Charging Late Payment Interest — Your Legal Right to Chase Overdue Invoices (2026)

The Law: Late Payment of Commercial Debts (Interest) Act 1998

The Late Payment of Commercial Debts (Interest) Act 1998 gives every UK business a statutory right to claim interest and reasonable debt-recovery costs when another business pays an invoice late. It is automatic. You do not need a clause in your contract, you do not need the customer's agreement, and you do not need to have warned them in advance. If a business owes you money and the payment is overdue, the right to charge interest exists by law.

This matters enormously for trades, because it shifts the balance of power. A late-paying commercial client — a builder you subbed for, a letting agent, a facilities manager, a shop or office you did work for — is exposed to a legal liability the moment they go past the due date. You can use that as leverage even if you ultimately choose to waive the charge as a goodwill gesture.

Crucial: This Applies to Business Customers — NOT Consumers

This is the single most important point in the whole article, so read it twice. The Late Payment of Commercial Debts (Interest) Act only applies to business-to-business (B2B) transactions. It does not apply when your customer is a private individual having work done on their own home — a consumer.

• Business customer (B2B): Another company, a sole trader, a landlord, a letting agent, a shop, an office. The statutory right to interest and fixed compensation applies automatically.
• Consumer / domestic customer: A homeowner paying for work on their own home. The Act does not apply. You can only charge late payment interest if your written contract or terms and conditions clearly state that you will — and the rate must be fair and not a penalty.

So for a kitchen fit in a private house, you cannot rely on the statutory rate — you need a late-payment clause in the terms the customer agreed to before you started. For commercial work, you have the statutory right whether or not you ever mentioned it. Getting this distinction wrong is the most common mistake trades make when they try to add interest.

The Statutory Interest Rate: 8% Plus the Base Rate

For B2B debts, the statutory interest rate is 8% above the Bank of England base rate. The base rate used is the one in force on a fixed reference date — 31 December for debts becoming overdue between 1 January and 30 June, and 30 June for debts becoming overdue between 1 July and 31 December. You add 8 percentage points to that figure to get the annual rate you can charge.

For example, if the Bank of England base rate is 4.25%, your statutory interest rate is 12.25% per year (4.25% + 8%). This is a simple annual rate applied to the outstanding amount for the period the invoice is late — it is not compounded.

Always confirm the current base rate on the Bank of England website before you calculate, because it changes through the year and the reference-date rule fixes which figure applies to your particular debt.

Fixed Compensation (Debt Recovery Costs)

On top of interest, the Act lets you claim a fixed sum for each overdue commercial invoice to cover the cost of recovering the debt. This is a flat amount per invoice, charged once, and the figure depends on the size of the debt.

• Debt up to £999.99: £40
• Debt of £1,000 to £9,999.99: £70
• Debt of £10,000 or more: £100

If your actual reasonable costs of recovering the debt exceed the fixed sum — for example if you instructed a debt-recovery agent or a solicitor — you can also claim those reasonable additional costs on top of the fixed amount. The fixed compensation is per invoice, so several overdue invoices each attract their own charge.

When Does the Interest Start?

Interest begins to run from the day after the agreed payment date passes. If your invoice says "payment due within 14 days", interest starts on day 15. If your terms say 30 days, it starts on day 31.

If you did not agree a payment period with the customer, the law sets a default of 30 days. That 30-day clock starts from the later of the date the customer received the invoice or the date the goods or service were provided. So even with no written terms at all, a commercial customer is in late-payment territory 30 days after you invoiced them for completed work.

Note that for commercial contracts the maximum payment term you can usually agree is 60 days, unless a longer period is expressly agreed and is not grossly unfair to you as the supplier.

How to Calculate Daily Interest

Statutory interest is calculated on a daily basis. The formula is straightforward:

• Annual rate (%) ÷ 365 = daily interest rate
• Daily rate × number of days late × invoice amount = interest owed

In other words, work out the annual percentage owed on the invoice, divide it by 365 to get the per-day amount, then multiply by how many days the payment is overdue. The interest keeps accruing every day until the customer pays.

Worked Example

Say you completed commercial work for a letting agent and invoiced £5,000, due within 30 days. The payment is now 45 days late. Assume the Bank of England base rate is 4.25%, so your statutory rate is 12.25% (4.25% + 8%).

• Annual interest on £5,000 at 12.25% = £612.50
• Daily interest = £612.50 ÷ 365 = £1.68 per day
• 45 days late × £1.68 = £75.60 in interest
• Plus fixed compensation (debt is in the £1,000–£9,999 band) = £70
• Total you can add: £145.60

So the agent now owes £5,145.60, and the interest keeps growing by £1.68 every day until they settle. On a larger or longer-overdue invoice the figures climb quickly — which is exactly why this is such effective leverage.

How to Present It on a Statement or Reminder

You do not need to issue a fresh VAT invoice for statutory interest — it is not a supply, so it sits outside VAT. The cleanest approach is to send a statement of account or a formal payment reminder that itemises the original debt, the interest accrued to date, and the fixed compensation, with a clear total and a fresh deadline.

Make it factual and unemotional. Reference the Late Payment of Commercial Debts (Interest) Act 1998, state the base rate and resulting statutory rate you have applied, show the number of days overdue, and show the daily figure so the customer can see the clock is still ticking. A well-presented statement reads as professional and inevitable rather than aggressive, and that tone gets invoices paid.

Using It as Leverage — Even If You Waive It

Here is the practical reality: most trades who add statutory interest do not actually want a war with the client — they want to get paid. The power of the Act is often greatest as a stated right that you then choose to waive.

A reminder that says "Under the Late Payment of Commercial Debts (Interest) Act 1998 this overdue invoice has accrued £145.60 in interest and statutory compensation; we're willing to waive this if the £5,000 is settled by Friday" does two things at once. It tells the customer you know your rights, and it gives them a clean, face-saving reason to pay now. That combination clears more overdue invoices than either threat or pleading on its own.

Quick Reference: Fixed Compensation by Debt Size (2026)