Late Payment Interest in the UK: How to Charge It (2026)

Under UK law, businesses and freelancers have a statutory legal right to charge interest and claim debt recovery compensation when commercial invoices are paid late. The Late Payment of Commercial Debts (Interest) Act 1998 sets the statutory interest rate at 8% plus the Bank of England reference rate (base rate). In addition to daily interest, creditors can claim a fixed statutory compensation fee between £40 and £100 per overdue invoice, alongside reasonable additional debt recovery costs. Charging statutory late payment interest protects your cash flow, discourages chronic payment delays, and enforces commercial discipline.

The Legal Framework: The Late Payment of Commercial Debts Act

Late payment is one of the most persistent threats to small businesses and self-employed professionals across the United Kingdom. Cash flow constraints caused by slow-paying clients disrupt operations, hinder hiring, and force solvent businesses into financial difficulty.

To level the playing field, the UK Parliament enacted the Late Payment of Commercial Debts (Interest) Act 1998, as amended by subsequent regulations. The official statutory framework is documented on GOV.UK Charging Interest on Commercial Debt (checked 4 October 2026). The legislation provides UK businesses with an automatic statutory right to charge interest on commercial debts and claim fixed compensation for debt recovery costs.

Crucially, this right exists by default. Even if your contract does not contain a specific late payment clause, statutory interest applies automatically to commercial transactions unless the contract provides a substantial alternative remedy for late payment. Contractual clauses that attempt to completely exclude interest or offer negligible penalties are typically deemed void under the Act for being unfair.

The Commercial Payments Bill: Proposed Reforms

In May 2026, the UK government introduced the Commercial Payments Bill into Parliament. According to the official announcement on UK Government Late Payment Bill Announcement (checked 4 October 2026), the proposed legislation targets commercial late payments with new statutory measures.

The bill is still before Parliament, so none of these measures are law yet. Under its proposals:

• Statutory 60-day cap: Payment terms for large commercial buyers would be capped at 60 days.
• Expanded commissioner powers: The Office of the Small Business Commissioner (checked 4 October 2026) would gain statutory powers to investigate, adjudicate and fine persistent offenders.
• Accountability for delays: Boards or audit committees of persistently late-paying large firms would have to publish explanations.

How Statutory Late Payment Interest is Calculated

Calculating statutory late payment interest involves a clear mathematical formula based on the official reference rate set by the Bank of England.

Understanding the Reference Rate

Under the statutory rules, the Bank of England base rate used to calculate interest is fixed twice each calendar year:

• The base rate in effect on 31 December applies to debts that become overdue between 1 January and 30 June.
• The base rate in effect on 30 June applies to debts that become overdue between 1 July and 31 December.

The statutory interest rate is calculated as: Reference Rate + 8%. For instance, with the Bank of England base rate at 3.75% on 30 June 2026 (checked 4 October 2026), the annual statutory interest rate is 3.75% + 8.0% = 11.75%.

The Daily Interest Formula

Statutory interest accrues on a simple daily basis from the day after the payment due date until the debt is settled. The formula is:

Claiming Fixed Debt Recovery Compensation

In addition to daily interest, the legislation allows you to claim a fixed statutory sum to cover the internal and administrative costs of chasing the debt. According to GOV.UK Claim Debt Recovery Costs (checked 4 October 2026), the fixed compensation amount is determined by the size of the outstanding debt:

You can charge this fixed compensation once per overdue invoice. If your reasonable costs in attempting to recover the debt (such as hiring a solicitor or debt collection agency) exceed the fixed compensation amount, you have the legal right to claim those additional reasonable expenses as well.

Worked Example: Calculating Statutory Interest and Compensation

To see how the formula works in practice, let us walk through a realistic business billing scenario.

Example: A £3,000 Overdue Invoice Paid 45 Days Late

Imagine you run a digital marketing consultancy in Manchester. On 1 August 2026, you issued an invoice for £3,000.00 with 30-day payment terms to a corporate client. The payment due date was 31 August 2026. The client fails to pay on time and finally settles the invoice 45 days late, on 15 October 2026.

