Late payment interest is not a favour your customer might agree to if you ask nicely. It is a statutory right, written into UK law since 1998, that lets you charge for every day an invoice goes unpaid. Many small business owners know this right exists in theory. Far fewer actually use it, often because the mechanics (how much, from when, and how to claim it) feel murky. This guide sets those mechanics out clearly, using the rates that apply right now.
What the law actually gives you
The Late Payment of Commercial Debts (Interest) Act 1998 gives you an automatic right to charge interest on an overdue amount. It applies whenever another business, or a public authority, owes you money. You do not need to write this into your contract. You do not need your customer’s agreement. The right exists in law, and it applies whether or not your invoice or terms and conditions mention it.
The Act does two things. First, it sets a statutory interest rate that accrues daily on the outstanding debt. Second, it adds a fixed sum of compensation for each invoice paid late. This is meant to cover the basic cost of chasing the money. Together, these turn a slow-paying customer from a minor irritant into something that costs them money, which is rather the point.
It is worth saying plainly: this law exists because business-to-business late payment is a structural problem in the UK. It is not a personal failing on your part for not chasing hard enough. The legislation assumes you will want to use it, and builds in the numbers so you do not have to negotiate them. For the wider picture of the pressures on women running businesses, our facts and figures on women in UK business show how common these cash flow strains are.
The current late payment interest rate and how to calculate it
The law sets statutory interest at 8 per cent a year above the Bank of England base rate, charged as simple interest rather than compound interest. The Bank of England base rate stands at 3.75 per cent as of October 2026 and has held at that level since December 2025. The next rate decision is due on 5 November 2026. That makes the current statutory late payment interest rate 11.75 per cent a year.
The calculation itself is straightforward, and gov.uk sets out the method: take the outstanding debt, multiply it by 0.08 plus the base rate (expressed as a decimal), and that gives you the annual interest figure. Divide by 365 to get the daily rate, then multiply by the number of days the payment is overdue.
Worked example, using October 2026 rates:
- Invoice value: £3,000
- Annual late payment interest: £3,000 × 0.1175 = £352.50
- Daily rate: £352.50 ÷ 365 = 96.6 pence a day
- If the invoice is 45 days overdue: 45 × 96.6p = £43.47
A second example on a smaller invoice:
- Invoice value: £650
- Annual interest: £650 × 0.1175 = £76.38
- Daily rate: about 20.9 pence
- If overdue by 21 days: 21 × 20.9p = £4.39
On its own, late payment interest on a single modest invoice will not transform your cash flow. Its real power lies in two things. It applies to every overdue invoice, across every client, every year. And combined with the fixed compensation below, it changes the economics of paying you late at all.
Fixed compensation: the part most business owners miss
Alongside interest, the Act gives you a fixed sum of compensation for each invoice paid late. It applies regardless of how long the delay lasts or how much interest accrues. Section 5A of the Act sets this out, and the amount depends on the size of the debt:
- £40 for debts up to £999.99
- £70 for debts between £1,000 and £9,999.99
- £100 for debts of £10,000 or more
This compensation covers the basic administrative cost of chasing a late payment: a reminder email, a phone call, the time spent checking your aged debtors list. You can claim it once per invoice, as soon as that invoice becomes overdue. You do not need to prove you actually incurred £40 or £70 or £100 in costs. The law fixes the sum.
Your actual recovery costs may genuinely exceed the fixed compensation. You might, for example, have involved a debt recovery agent or spent significant time on correspondence. In that case, section 5A(2A) lets you claim the difference as well, provided you can show the costs were reasonable. In practice, most small businesses find the fixed sum adequate for routine chasing. They reserve the additional claim for persistent non-payers.
One protection worth knowing about: the Act itself limits how far your rights can be signed away. Under sections 7 to 9 of the Act, a term that tries to exclude or reduce your right to statutory interest and compensation faces a test. It only stands if the contract provides a substantial remedy for late payment in its place. A clause that simply strips out your rights, or replaces them with something trivial, is void. The law makes this fixed compensation deliberately hard to contract away.
Who this right applies to, and who it does not
The Late Payment of Commercial Debts (Interest) Act 1998 applies to contracts for the supply of goods or services between businesses. It also covers contracts with public sector authorities. If you invoice a limited company, a partnership, a sole trader, a charity acting commercially, or a government body or council, the right applies. Your own structure makes no difference: the protection covers you whether you operate as a sole trader or through a limited company.
It does not apply to consumer contracts. If you sell directly to members of the public rather than to other businesses, the Act gives you no automatic right to charge interest on a late-paying customer. Entirely different rules govern consumer debt. Attempting to apply statutory commercial interest to a consumer invoice would be a mistake.
This distinction matters most for businesses that sell to both markets. Take a photographer who invoices corporate clients for events and also takes family portrait bookings from individuals. The corporate invoice carries late payment interest rights automatically. The family portrait invoice does not.
