Late Payment Legislation UK

The Late Payment Act explained

The Late Payment of Commercial Debts (Interest) Act 1998is a UK law that gives businesses the right to charge interest on overdue commercial invoices. It was designed to protect smaller suppliers from large clients who use extended payment terms as a form of free credit at the supplier's expense.

In plain terms: if a client does not pay your invoice by the agreed due date, the Act entitles you to charge interest automatically, without needing to have mentioned it in advance or having a specific clause in your contract. The right to interest arises as a matter of law.

The Act also entitles you to fixed compensation for the administrative cost of chasing the debt, on top of the interest.

Who it applies to

The Act applies to business-to-business (B2B) commercial contracts. If you are a sole trader or freelancer invoicing a business client, it applies to you. It does not apply to consumer contracts (invoicing an individual who has hired you personally, rather than on behalf of a business).

There is no minimum contract value. The Act applies whether your invoice is for £200 or £200,000.

If you have a written contract with the client that specifies different payment terms, those terms govern when payment is due. If there is no written agreement, payment is due within 30 days by default.

Statutory interest: the rate

Statutory interest under the Act is calculated at 8% per year above the Bank of England base rate. The base rate changes periodically, so the effective interest rate changes too.

At the time of writing, with the base rate at approximately 4.5%, statutory interest runs at 12.5% per year on unpaid invoices. Interest accrues daily from the day after the payment was due.

To calculate the daily interest on an overdue invoice:

• Multiply the invoice amount by the statutory interest rate (e.g. 0.125 for 12.5%)
• Divide by 365 to get the daily rate
• Multiply by the number of days overdue

For example, on a £2,000 invoice that is 30 days overdue at 12.5% interest: £2,000 × 0.125 ÷ 365 × 30 = approximately £20.55 in statutory interest.

Fixed compensation amounts

In addition to interest, you are entitled to a fixed sum to compensate for the cost of recovering the debt. The amounts are set by the Act:

• £40 for invoices under £1,000
• £70 for invoices between £1,000 and £9,999
• £100 for invoices of £10,000 or more

If your reasonable debt recovery costs exceed the fixed sum, you can claim the difference as “reasonable costs” on top. This would apply if, for example, you engaged a solicitor to recover the debt.

These compensation amounts arise automatically at the point the debt becomes overdue. You do not need to have stated them on your invoice in advance.

How to claim interest and compensation

Most freelancers use the threat of statutory interest informally: a note in a chasing email that interest is accruing under the Late Payment Act is often enough to prompt payment without actually sending a formal claim.

If you want to formally claim, you can either:

• Issue a revised invoice or a separate interest invoice that itemises the original debt, the interest accrued to date, the daily rate going forward, and the fixed compensation amount
• Include the interest and compensation figures in a formal letter before action

A formal notice should state: the original invoice number, the amount due, the due date, the number of days overdue, the interest amount, the compensation amount, and a final deadline for payment before you take further action.

For ready-to-use email templates for the stages before a formal notice, see Chasing Late Invoices.

When to escalate to court

If a client continues to ignore a formal notice, your options are:

• Small Claims Court: for debts up to £10,000 in England and Wales (£5,000 in Scotland, £3,000 in Northern Ireland). The process is relatively straightforward and does not require a solicitor. Court fees vary by claim amount but typically range from £35 to £455. If you win, you can also recover your court fee.
• Statutory demand: a formal legal document demanding payment. If the debt is over £750 and the company ignores a statutory demand for 21 days, you can apply to wind up the company. This is a serious step, but the threat alone often prompts payment.
• Debt collection agency: for amounts where the cost of legal action seems disproportionate, a debt collection agency will pursue the debt for a percentage of the amount recovered (typically 15 to 30%).

Before going to court, check that the client is solvent. Winning a court judgment against a company that has no assets to pay it leaves you with an unenforceable judgment and legal costs.

Prevention: protecting yourself

The most effective use of the Late Payment Act is as a deterrent. Mentioning that overdue invoices will accrue statutory interest on your invoice footer or in your payment terms signals that you know your rights and will use them.

Practically:

• Include a clear payment due date on every invoice, not just “30 days”
• Add a line such as: “Invoices unpaid after the due date will accrue statutory interest at 8% above the Bank of England base rate under the Late Payment of Commercial Debts (Interest) Act 1998”
• Ask for a deposit upfront on new clients or large projects
• Set up a consistent follow-up process so overdue invoices never go unnoticed for long

For more on setting payment terms, see Invoice Payment Terms.