Late payment interest: How to charge it and recover costs from overdue invoices

Published Friday 21 August 2026

Table of contents

• What is late payment interest?
• Your legal right to charge interest on overdue invoices
• How to calculate statutory late payment interest
• Fixed compensation for debt recovery costs
• How to add late payment interest to your invoices
• When you can and can't charge late payment interest
• How late payments affect small businesses
• Practical tips to reduce late payments
• Take control of your cash flow with Xero
• FAQs on late payment interest

Key takeaways

• Under the Late Payment of Commercial Debts (Interest) Act 1998, you have a statutory right to charge interest at 8% above the Bank of England base rate on overdue business-to-business invoices, currently totalling 11.75% per annum.
• You can also claim fixed compensation of £40, £70, or £100 per invoice depending on the debt size, plus reasonable debt recovery costs.
• You don't need a contract clause to charge statutory late payment interest; the right applies automatically to commercial transactions for goods and services supplied on credit.
• Setting clear payment terms, invoicing promptly, and following up before the due date can help you reduce late payments and protect your cash flow.

What is late payment interest?

Late payment interest is a charge you can add to an overdue invoice when a customer hasn't paid by the agreed date. It's designed to compensate you for the cost of not having that money available and to encourage prompt payment.

In the UK, there are two types of interest you can charge on overdue invoices. Statutory late payment interest is set by law under the Late Payment of Commercial Debts (Interest) Act 1998 and applies to business-to-business (B2B) transactions. Contractual interest, on the other hand, is a rate you and your customer agree on in your payment terms.

The statutory rate gives you a legal safety net. Even if your contract doesn't mention interest, you can still charge it on overdue commercial debts.

Your legal right to charge interest on overdue invoices

You don't need to include a specific clause in your contract to charge statutory interest on overdue invoices. The Late Payment of Commercial Debts (Interest) Act 1998 gives you an automatic right to claim interest when a business or public authority pays late for goods or services supplied on credit.

This applies to transactions between businesses (B2B) and to transactions between a public authority and a business. It covers both goods and services, as long as there's an agreed or implied payment date.

If your contract already includes a late payment interest clause, that contractual rate takes precedence. However, if the contractual rate is substantially lower than the statutory rate, you may be able to challenge it under the Act. You can't claim both statutory and contractual interest on the same debt.

The statutory right doesn't apply to consumer transactions. If you sell directly to individuals who aren't acting in a business capacity, different rules apply.

How to calculate statutory late payment interest

The statutory interest rate is 8% above the Bank of England base rate. With the current base rate at 3.75%, the total statutory rate is 11.75% per annum. This is simple interest, not compound, and it's calculated from the day after the agreed payment date.

Here's how to work out what you're owed.

1. Multiply the invoice amount by the annual interest rate to get the yearly interest.
2. Divide that figure by 365 to get the daily rate.
3. Multiply the daily rate by the number of days the payment is overdue.

For example, if a customer owes you £5,000 and the invoice is 30 days overdue:

• Annual interest: £5,000 x 11.75% = £587.50
• Daily rate: £587.50 / 365 = £1.61
• Interest for 30 days: £1.61 x 30 = £48.29

On top of that, you can claim £70 in fixed compensation (for debts between £1,000 and £9,999.99), bringing the total claim to £118.29.

The Small Business Commissioner's interest calculator can help you check your figures quickly.

Fixed compensation for debt recovery costs

On top of statutory interest, you're entitled to claim a fixed sum as compensation for the cost of recovering a late payment. The amount depends on the size of the outstanding debt:

• Up to £999.99: £40 compensation
• £1,000 to £9,999.99: £70 compensation
• £10,000 or more: £100 compensation

This compensation applies per invoice, not per customer. So if a customer has three overdue invoices, you can claim the fixed amount on each one.

You can also claim reasonable costs for recovering the debt beyond the fixed compensation. This might include costs like hiring a debt recovery agency or taking legal action. These additional costs must be reasonable, and you'd need to be able to justify them if challenged.

How to add late payment interest to your invoices

Once you've confirmed that a payment is overdue, follow these steps to formally charge interest.

1. Check your payment terms. Review the original invoice to confirm the agreed payment date has passed. If no payment date was agreed, the default under the Act is 30 days after the customer receives the invoice or the goods/services are delivered, whichever is later.
2. Calculate the interest owed. Use the statutory formula (8% + Bank of England base rate, currently 11.75%) and multiply the daily rate by the number of overdue days.
3. Work out the fixed compensation. Identify which tier applies based on the original invoice amount.
4. Issue a formal interest claim. You can either add a line item to a new invoice or issue a separate invoice for the interest and compensation. Reference the original invoice number and cite the Late Payment of Commercial Debts (Interest) Act 1998.
5. Send a covering letter or email. Include a clear breakdown of the calculation, the original invoice details, the number of days overdue, and the total amount now owed, including interest and compensation.