When late payment interest starts, and how contracts affect it
Late payment interest begins accruing the day after the relevant payment date for the debt. Where you and your customer agreed a payment period, for example 30 days from invoice, interest starts the day after that agreed date passes.
If you never agreed a credit period, the law supplies a default. Interest starts 30 days after the later of two events. These are delivery of the goods or completion of the service, or the customer receiving notice of the amount owed (in effect, the date of your invoice). This default protects businesses that never formalised payment terms. That happens more often than it should among freelancers and small suppliers working on informal arrangements.
Contract terms can change which rate applies, but not always in the customer’s favour. Your contract may specify a different interest rate for late payment. If that rate amounts to what the law calls a “substantial remedy”, it overrides the statutory 11.75 per cent. A substantial remedy is one that genuinely compensates you for late payment, rather than a token or trivial figure. This cuts both ways. In principle, you could negotiate a higher contractual rate with a client. In practice, most B2B contracts are silent on the point, so the statutory rate applies by default.
There is one firm limit. When you contract with a public authority, the authority cannot use its standard terms to reduce, exclude or vary your statutory right to late payment interest. This protection exists for a reason. Public sector buyers have historically used their negotiating weight to impose terms that would otherwise weaken supplier protections. The full text of the Act addresses this directly.
How to actually claim late payment interest
Here is the detail that trips people up. Late payment interest accrues automatically, as a matter of law, from the moment the relevant payment date passes. You do not need to send a warning notice for the interest to start building. The clock runs whether you mention it or not.
However, to recover that interest, you must tell the customer you intend to claim it. The right exists automatically; the recovery does not happen without you asserting it. In practice, this means your overdue payment reminder needs to say something along the lines of:
“This invoice is now overdue. Under the Late Payment of Commercial Debts (Interest) Act 1998, statutory interest, currently 11.75 per cent a year, is accruing on the outstanding balance, together with fixed compensation of [£40, £70 or £100, depending on the invoice value]. Please settle the original invoice, together with interest and compensation, within [your chosen period].”
You can choose to raise this at the first reminder, or hold it in reserve for persistent late payers. Many small business owners send a first polite reminder without mentioning interest. They then introduce it explicitly if payment still has not arrived after a second or third chase. This is a legitimate and common approach. What matters is that you state your intention clearly before you expect the customer to pay the interest and compensation. Silently hoping a customer notices the Act exists rarely works.
Two practical notes. First, do not add VAT to statutory interest or fixed compensation: both sit outside the scope of VAT. Second, setting out your payment terms and total amounts clearly from the outset makes it far easier to calculate and justify interest later. Our guide to writing your first invoice covers this in more detail.
You can claim even after the invoice has been paid
A point many owners never discover: the right to interest and compensation survives payment of the invoice itself. If a client eventually settled 50 days late, the interest for those 50 days, plus the fixed compensation, remains yours to claim. You write to the customer, set out the calculation, and request payment. You can generally go back six years in England, Wales and Northern Ireland, or five years in Scotland. Few businesses bother over small sums, but a large invoice paid very late can justify a retrospective claim worth hundreds of pounds.
If a customer refuses to pay what is owed, the debt can be pursued through the small claims court. Where a larger customer is treating a smaller supplier unfairly, the Small Business Commissioner also offers a free complaints route.
When charging it strengthens a relationship, and when it damages one
The judgement call many business owners wrestle with is not whether the right exists, but whether using it is wise with a particular client. Plenty of owners hesitate here, worried about seeming difficult for simply asking to be paid on time. It helps to remember that the law has already made the decision: the interest applies unless you actively choose to waive it. A few patterns are worth knowing.
With large, well-resourced customers, charging statutory late payment interest rarely damages the relationship. Public authorities and corporates with formal accounts payable processes expect it. These organisations budget for it, and often have internal policies that flag suppliers who are entitled to claim it. Not charging it, in these cases, is simply leaving money on the table.
Smaller clients and genuinely good-faith relationships call for more care. A payment may slip because of a one-off admin error rather than a pattern of poor practice. In that case, many business owners choose to waive interest on a first occasion while still mentioning that the right exists. This signals that you know your rights without escalating a minor hiccup into a confrontation.
Charging becomes essential with chronic late payers: the client who is consistently 20, 40 or 60 days late, invoice after invoice. Here, charging interest and fixed compensation is not aggressive. It simply applies the cost the law intends for exactly this behaviour. A customer may respond to a statutory interest charge by refusing to work with you again. If so, ask honestly whether that relationship was financially worth keeping in the first place. Persistent late payment, left unaddressed, is one of the most common drivers of cash flow strain for small suppliers.
Ultimately, late payment interest works best as a tool you use consistently and transparently, rather than a punishment deployed unevenly. State your terms clearly. Apply the right the same way to every client. Follow the GOV.UK calculation method precisely. Together, these build a reputation as a supplier who is easy to work with but not easy to take advantage of.
For related guidance, start with our companion piece on setting payment terms that prevent late payment, and read our guide to cash flow finance options for the moments when a gap still opens up.
