdue invoice:

Statutory interest = Invoice amount × (8% + Bank of England base rate) ÷ 365 × number of days overdue

The 8% addition is fixed by the Late Payment of Commercial Debts Act. The Bank of England base rate is the variable component — as of early 2026, it stands at 4.5%, giving a total annual statutory interest rate of 12.5%. This is a simple annual rate applied daily, not compound interest.

One important detail: the base rate that applies to your calculation is the one in force on the date interest starts to run (typically the day after the payment due date). If the base rate changes after that date, your calculation still uses the rate from when interest first accrued on that specific invoice.

Worked Examples at the Current 12.5% Rate

Example 1: £500 invoice, 30 days overdue

Annual interest: £500 × 12.5% = £62.50
Daily rate: £62.50 ÷ 365 = £0.1712 per day
Interest for 30 days: £0.1712 × 30 = £5.14
Fixed compensation (invoices under £1,000): £40.00
Total claimable: £45.14 on top of the original £500

Example 2: £5,000 invoice, 60 days overdue

Annual interest: £5,000 × 12.5% = £625.00
Daily rate: £625.00 ÷ 365 = £1.7123 per day
Interest for 60 days: £1.7123 × 60 = £102.74
Fixed compensation (invoices £1,000 to £9,999.99): £70.00
Total claimable: £172.74 on top of the original £5,000

Example 3: £15,000 invoice, 90 days overdue

Annual interest: £15,000 × 12.5% = £1,875.00
Daily rate: £1,875.00 ÷ 365 = £5.1370 per day
Interest for 90 days: £5.1370 × 90 = £462.33
Fixed compensation (invoices £10,000 and above): £100.00
Total claimable: £562.33 on top of the original £15,000

A £15,000 invoice sitting unpaid for three months generates over £460 in statutory interest alone — money your business is legally entitled to claim.

If a customer makes a partial payment, interest switches to the remaining balance from that date forward. Fixed compensation is based on the original invoice amount, not the outstanding balance.

Checking the Current Base Rate

The Bank of England updates the base rate periodically through its Monetary Policy Committee decisions. Before running your calculation, verify the current rate at the Bank of England website. The 8% statutory addition never changes, but the base rate component means the total annual rate shifts with monetary policy. At any point in recent years, the combined rate has ranged from 8.5% (when the base rate was 0.5%) to the current 12.5% — so checking matters.

Fixed Compensation and Debt Recovery Costs

Beyond interest, the Late Payment of Commercial Debts Act 1998 grants suppliers a separate entitlement that many overlook entirely: fixed compensation for every overdue invoice. This is not an alternative to interest — it is payable in addition to it, on the same invoice.

The compensation amount depends on the size of the debt:

Invoice Amount	Fixed Compensation
Up to £999.99	£40
£1,000 – £9,999.99	£70
£10,000 or more	£100

One detail worth getting right: compensation applies per invoice, not per overall debt. If a customer owes you money across three separate invoices — say £800, £2,500, and £15,000 — you can claim £40, £70, and £100 respectively. That is £210 in fixed compensation before interest is even considered.

Reasonable Debt Recovery Costs

Fixed compensation is a starting point. Where the actual cost of chasing payment exceeds the fixed amount, the Act entitles suppliers to claim reasonable costs incurred in recovering the debt. This can include:

The cost of sending formal reminder letters or final demands
Solicitor fees for drafting a letter before action
Debt collection agency charges
Administrative time spent on credit control follow-up

The key qualifier is "reasonable." Courts expect these costs to be proportionate and demonstrable. Keeping clear records of recovery activity — dates, communications, and expenses — strengthens any claim substantially.

How to Formally Claim Compensation

The standard mechanism for billing these additional charges is issuing a debit note for additional charges against the outstanding invoice. A debit note documents the fixed compensation amount, any reasonable recovery costs, and the statutory basis for the claim — giving the debtor a clear, auditable record of what is owed and why.

