Late payment recovery: Your small business legal rights under UK law

Published 16 March 2026

Table of contents

• Why late payment law matters
• What late payment law covers
• How much interest and compensation you can charge
• Tips to claim what you’re owed
• Upcoming late payment rules
• Reduce late payments with Xero
• FAQs on late payment law

Key takeaways

• The main late payment law in the UK is the Late Payment of Commercial Debts (Interest) Act 1998. Under this legislation, UK business owners can add interest and debt recovery fees to overdue invoices.
• The statutory rate of interest you can add to overdue invoices is 8%, plus the Bank of England base rate. Debt recovery charges are at a fixed rate, depending on how much money your customer or client owes you.
• Paying on time is up to your customer or client, but there are steps you can take to smooth out your invoicing processes. For example, invoicing software lets you send payment reminders and gives your customers options to pay online which makes it easier for them to pay you.

Why late payment law matters

Late payments can stop businesses from paying their bills, delay investment, and disrupt ongoing operations. Despite this, late payments are a common occurrence for small businesses in the UK.

Knowing your rights under late payment law – the Late Payment of Commercial Debts (Interest) Act 1998 – can help you challenge late payments, recover the money owed to you, and make managing business cash flow easier.

What late payment law covers

The main piece of late payment legislation UK businesses are impacted by is the Late Payment of Commercial Debts (Interest) Act 1998. It applies to contracts for supplying goods and services between:

• businesses and other businesses (B2B) – like a contract between a marketing agency and a freelancer
• businesses and public authorities – such as a contract between a landscaping business and local council

The Act doesn’t apply to employment contracts or consumer transactions.

A payment becomes late after the agreed payment date between you and the client or customer is passed. If there’s no agreed payment date, it’s considered late 30 days after the customer gets the invoice or you provide the goods or services – whichever is later.

UK late payment law allows businesses to charge statutory interest on late payments, as well as debt-recovery costs. If you’ve already agreed to a substantial remedy for late payments in your contracts, you cannot apply statutory interest to the outstanding bill.

How much interest and compensation you can charge

You can charge a statutory interest rate on late payments, and a fixed sum for debt recovery costs. Let’s take a closer look at the rates.

Statutory interest rates and calculation

Statutory interest on late commercial payments is 8% plus the Bank of England base rate for business-to-business transactions. If there’s a different interest rate set out in your contract with a client or customer, you cannot charge statutory interest – you need to use the rate recorded in your contract. You must use the statutory interest rate for contracts with public authorities.

Here’s an example of how to charge interest on late payments:

Let’s imagine you’re owed £2500 from a client and the Bank of England base rate is 3.75%. Add statutory interest at 8%, and the total is 11.5%.

• First, multiply the amount owed by the statutory interest rate: £2500 x 11.5% = £287.50
• Next, divide £287.50 by 365 to get the daily interest: £2287.5 ÷ 365 = £0.78
• Then multiply the daily interest of £0.78 by the number of days the payment is overdue.

So, if you want to add interest 7 days after the payment is due, that’s: £0.78 x 7 = £5.46 in interest.

Alternatively, you can also use the UK government’s late payment interest calculator.

Claim fixed recovery fees

On top of the interest, you can also charge a debt recovery fee for the cost of getting an invoice paid. You can only apply this charge once per payment. There are fixed debt recovery charges for different amounts owed:

• £40 for a debt of up to £999.99
• £70 for a debt between £1000–£9999.99
• £100 for a debt of £10,000 or more

If you’re a supplier, you can also claim reasonable costs for your debt recovery efforts, such as the cost of using a debt collection agency.

Add interest and fees to an invoice

If you decide to charge interest and debt recovery fees, send a new invoice with the extra costs clearly stated. If the bill still isn’t settled, you can recalculate the interest at a later point and issue another invoice with updated daily interest fees.

Tips to claim what you’re owed

Here are four tips to encourage customers to pay on time.

• Send an overdue notice. Resend your invoice as soon as it’s overdue, with a note highlighting the payment date. If you’re using modern accounting software, you might be able to set up automatic invoice reminders to gently nudge late payers without you having to type an email.
• Send a late payment letter. If you aren’t getting a response from digital messages, try sending a late payment letter that sets out the interest and debt recovery charges you plan to apply to the invoice.
• Start debt recovery or make a claim. Apply statutory interest and debt recovery fees to the overdue payment, and send a new invoice to your customer or client. You might accompany this with an email or message explaining the circumstances and highlighting your legal rights under UK late payment law. In extreme circumstances, you could make a court claim – which will incur costs for your business.
• Protect future invoices. Agree on payment terms upfront with clients, send accurate invoices, and use automated reminders and scheduling software that helps you bill clients and customers consistently. If a client continues to pay late and disrespect your terms, it might be best to end your contract with them.

Upcoming late payment rules

The UK government recently closed a consultation on new late payment rules. Deadlines are yet to be confirmed, but the proposed changes include:

• a limit to payment terms between businesses to a maximum of 60 days (reduced to 45 days after 5 years)
• a 30-day deadline on invoice disputes, otherwise the invoice (and any statutory interest and debt recovery charges) will need to be paid in full
• a mandatory statutory interest rate, so that lower rates can’t be used in commercial contracts
• extra reporting requirements will be introduced for businesses charging statutory interest to improve transparency around late payments
• financial penalties for businesses that repeatedly pay late

The full list of proposed late payment changes is available on the GOV.UK website.

Reduce late payments with Xero

Although it’s up to your client or customer to pay on time, Xero is the best help you can get.

Set invoice reminders so that chasing late payments happens automatically. Give customers every incentive to pay you sooner with digital payment options and the choice to pay you directly from your invoices. Not only that – Xero lets you send automatic invoices to your repeat clients, smoothing your invoicing process.

Get one month free

FAQs on late payment law

UK late payment law can help you get the bill settled once and for all. Here’s some extra information you might need:

Are late payment charges legal?

Yes. In fact, statutory interest and debt recovery charges are set out in UK payment legislation. Small businesses can add these costs to existing invoices to reclaim more than what was initially owed by the customer or client. Just make sure you check government guidance on late commercial payments to make sure you’re applying additional fees correctly.

How many days until late payment charges are triggered?

If you haven’t agreed a payment date with your customer or client, you can apply interest charges 30 days after whichever is later:

• the customer receives the invoice
• you provide the goods or services

If you’ve agreed a payment date in advance, you can charge statutory interest as soon as you like.

What is the Late Payment of Commercial Debts Act?

The Late Payment of Commercial Debts (Interest) Act 1998 is the main piece of legislation governing late business payments in the UK. It mandates the use of statutory interest and debt recovery charges to provide support for those who’ve been impacted by late payments.

Can I charge contractual interest instead of statutory interest?

Yes, for now. But legislation is changing, and contractual interest that’s lower than statutory interest will eventually be banned.

Can I add interest on a disputed invoice?

No – the recipient must accept the invoice before you can charge interest. A disputed invoice cannot have interest applied.

Does late payment law apply across the UK?

Yes – the Late Payment of Commercial Debts (Interest) Act 1998 applies across the UK.