Late payment interest: what you can actually charge on an overdue invoice

Most owners know, in a vague way, that there is some legal right to charge interest on a late invoice. Far fewer know the rate. Almost nobody knows about the fixed compensation payment that sits alongside it, which is a shame, because it is the part that actually changes behaviour on small invoices.

None of this requires a solicitor, a clause you forgot to insert, or a difficult phone call. It is already sitting in your contracts whether you put it there or not.

The right exists whether or not it is in your terms

The Late Payment of Commercial Debts (Interest) Act 1998 implies a term into every business-to-business and public sector contract for the supply of goods or services. It applies automatically. You do not need it written on your quote, your invoice or your terms of business for the entitlement to exist.

Two limits are worth knowing. It does not apply to consumers, so if you sell to the public this is not your remedy. And if your contract sets out its own remedy for late payment, that remedy has to be a substantial one; a token 1% a year written into your terms does not displace the statutory right, it just gets ignored by a court.

What you can claim: three things, not one

**Statutory interest** runs at 8 percentage points above the Bank of England base rate. The Act fixes the reference rate twice a year rather than tracking every rate decision: the base rate in force on 30 June applies to debts falling due in the second half of the year, and the rate on 31 December applies to the first half. The base rate is 3.75%, held again at the Monetary Policy Committee's July 2026 meeting, so the statutory rate for invoices falling due between 1 July and 31 December 2026 is 11.75% a year. It is simple interest, accruing daily from the day after the debt became due until the day it is paid.

**Fixed sum compensation** is a flat payment for the cost of chasing, due on each late invoice rather than on each customer. It is £40 where the debt is under £1,000, £70 where the debt is between £1,000 and £9,999.99, and £100 where the debt is £10,000 or more. Five late invoices of £800 each carry five separate £40 entitlements.

**Reasonable recovery costs** on top, where your actual costs of recovering the debt exceed the fixed sum. If you instruct a debt recovery firm and their fee is £350 on a £4,000 invoice, you can claim the shortfall above the £70 rather than absorbing it.

When the clock starts

If you agreed a payment date, the debt is late the day after it. If you agreed nothing, the default is 30 days from the later of the day the customer received the invoice and the day the goods or services were delivered. Agreed terms longer than 60 days between businesses are open to challenge as grossly unfair, which is worth remembering the next time a large customer sends you a 90-day purchase order — the position is set out in more detail in the big contract with 90-day payment terms.

Putting real numbers on it

Take an illustrative invoice of £6,400 on 30-day terms, paid 45 days after the due date.

Annual interest is £6,400 × 11.75% = £752. Divide by 365 for a daily rate of £2.06. Multiply by the 45 days it was late and the interest comes to £92.71. The debt is over £1,000 and under £10,000, so add £70 of fixed compensation. The total claim is £162.71.

That will not fund your Christmas party. What it does is change the shape of the conversation. A customer who is 45 days late and receives a polite email explaining that £162.71 is now due, with the calculation shown, is being told something specific and lawful rather than being nagged. Do the same across the eight invoices a habitually slow customer has run late over a year and the number stops being trivial.

The value of statutory interest is rarely the interest. It is that it turns "please pay" into a conversation with a price attached, and prices get escalated internally in a way that requests do not.

Whether to actually charge it

It is a right, not an obligation, and you can apply it selectively. Most businesses that use it well operate three tiers.

**Good customers who are occasionally late.** Do not invoice the interest. Mention that the entitlement exists in your terms and on your invoice footer, and leave it there. The reminder does the work.

**Customers who are always late.** Start invoicing it, consistently, from the first day it applies. Send it as a separate invoice with the calculation attached so there is nothing to argue about. Consistency matters more than the amount: a charge applied once looks like temper, a charge applied every time looks like policy.

**Customers heading for a dispute or a claim.** Claim it in full, including recovery costs, and say so in writing before you escalate. If a claim reaches the small claims track the court will normally allow statutory interest and the fixed sum, so raising it early is simply telling them what the ending looks like.

Three practical details that catch people out

Interest and compensation are outside the scope of VAT. They are compensation for late payment, not consideration for a supply, so no VAT is added — but the interest you receive is taxable income in your accounts, so it is not free money.

You can claim retrospectively. A simple contract debt carries a six-year limitation period, so interest on invoices that were paid late two years ago is still claimable in principle. That is a nuclear option in a live relationship and a genuinely useful lever in a dying one.

And it is not a substitute for credit control. Statutory interest is worthless against a customer with no money, which is why the work that actually protects you happens before the invoice goes out — see how to credit-check a customer before you take a big order and the system in how to chase late invoices without losing the client.

What to do this week

Add one line to your terms and your invoice template: that you reserve the right to charge statutory interest and fixed compensation under the Late Payment of Commercial Debts (Interest) Act 1998 on overdue accounts. Then pull your aged debtors report and work out, for the three worst offenders, what a year of applying it would have come to. If the number surprises you, you now know which customer relationship needs repricing rather than re-chasing.

Common questions

Can I charge late payment interest if it is not in my contract?

Yes. The Late Payment of Commercial Debts (Interest) Act 1998 implies the right into business-to-business and public sector contracts automatically, so it applies even if your terms are silent. Writing it into your terms and your invoice footer is still worth doing, because it makes the entitlement visible before the invoice goes late rather than looking like a penalty invented afterwards. The one thing that can displace the statutory right is a contractual remedy of your own, and only if that remedy is a substantial one. A token rate written into your terms does not override the statutory entitlement; it simply gives a customer something to argue about.

What is the statutory interest rate right now, and how do I calculate it?

It is 8 percentage points above the Bank of England base rate, and the Act fixes the reference rate for six months at a time rather than tracking every decision. With the base rate at 3.75%, the statutory rate for debts falling due between 1 July and 31 December 2026 is 11.75% a year. Calculate it as simple daily interest: multiply the debt by 11.75%, divide by 365, then multiply by the number of days the invoice has been overdue. On a £6,400 invoice that is £2.06 a day, so 45 days late produces £92.71, plus £70 of fixed compensation because the debt sits between £1,000 and £9,999.99.

How much is the fixed compensation, and is it per invoice or per customer?

It is per invoice, which is the detail most owners miss. You can claim £40 where the debt is under £1,000, £70 where it is between £1,000 and £9,999.99, and £100 where it is £10,000 or more. A customer sitting on six overdue invoices of £600 each owes six separate £40 payments, not one. If your actual costs of recovering the debt exceed the fixed sum — a debt collection agency fee, for instance — you can also claim the reasonable excess above it, so the fixed sum is a floor on your recovery costs rather than a cap.

Will charging interest cost me the client?

Sometimes, and that is worth thinking about honestly rather than pretending otherwise. The practical approach is to treat it as a tiered policy instead of an emotional decision. Good customers who are occasionally late get a reminder that the entitlement exists and nothing more. Persistent offenders get it invoiced every time, consistently, with the calculation attached, because inconsistency is what makes it feel personal. If a customer would genuinely walk over being charged what the law entitles you to on money they held for 45 days, you were funding their working capital out of yours, and that is a relationship worth repricing anyway.