The law most businesses do not know about.
If a client pays you late, you have the legal right to charge them interest on the overdue amount. Not a little bit. A lot.
Under the Late Payment of Commercial Debts (Interest) Act 1998, UK businesses can charge 8% per year on top of the Bank of England base rate on any overdue invoice. With the base rate currently at 3.75%, that means you can charge 11.75% per year in interest on money you are owed.
On top of that, you can claim a fixed compensation fee for every single overdue invoice: between £40 and £100 depending on the size of the debt.
This is not some obscure loophole. It is your legal right. It applies automatically to all business-to-business (B2B) transactions in England, Wales, Scotland, and Northern Ireland. You do not need a special clause in your contract. You do not need your client to agree. The law gives you this right whether your payment terms mention it or not.
And yet, the vast majority of UK business owners have never heard of it.
Here is the truth:
The law is on your side. You did the work. You sent the invoice. If your client does not pay on time, the Late Payment Act gives you real, enforceable rights. Knowing them changes the conversation.
How it works.
The Late Payment of Commercial Debts (Interest) Act 1998 (updated by the Late Payment of Commercial Debts Regulations 2013) gives you the right to charge statutory interest on any commercial debt that is paid late.
Here are the key points:
- The rate is 8% above the Bank of England base rate. As of March 2026, the base rate is 3.75%, making the total statutory interest rate 11.75% per year.
- Interest starts running from the day after the payment was due. If your invoice has 30-day terms and is dated 1 March, payment is due by 31 March. Interest starts accruing from 1 April.
- It is calculated as simple interest, not compound. The daily rate is the annual rate divided by 365.
- It applies to B2B transactions only. This covers invoices between businesses, sole traders, partnerships, and public authorities. It does not apply to consumer debts (B2C).
- You do not need to include it in your contract. Statutory interest is your default legal right. However, if your contract specifies a different interest rate, the contractual rate takes priority (unless it is so low that a court would consider it unfair, in which case statutory interest can still apply).
- It cannot be excluded by contract. A client cannot write a clause into their terms that removes your right to statutory interest. If they try, that clause is unenforceable.
- The base rate that applies is the one in force on the date interest starts accruing. If the Bank of England changes the rate after that date, your calculation still uses the rate from when interest first started running on that specific invoice.
That last point is important. You lock in the rate at the point the invoice becomes overdue, not the rate at the time you finally claim.
The compensation you can claim on top.
Statutory interest is not the only thing you are entitled to. The Late Payment Act also gives you the right to claim a fixed compensation fee on every overdue invoice. This is on top of the interest, not instead of it.
The amount depends on the size of the debt:
- Up to £999.99: £40 compensation
- £1,000 to £9,999.99: £70 compensation
- £10,000 or more: £100 compensation
This is per invoice, not per client. If a client has three overdue invoices of £2,000 each, you can claim £70 on each one (£210 total), plus the interest.
You can also claim reasonable costs incurred in recovering the debt, if those costs exceed the fixed compensation amount. This might include the cost of sending recorded delivery letters, hiring a debt recovery service, or taking legal advice. However, you would need to demonstrate that the costs were reasonable and directly related to recovering the specific debt.
How to calculate it.
The calculation is straightforward. Here is the formula:
Daily interest = Invoice amount × (8% + Bank of England base rate) ÷ 365
Then multiply the daily interest by the number of days the invoice is overdue.
So the steps are:
- Find the Bank of England base rate on the date the payment became overdue.
- Add 8% to get the total annual statutory rate.
- Divide by 365 to get the daily rate.
- Multiply the daily rate by the overdue invoice amount.
- Multiply that figure by the number of days overdue.
- Add the fixed compensation fee.
A real example.
Let us say you are owed £5,000 on an invoice with 30-day payment terms. The invoice was dated 1 February 2026. Payment was due by 3 March 2026. It is now 18 March 2026, making the invoice 15 days overdue.
Step 1: The Bank of England base rate on 4 March 2026 (the day interest starts) is 3.75%.
Step 2: The total statutory rate is 3.75% + 8% = 11.75%.
Step 3: The daily rate is 11.75% ÷ 365 = 0.03219% per day.
Step 4: Daily interest on £5,000 = £5,000 × 0.0003219 = £1.61 per day.
Step 5: 15 days overdue = £1.61 × 15 = £24.15 in interest.
Step 6: The invoice is between £1,000 and £9,999.99, so the fixed compensation is £70.
Total you can claim: £24.15 + £70 = £94.15 on top of the original £5,000 owed.
That might not sound dramatic on a single invoice. But think about it across your whole business. If you are owed £80,000 across multiple invoices averaging 30 days overdue, the statutory interest alone is over £770 per month. Add the compensation fees and you are looking at a meaningful sum.
More importantly, the mere mention of statutory interest in your follow-up communications tends to get invoices paid faster. It signals that you know your rights and you take payment seriously.
The real power of statutory interest is not in collecting it. It is in the effect it has on payment behaviour. Clients who know you are aware of your legal rights tend to pay on time.