Here's an example of the wording you might include:

"In accordance with the Late Payment of Commercial Debts (Interest) Act 1998, we are exercising our statutory right to claim interest and compensation on the overdue amount of [amount] relating to invoice [number], dated [date]. Interest has been calculated at 11.75% per annum (8% + Bank of England base rate of 3.75%) for [number] days, totalling [interest amount]. Fixed compensation of [amount] is also claimed. The total amount due, including the original debt, is [total]."

Keep a record of all correspondence. If the matter escalates, having a clear paper trail will support your position. For more on following up, see this guide to chasing outstanding invoices.

When you can and can't charge late payment interest

Statutory late payment interest doesn't apply in every situation. Here's a breakdown of when you can and can't use it.

When you can charge

You can charge statutory interest in these situations.

• Business-to-business transactions for goods or services supplied on credit
• Transactions between a public authority (such as a government department or local council) and a business
• Situations where your contract doesn't mention late payment interest at all; the statutory right fills the gap automatically

When you can't charge

Statutory interest doesn't apply in the following cases.

• Consumer transactions, where your customer is an individual buying for personal use rather than for a business
• Debts that are more than six years old, as the standard limitation period applies

Under strict UK protections reinforced by the Commercial Payments Bill, the historic loophole allowing large corporate buyers to write a lower, unfair interest rate into their contracts has been eliminated. Any business-to-business contract terms that attempt to lower or exclude the statutory interest rate are automatically void. The statutory Bank of England base rate plus 8% stands as a mandatory minimum baseline to safeguard small suppliers.

Act promptly. The longer you wait to claim interest, the harder it can be to recover. While the law allows you to claim interest on debts up to six years old, pursuing it early sends a clear signal that you take your payment terms seriously.

How late payments affect small businesses

Late payments are more than an inconvenience. They can put real pressure on your cash flow and your ability to run your business day to day.

According to Xero Small Business Insights, UK small businesses are paid approximately 8.3 days late on average. That might not sound like much, but when you're waiting on multiple invoices, those extra days add up quickly.

When cash isn't coming in on time, you may struggle to pay your own suppliers, cover wages, or invest in growth. Some businesses end up taking on borrowing just to bridge the gap, adding interest costs that eat into already tight margins.

The knock-on effects go further. Spending time chasing overdue payments takes you away from running your business. It can also strain customer relationships, especially when you need to have difficult conversations about money.

Practical tips to reduce late payments

Charging interest is your right, but preventing late payments in the first place is even better. Here are some practical steps you can take.

• Set clear payment terms from the start of every business relationship, including due dates, accepted payment methods, and consequences for late payment.
• Invoice promptly and accurately; errors or delays in sending invoices give customers a reason to hold off paying.
• Offer multiple payment methods so customers can pay in the way that's easiest for them, such as bank transfer, card payment, or direct debit.
• Send friendly reminders a few days before the due date and follow up quickly if a payment is missed.
• Use automated invoice reminders to save time and make sure nothing slips through the cracks.
• Consider offering a small discount for early payment if your margins allow it.
• If a dispute arises over a late payment, the Small Business Commissioner can help you resolve it without going to court.

The key is to build good habits early. When your payment processes are consistent and professional, customers are more likely to pay on time.

Take control of your cash flow with Xero

Late payments can disrupt even the best-run business. Xero's cloud accounting software helps you stay on top of your invoices, track what's owed, and send automated payment reminders, so you spend less time chasing money and more time growing your business.

With real-time cash flow visibility, you'll always know where you stand. Xero customers who use online invoice payments get paid up to twice as fast, helping you keep your cash flow healthy and predictable.

Ready to take the hassle out of invoicing? Get one month free and see how Xero can help you manage your finances with confidence.

FAQs on late payment interest

Here are answers to some common questions about charging interest on overdue invoices.

What is the current statutory interest rate for late payments?

The statutory rate is 8% above the Bank of England base rate. With the base rate currently at 3.75%, the total rate you can charge is 11.75% per annum, calculated as simple interest from the day after the agreed payment date.

Can I charge interest on overdue invoices without a contract clause?

Yes. The Late Payment of Commercial Debts (Interest) Act 1998 gives you an automatic statutory right to charge interest on overdue B2B invoices, even if your contract doesn't mention it.

Do I need to warn a customer before charging late payment interest?

There's no legal requirement to give advance warning before charging statutory interest. However, including your late payment policy in your terms and conditions helps set expectations and can encourage timely payment.

Can I charge late payment interest to consumers?

No. Statutory late payment interest under the Act only applies to business-to-business and public authority-to-business transactions. Different rules apply to consumer debts.

What should I do if a customer refuses to pay the interest?

Start by sending a formal letter outlining your statutory right and the calculation. If they still don't pay, you can escalate the matter through the Small Business Commissioner's dispute resolution service or take legal action through the county court.