Late Payment Wording to Include on Your Invoices

Including late payment terms on your invoices is not a legal prerequisite for exercising your rights under the Act. The statutory entitlement to interest and compensation exists regardless of what your invoice says. That said, explicitly stating your terms is strongly recommended — it puts your customer on clear notice, reduces disputes about payment expectations, and strengthens your position considerably if you need to escalate collection.

Standard 30-day payment terms:

Payment is due within 30 days of the invoice date. Under the Late Payment of Commercial Debts (Interest) Act 1998, we reserve the right to charge statutory interest at 8% above the Bank of England base rate and to claim fixed compensation on any overdue invoices.

14-day payment terms variant:

Payment is due within 14 days of the invoice date. Invoices not settled by the due date will be subject to statutory interest at 8% above the Bank of England base rate, plus fixed compensation for debt recovery costs, in accordance with the Late Payment of Commercial Debts (Interest) Act 1998.

60-day payment terms variant:

Payment terms: 60 days from invoice date. We reserve the right to charge interest on late payments at the statutory rate of 8% above the Bank of England base rate and to claim compensation for debt recovery costs under the Late Payment of Commercial Debts (Interest) Act 1998.

Adapt the number of days to match whatever terms you have agreed with your customer. The critical elements are the payment deadline, the reference to the Act, and the mention of both interest and compensation — this signals that you are aware of your entitlements and prepared to use them.

Where to Place the Wording

The late payment clause belongs in the payment terms section of your invoice, typically near your bank details or preferred payment method. Some businesses place it in the invoice footer. Either location works, provided it is legible and not buried in fine print. The goal is visibility: your customer should encounter it naturally when reviewing how and when to pay.

Beyond the late payment clause itself, your invoices should clearly state three data points that become essential if you ever need to calculate interest: the invoice date, the payment due date, and the accepted payment method. These are also foundational elements of UK VAT invoice compliance requirements, so getting them right serves double duty. Missing or ambiguous dates are one of the most common reasons late payment claims stall — the debtor disputes when the clock started running, and without a clear due date on the invoice, that argument gains traction.

A well-structured invoice with unambiguous terms does much of the enforcement work before a payment ever becomes overdue. Customers who see specific statutory language on every invoice tend to prioritise those payments over invoices with vague or absent terms.

When Contractual Interest Overrides the Statutory Rate

Most B2B contracts include payment terms, and many include an interest clause for late payment. Where a valid contractual interest provision exists, it generally takes precedence over the Late Payment of Commercial Debts Act 1998. The Act functions as a fallback — it fills the gap when the contract is silent on interest, rather than overriding terms the parties have freely agreed.

This means that if your contract specifies interest at, say, 3% above base rate per annum on overdue invoices, that is the rate you charge. You cannot simply ignore it and claim the higher statutory rate of 8% above base rate because it would yield more.

But there is a critical exception.

The "Substantial Remedy" Test

The Act includes a safeguard against contracts that technically include an interest clause but set the rate so low that it offers no real deterrent against late payment. Under section 9 of the Act, a contractual interest term can be challenged if it does not provide a substantial remedy for late payment compared to what the statutory scheme would deliver.

In practice, this works as follows. If your contract sets interest at 2% per annum on overdue amounts, and the statutory rate is 8% above the Bank of England base rate (currently 4.5%, giving a total of 12.5%), the contractual provision is clearly inadequate by comparison. A supplier in that position can set aside the contractual clause and claim statutory interest instead, along with the fixed compensation the Act provides.

There is no rigid formula or bright-line threshold for what qualifies as a substantial remedy. Courts assess the overall commercial circumstances on a case-by-case basis, considering factors such as:

The gap between the contractual rate and the statutory rate — the wider the gap, the weaker the contractual remedy
Whether the contract also excludes fixed compensation — stripping out the £40–£100 compensation element further weakens the remedy
The bargaining positions of the parties — a clause imposed by a dominant buyer on a small supplier faces greater scrutiny

A contractual rate significantly below the statutory rate is unlikely to survive a substantial remedy challenge.

Reviewing Your Existing Contracts

For credit controllers and accountants advising on how to charge late payment interest on invoices in the UK, the practical takeaway is straightforward. Audit your contracts and check that any interest clause stands up against the statutory benchmark.