When to use it (and when not to).
This is where it gets practical. Just because you have the legal right to charge statutory interest does not mean you should slap it on every invoice the moment it goes a day overdue.
When it makes sense to use it
- Repeat offenders. A client who consistently pays late despite reminders needs to understand there are consequences. Statutory interest makes the cost of paying late tangible.
- Formal escalation. If you have sent friendly reminders, followed up by phone, and sent a firm written notice with no result, referencing statutory interest in your next communication is a legitimate escalation step.
- Letter before action. If you are preparing to take formal legal action, your letter before action should include the statutory interest and compensation owed. This is standard practice and often prompts payment before court proceedings become necessary.
- Significant amounts. On larger invoices where the interest and compensation add up to a meaningful figure, it is worth claiming.
When to hold back
- First-time lateness from a good client. If a reliable client pays a few days late for the first time, charging statutory interest is likely to damage the relationship disproportionately. A polite reminder is usually all that is needed.
- Genuine disputes. If there is a legitimate dispute about the work or the invoice amount, adding interest before the dispute is resolved can escalate things unnecessarily.
- Very small amounts. On a £200 invoice that is a week late, the statutory interest is about 45p. Claiming it is not worth the awkwardness. The £40 compensation fee is technically valid, but using it on a minor delay from an otherwise good client is a judgement call.
The key is proportionality. Statutory interest is a tool. Like any tool, it is most effective when used at the right time, in the right situation.
How to mention it in your payment terms.
You do not need to include statutory interest in your terms for it to apply. It is your right regardless. However, mentioning it serves two purposes: it sets expectations upfront, and it acts as a deterrent.
Here are three examples you can adapt, depending on how direct you want to be:
Subtle
"Payment is due within 30 days of the invoice date. We reserve the right to charge interest on overdue invoices in accordance with the Late Payment of Commercial Debts (Interest) Act 1998."
Direct
"Payment is due within 30 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, as provided by the Late Payment of Commercial Debts (Interest) Act 1998."
Firm
"Payment terms: 14 days from invoice date. Late payments will incur statutory interest at 8% above the Bank of England base rate, calculated daily from the date payment becomes overdue. Fixed compensation of £40 to £100 (depending on debt value) will also be applied per overdue invoice under the Late Payment of Commercial Debts (Interest) Act 1998."
Choose the one that matches your relationship with the client and your brand. For most SMEs, the "direct" version hits the right balance: clear, professional, and not aggressive.
Qascade tip
Including a reference to the Late Payment Act on your invoices (even as a small line at the bottom) plants a seed. Most clients will never test it. But the ones who are inclined to pay late will think twice.
Common questions.
Do I need to warn my client before charging interest?
No. Statutory interest accrues automatically from the day after payment is due. You do not need to notify your client first. However, in practice, most businesses reference it as part of their escalation process (for example, mentioning it in a formal follow-up at 14 or 30 days overdue) rather than adding it without warning. This is better for the relationship and gives the client an opportunity to pay before the charges are applied.
Can my client refuse to pay the interest?
They can dispute it, but they cannot override the law. If the debt is a qualifying B2B commercial debt and payment is late, statutory interest applies. If you needed to pursue it through the courts, the court would uphold your right to claim.
What if my contract already has a late payment clause?
If your contract specifies a different interest rate for late payments, the contractual rate takes priority. However, if the contractual rate is significantly lower than the statutory rate, and a court considers it to be "not a substantial remedy" for late payment, you can challenge it and claim statutory interest instead.
Does this apply to public sector clients?
Yes. The Late Payment of Commercial Debts (Interest) Act 1998 applies to public authorities as well as private businesses. In fact, the UK government's own Prompt Payment Code commits signatories to paying 95% of invoices within 30 days.
Can I charge interest on an invoice that did not specify payment terms?
Yes. If no payment terms were agreed, the law implies a default payment period of 30 days from the date the invoice was received (or the date the goods/services were delivered, whichever is later). Interest starts running from the day after that 30-day period expires.
Is it worth using on small invoices?
The interest itself on a small invoice paid a few days late will be negligible. However, the fixed compensation (£40 minimum) applies regardless of how small the debt is. Whether you claim it is a commercial judgement. On persistent late payers, even small claims send a message.
Key takeaways
- Under UK law, you can charge 8% above the Bank of England base rate on overdue B2B invoices. That is currently 11.75% per year.
- You can also claim fixed compensation: £40, £70, or £100 per invoice depending on the amount owed.
- You do not need a contract clause for this to apply. It is your automatic legal right.
- The real power is in the deterrent. Clients who know you understand your rights tend to pay on time.
- Use it proportionately. It is a tool for escalation and repeat offenders, not a penalty for every minor delay.
- Include a reference to the Late Payment Act in your payment terms and on your invoices. It costs nothing and sets expectations.
- If a client consistently pays late despite reminders, knowing what steps to take next is just as important as knowing your rights.