Here is how you calculate the statutory late payment charge:

1. Determine the applicable reference rate: Because the invoice fell due in the second half of the calendar year, you examine the Bank of England base rate in effect on 30 June 2026, which was 3.75% (Bank of England Official Bank Rate, checked 4 October 2026).
2. Calculate the statutory annual interest rate: 3.75% + 8.0% = 11.75% per year.
3. Calculate annual interest on the debt: £3,000.00 × 11.75% = £352.50.
4. Calculate the daily interest rate: £352.50 ÷ 365 = £0.9658 per day.
5. Calculate accrued interest for the overdue period: 45 days × £0.9658 = £43.46.
6. Add fixed statutory compensation: For a £3,000 debt (falling in the £1,000 to under £10,000 bracket), the fixed statutory compensation is £70.00.
7. Calculate the total late payment charge: £43.46 (Interest) + £70.00 (Compensation) = £113.46.

Under statutory rules, the client owes a total of £3,113.46. You are entitled to issue a revised invoice or supplementary payment demand for £113.46.

Step-by-Step Guide: How to Claim Late Payment Interest from a Client

Chasing late payments requires a balance of assertiveness and commercial tact. Follow these steps to claim statutory interest professionally:

Step 1: Verify When the Invoice Officially Became Overdue

Check your contract or invoice terms. If you agreed on 30-day terms, the invoice is overdue on day 31. Under UK statutory law, if no payment terms were agreed in writing, the default payment deadline is 30 days from the date the customer received your invoice or the date you delivered the goods or services (whichever is later).

Step 2: Send a Polite Reminder Before Applying Penalties

Before issuing statutory interest charges, send a friendly payment reminder referencing the original invoice. In many cases, late payments are the result of administrative oversights rather than intentional evasion. Read our guide on automating freelance invoicing and reminders for practical tips on setting up automated billing workflows.

Step 3: Issue a Formal Notice of Late Payment Interest

If polite reminders are ignored and the invoice remains unpaid, send a formal statement of account and a supplementary invoice clearly citing the statutory authority. Include:

• Reference to the original invoice number, issue date, and original due date.
• A clear statement that interest is being claimed under the Late Payment of Commercial Debts (Interest) Act 1998.
• The exact calculation: Bank of England reference rate, the 8% statutory margin, the daily interest rate, and the number of days overdue.
• The fixed statutory compensation fee (£40, £70, or £100).
• The revised total balance due and your payment instructions.

Step 4: Escalate If the Customer Refuses to Pay

If a large commercial client refuses to pay your statutory interest claim or ignores the revised demand, you have several escalation routes:

• Lodge a complaint with the Small Business Commissioner: The Commissioner provides free dispute resolution services and investigates unfair payment practices among large corporate buyers.
• Mediation: Small business mediation services can resolve disputes without the expense of formal litigation.
• County Court Money Claim: For unresolved debts under £100,000 in England and Wales, you can submit an online claim through the Money Claim Online (MCOL) system.

Preventing Late Payments with Professional Invoicing

While the law provides robust remedies for late payments, preventing overdue bills before they happen is always preferable to pursuing delinquent clients. Setting up transparent billing practices from day one drastically reduces payment friction:

• Clear invoice details: Ensure your invoices contain all mandatory information, detailed line items, and unambiguous due dates. Consult our comprehensive guide on how to create an invoice and download free templates using the Invollo free invoice generator.
• Automate overdue reminders: With Invollo Smart Invoicing, automated reminder emails are sent automatically once the invoice is overdue, nudging clients without requiring awkward manual emails.
• Multiple payment options: Clients pay by card through your own Stripe account, PayPal, or bank transfer. Invollo integrates with your own Stripe and PayPal accounts and takes 0% cut of your client payments.

Get started today on Invollo's free forever plan or explore team capabilities on our pricing page.