UK Late Payment Interest Formula Explained
Late payment interest can help businesses understand how much may be added to an overdue invoice when payment is not made on time. In the UK, many business-to-business late payment interest calculations are based on a simple formula using the invoice amount, the applicable annual interest rate, and the number of days the invoice is overdue.
This guide explains the UK late payment interest formula, how daily interest is calculated, and how to apply the formula to a simple overdue invoice example.
What is the UK late payment interest formula?
A common formula for calculating late payment interest is:
Invoice amount × annual interest rate × number of overdue days ÷ 365
For example, if an invoice is overdue by a certain number of days, interest is usually calculated on a daily basis. This means the longer the invoice remains unpaid, the more interest may accrue.
The formula can be written as:
Interest = Debt amount × interest rate × overdue days ÷ 365
Where:
Debt amount means the unpaid invoice amount.
Interest rate means the annual rate used for the calculation.
Overdue days means the number of days between the due date and the actual payment date, or the date you are calculating interest up to.
365 is used to convert the annual interest rate into a daily interest amount.
What interest rate is used for UK late payments?
For many UK business-to-business invoices, statutory interest is commonly calculated at the Bank of England base rate plus 8%.
For example, if the Bank of England base rate is 5.25%, the annual statutory interest rate would be:
5.25% + 8% = 13.25%
This annual percentage rate is then used in the daily interest formula.
It is important to check the relevant base rate and the payment terms that apply to your invoice. Some contracts may contain their own interest terms, and different rules may apply depending on the type of transaction.
Example late payment interest calculation
Here is a simple example.
Invoice amount: £1,000
Annual interest rate: 13.25%
Days overdue: 30 days
Using the formula:
£1,000 × 13.25% × 30 ÷ 365
First, convert the percentage into a decimal:
13.25% = 0.1325
Then calculate:
£1,000 × 0.1325 × 30 ÷ 365 = £10.89
So, the estimated late payment interest would be:
£10.89
The estimated total amount including interest would be:
£1,010.89
Daily interest calculation
You can also calculate the daily interest first.
Using the same example:
£1,000 × 13.25% ÷ 365 = £0.36 per day
This means the invoice may accrue around £0.36 of interest per day while it remains unpaid.
For 30 days:
£0.36 × 30 = £10.80 approximately
The small difference is due to rounding. For more accurate results, calculate using the full formula before rounding the final amount.
Use our UK Late Payment Interest Calculator
If you want a quicker estimate, you can use our UK Late Payment Interest Calculator to calculate interest based on the invoice amount, due date, payment date, and interest rate.
The calculator can help you estimate:
The number of overdue days
The daily interest amount
The total estimated interest
The total amount including interest
This can be useful when preparing a payment reminder, checking an overdue invoice, or understanding how much interest may apply.
Why the number of overdue days matters
The number of overdue days is an important part of the formula. Even if the invoice amount and annual interest rate stay the same, the total interest will increase as more days pass.
For example, using a £1,000 invoice and a 13.25% annual interest rate:
10 days overdue may produce around £3.63 interest.
30 days overdue may produce around £10.89 interest.
60 days overdue may produce around £21.78 interest.
90 days overdue may produce around £32.67 interest.
This shows why late payment interest is calculated on a daily basis. The longer the delay, the higher the interest amount.
Statutory interest and compensation
In some UK business-to-business situations, statutory late payment rules may also allow a business to claim fixed compensation for debt recovery costs. The amount can depend on the size of the unpaid invoice.
Common fixed compensation bands are:
£40 for debts under £1,000
£70 for debts from £1,000 to £9,999.99
£100 for debts of £10,000 or more
This compensation is separate from the interest calculation. However, whether it applies depends on the specific circumstances, contract terms, and the type of debt.
Contractual interest vs statutory interest
Some invoices or contracts may include their own late payment interest terms. This is known as contractual interest.
If a contract clearly states a late payment interest rate, that rate may be used instead of the statutory rate. If there is no clear contractual rate, statutory interest may be relevant for many commercial debts.
Because contracts can vary, businesses should always check their invoice terms and agreement before applying interest.
Important points to remember
The basic formula is:
Invoice amount × annual interest rate × overdue days ÷ 365
For many UK business-to-business invoices, statutory interest is commonly based on the Bank of England base rate plus 8%.
Interest is usually calculated daily.
The total interest increases as the invoice remains overdue.
Fixed debt recovery compensation may also apply in some cases.
Contract terms should always be checked before adding interest.
Final thoughts
The UK late payment interest formula is simple once you understand the three main inputs: the unpaid invoice amount, the annual interest rate, and the number of overdue days.
For a quick estimate, you can use a calculator rather than working through the formula manually. This can help reduce mistakes and make it easier to understand how much interest may be added to an overdue invoice.
This article is for general information only and does not constitute legal or financial advice.