If the contract specifies a competitive rate — for example, 8% above base rate or higher — the contractual term governs, and the Act does not apply.

If the contract specifies a below-market rate — anything substantially lower than the statutory rate — the clause is vulnerable. A supplier could argue it fails the substantial remedy test and claim the full statutory entitlement instead.

If the contract is entirely silent on interest — no clause, no mention — statutory interest applies automatically. There is nothing to override. The supplier's right to 8% above base rate, plus fixed compensation, arises by operation of law from the day after the agreed payment date (or after 30/60 days if no date was agreed).

Businesses negotiating new contracts should set their interest clause at or above the statutory rate. Doing so removes ambiguity, signals seriousness about payment discipline, and ensures the clause will be enforceable on its own terms without needing to fall back on the Act.

Enforcing Late Payment Interest: Practical Considerations

Knowing your legal rights and knowing when to exercise them are different things. The reality is that most UK businesses never charge late payment interest, even when they are fully entitled to do so. That reluctance is understandable — but it means chronic late payers face no consequences, and the cycle continues.

The decision to enforce should be commercial, not emotional. A practical framework helps.

When enforcement makes sense:

A customer has received reminders and continues to pay beyond terms. Charging interest signals that you take your payment terms seriously — and the warning itself often accelerates payment before interest is actually applied.
When the interest amount runs into hundreds or thousands of pounds, the administrative effort and any relationship friction are proportionate to the recovery.
One-off or infrequent customers present lower commercial risk. There is less to lose by asserting your statutory rights.
If late payments are forcing you to use overdrafts, delay your own supplier payments, or defer investment, the cost of not enforcing exceeds the cost of any awkwardness.

When enforcement may not justify the friction:

A reliable customer who pays a week late once or twice a year is different from a habitual offender. A conversation often resolves what a formal interest charge would escalate.
Calculating, invoicing, and chasing £4.50 in interest on a £200 invoice rarely makes commercial sense.
If a customer represents significant ongoing revenue, weigh the interest claim against the lifetime value of the account. This does not mean accepting abuse — it means choosing the right enforcement tool.

If a Customer Refuses to Pay

If you send an interest claim and the customer pushes back, there is a clear escalation path. Start with a formal written demand that cites the Act and specifies the exact interest and compensation amounts owed. If that produces no result, the next step is a letter before action under the Pre-Action Protocol for Debt Claims — this gives the debtor a final opportunity to settle before court proceedings. For claims up to £10,000 (the combined original debt plus interest and compensation), you can issue a claim through Money Claim Online, the government's small claims portal, without needing a solicitor. Larger claims follow the standard county court process.

The Small Business Commissioner

Before escalating to court, consider the Small Business Commissioner (SBC). This government body was established specifically to help small businesses resolve payment disputes with larger organisations. The SBC can intervene on your behalf, contact the debtor, and mediate a resolution — without legal fees or the adversarial dynamics of formal proceedings. It is a free service and a practical first step when direct communication has failed.

The Fair Payment Code

Introduced in December 2024, the Fair Payment Code replaced the earlier Prompt Payment Code with stronger commitments around payment behaviour and transparency. Signatories pledge to pay suppliers within agreed terms and to report publicly on their payment practices. When dealing with a customer who is a signatory, their commitment to the Code gives you additional leverage — a formal interest notice carries more weight when it highlights a gap between their public commitments and their actual payment conduct.

Identifying Overdue Invoices at Scale

For businesses processing high volumes of invoices, the practical bottleneck is often not the law or the calculation — it is identifying which invoices are actually overdue. Extracting payment terms, due dates, and totals from invoice documents systematically is the prerequisite to any enforcement workflow. Tools like AI-powered invoice data extraction can process batches of invoices and pull out due dates, payment terms, and totals — the exact data points you need to flag overdue payments and calculate the interest owed, turning a manual trawl through paperwork into a repeatable process.

The statutory right to charge interest exists precisely because late payment causes real harm to real businesses. Using it selectively — with clear policies, fair warnings, and proportionate judgment — protects your cash flow without unnecessarily damaging the relationships that sustain it.