When can a UK business charge late payment interest?

UK businesses often ask whether they can add interest when a customer pays an invoice late. In many commercial situations, late payment interest may be available, but it is important to understand the invoice terms, due date, type of customer and the relevant rules before adding charges.

Short answer

A UK business may usually consider charging late payment interest when a commercial invoice is overdue and the customer has failed to pay by the agreed payment date. If there is no agreed payment date, statutory rules may help determine when the payment becomes late.

For qualifying business-to-business debts, statutory interest is commonly calculated at 8% plus the Bank of England base rate. Fixed compensation for recovery costs may also apply depending on the size of the unpaid debt.

1. The invoice should normally be a commercial payment

Statutory late payment interest is mainly relevant to commercial transactions, such as invoices between businesses, suppliers, contractors, freelancers and commercial customers.

Examples may include:

• a freelancer invoicing a limited company client;
• a supplier invoicing a retailer;
• a contractor invoicing another business;
• a professional services provider invoicing a commercial client.

It may not apply in the same way to every type of transaction. For example, consumer debts, employment disputes or personal loans may involve different rules.

2. Check your contract or payment terms first

Before adding late payment interest, check whether your contract, quotation, purchase order, invoice terms or client agreement already states:

• the payment deadline, such as 7 days, 14 days or 30 days;
• whether interest can be charged on late payments;
• what interest rate applies;
• whether extra recovery costs can be added;
• any dispute or escalation process.

If your contract contains a clear late payment clause, that may affect how interest is calculated. If there is no written term, statutory late payment rules may still be relevant for commercial debts.

3. The payment must be overdue

Late payment interest normally starts to matter once the invoice is past its due date. For example, if your invoice says payment is due within 30 days, the invoice becomes overdue after that 30-day period has passed.

4. What if no payment date was agreed?

Sometimes a business invoice does not clearly state a due date. In that situation, UK late payment rules may help identify when the debt becomes late.

In general, where there is no agreed payment date, payment may be treated as late after a set period from when the customer receives the invoice or when the goods or services are delivered, depending on the circumstances.

Because timing can depend on the facts, you should keep clear records of:

• when the invoice was sent;
• when goods were delivered or services were completed;
• any emails confirming receipt;
• any agreed payment terms in writing.

5. How much interest can be charged?

For many qualifying commercial debts, statutory late payment interest is calculated using:

Interest is usually calculated daily. A simple way to estimate it is:

For a step-by-step explanation, see our guide: How to calculate late payment interest on overdue invoices.

6. Fixed compensation may also apply

In addition to interest, fixed compensation for recovery costs may apply to qualifying late commercial payments. The amount usually depends on the size of the unpaid debt:

• £40 for debts up to £999.99;
• £70 for debts from £1,000 to £9,999.99;
• £100 for debts of £10,000 or more.

Read more here: Late payment compensation: £40, £70 and £100 explained.

7. You should communicate clearly before escalating

Even if interest may be available, it is often sensible to send a polite reminder first. A clear reminder can help resolve a late payment without damaging the business relationship.

Your reminder email may include:

• the invoice number;
• the original invoice amount;
• the due date;
• how many days overdue the invoice is;
• the estimated interest and compensation, if you decide to mention them;
• a clear request for payment by a specific date.

See also: How to write a polite overdue invoice reminder email.

8. Keep evidence and records

If a payment is overdue, keep organised records. These may be useful if the matter becomes disputed or if you need professional advice later.

Useful records include:

• the signed contract or agreed terms;
• the original invoice;
• proof of delivery or completion of work;
• email correspondence with the customer;
• payment reminders sent;
• notes of phone calls or agreed payment plans.

9. When should you be careful?

You should be careful before adding interest if:

• the customer disputes the invoice;
• the invoice amount is incorrect;
• the goods or services were not delivered as agreed;
• your contract has special payment or dispute terms;
• the customer is not a business customer;
• you are unsure whether statutory late payment rules apply.

In these situations, it may be better to seek professional advice before taking further action.

10. Practical checklist before charging interest

Official sources

You can check the official UK guidance here:

• GOV.UK: Late commercial payments — interest and debt recovery
• Bank of England: Bank Rate