Under the Late Payment of Commercial Debts (Interest) Act 1998, any UK business can charge interest on overdue invoices at the Bank of England base rate plus 8% – currently 11.75% per annum – plus a fixed compensation payment, without needing to mention it in the original contract.
Most small business owners know that late payment is a problem. Fewer know that Parliament gave them a specific legal tool to do something about it. The Act has been in force since 1998, yet it remains one of the most underused rights available to UK SMEs. This guide explains what the law actually says, how to calculate what you are owed, and how to claim it.
Who the Act Applies To
The Late Payment Act applies to commercial debts between businesses. That means business-to-business (B2B) transactions only.
It does not apply to:
- Consumer debts (a customer buying from you for personal use)
- Debts owed by or to the public sector under certain specific contracts (though separate regulations extend similar rights to public sector contracts)
- Debts where a different interest arrangement has been agreed that meets the “substantial remedy” test (more on this below)
If you sell to other businesses – whether you are a sole trader, partnership, LLP, or limited company – the Act applies to you. The size of either business does not matter. A one-person consultancy has the same statutory right to charge late payment interest as a FTSE 100 company.
How to Calculate Statutory Interest
The statutory interest rate is the Bank of England base rate plus 8 percentage points. With the base rate at 3.75%, that gives a current rate of 11.75% per annum.
This is simple interest, not compound. It accrues daily from the day after the agreed payment date until the debt is paid.
The daily calculation is:
Daily interest = (Invoice amount x Statutory rate) / 365
Interest starts running from the day after payment was due. If your terms are 30 days and you invoiced on 1 March, payment was due on 31 March, and interest starts accruing on 1 April.
Fixed Compensation on Top of Interest
In addition to interest, the Act entitles you to a fixed compensation payment for every late invoice. The amount depends on the size of the debt:
| Debt amount | Fixed compensation |
|---|---|
| Under £1,000 | £40 |
| £1,000 to £9,999.99 | £70 |
| £10,000 or more | £100 |
This is per invoice, not per customer. If a customer is late on three invoices of £5,000 each, you can claim £70 on each – that is £210 in fixed compensation alone.
On top of the fixed sum, you can also claim reasonable costs incurred in recovering the debt. If you have spent money on solicitor’s letters, debt collection fees, or similar recovery costs, the Act allows you to recover those too, provided they are reasonable and exceed the fixed compensation amount.
A Worked Example
You invoiced a client £8,000 for consultancy work on 1 June, with payment terms of 30 days. Payment was due on 1 July. The client finally pays on 14 August – 45 days late.
Interest calculation:
- Statutory rate: 3.75% + 8% = 11.75%
- Daily interest: (£8,000 x 11.75%) / 365 = £2.58 per day
- Days late: 45
- Total interest: £2.58 x 45 = £116.10
Fixed compensation:
- The debt is between £1,000 and £9,999.99, so: £70
Total you can claim: £116.10 + £70 = £186.10
That will not change your life, but it serves two purposes. It partly compensates you for the real cost of being paid late – the borrowing costs, the time spent chasing, the opportunity cost. And it sends a clear signal to the customer that late payment has consequences.
Do You Need to Mention It in Your Contract?
No. The statutory right to charge late payment interest applies automatically to all qualifying B2B debts, whether or not your contract mentions it. You do not need to include it in your terms and conditions, on your invoices, or in any agreement.
That said, it is good practice to include a reference to it in your standard terms. Not because you need to legally, but because it sets expectations. A line in your terms stating that you reserve the right to charge interest on late payments under the Act reminds customers that this is not a threat you invented – it is the law.
Can a Contract Override the Act?
Yes, but only in limited circumstances. A contract can replace the statutory right with a different remedy – for example, a contractual interest rate of 4% instead of 11.75%. However, the Act says the replacement must provide a “substantial remedy” for late payment.
If the contractual alternative is not a substantial remedy – say, a token interest rate of 1%, or a clause that simply says “no interest shall be charged on late payments” – you can set aside the contractual terms and rely on the statutory right instead.
In practice, this means a large customer cannot simply insert a clause into their standard terms that waives your right to late payment interest. If their alternative is not genuinely fair, the Act overrides it.
How to Actually Claim It
You do not need a solicitor to claim statutory interest. A clear, professional email or letter is enough. Here is the kind of wording that works:
Dear [Name],
I am writing regarding invoice [number] for £[amount], dated [date], which was due for payment on [due date]. Payment was received on [payment date], [X] days after the due date.
Under the Late Payment of Commercial Debts (Interest) Act 1998, I am entitled to charge interest at the rate of [X]% per annum (Bank of England base rate of 3.75% plus 8%) on the overdue amount, together with fixed compensation of £[40/70/100].
The interest due is £[amount] and the fixed compensation is £[amount], giving a total of £[amount]. I would be grateful if you could arrange payment of this sum within 14 days.
I value our business relationship and hope we can avoid this situation in future by ensuring invoices are paid within the agreed terms.
Keep the tone professional, not aggressive. You are exercising a legal right, not picking a fight. Most businesses, when presented with a clear and reasonable claim, will either pay it or at least start paying your future invoices on time.
Common Misconceptions
“I can only charge interest if my contract says so.” Wrong. The statutory right applies automatically. A contract can replace it, but only with something that qualifies as a substantial remedy.
“It is compound interest.” It is not. Statutory late payment interest is simple interest – it accrues on the original debt amount only, not on accumulated interest.
“Charging interest will damage the relationship.” It might. But so does not being paid on time. If a customer consistently pays late, the relationship is already under strain. Claiming what you are legally entitled to is a reasonable response. Many businesses find that claiming interest once is enough to ensure future invoices are paid promptly.
“It is not worth the hassle for small amounts.” The fixed compensation element is specifically designed to make small claims worthwhile. On a £500 invoice, the £40 compensation alone is 8% of the debt – before interest is added.
“It only applies if you are a small business.” It applies to all B2B commercial debts, regardless of the size of either party. A large business paying a small supplier late is subject to exactly the same provisions as two sole traders.
When to Charge It and When Not To
Claiming late payment interest is a judgement call. The legal right is clear, but the commercial decision depends on your circumstances.
Charge it when:
- A customer is persistently late despite reminders
- The late payment has caused you real financial harm (borrowing costs, missed opportunities)
- You want to establish a precedent that late payment has consequences
- The customer relationship is already strained or you are prepared to lose it
Think carefully when:
- It is a first offence from an otherwise reliable customer – a conversation may be more effective
- The customer is going through genuine financial difficulty – pushing too hard might tip them into insolvency, in which case you get nothing
- The amount is trivial relative to the value of the ongoing relationship
Late payment is not a small problem. With 17.48 million overdue invoices recorded in Q1 2026, and 133 million staff hours spent chasing them, it is a systemic drain on UK businesses. The Late Payment Act gives you a concrete tool to push back. Whether you use it on every late invoice or hold it in reserve for persistent offenders, knowing your rights puts you in a stronger position.
For a step-by-step approach to dealing with a specific overdue invoice, see My Customer Is 60 Days Late – What Are My Options?. To understand how late payment is affecting your overall cash collection, check your numbers with the DSO Calculator, and read our guide on How to Reduce Your DSO for practical strategies to get paid faster.
This article is for informational purposes only and does not constitute legal or financial advice. The law on late payment interest can be complex, particularly where contracts contain alternative provisions. If you are unsure about your rights or are considering legal action to recover a debt, seek advice from a qualified solicitor.