Statutory Interest vs Contractual Interest in the UK
When a UK invoice becomes overdue, businesses often ask whether they should charge statutory interest or contractual interest. The answer depends on what your payment terms say, whether the debt is commercial, and whether there is a valid interest clause in your agreement.
Both statutory interest and contractual interest can help discourage late payment, but they work in different ways. This guide explains the main differences, when each type may apply, and what small businesses should check before adding interest to an overdue invoice.
What is statutory interest?
Statutory interest is interest that may be claimed under UK late payment rules for qualifying commercial debts. It is commonly used where one business supplies goods or services to another business and the invoice is paid late.
For many UK business-to-business debts, statutory late payment interest is calculated at 8% above the Bank of England base rate. This is separate from the original invoice amount.
Statutory interest is useful because it does not always need to be written into your contract. If the debt qualifies and your contract does not provide a suitable alternative, you may be able to rely on the statutory late payment rules.
You may also be able to claim fixed late payment compensation, depending on the value of the overdue debt.
What is contractual interest?
Contractual interest is interest that comes from the terms agreed between the parties. This may appear in:
- Written terms and conditions
- A signed contract
- A service agreement
- A credit agreement
- Purchase terms
- Invoice payment terms, if properly incorporated into the contract
For example, your contract may say that overdue invoices will attract interest at 4% above base rate, 2% per month, or another agreed rate.
Unlike statutory interest, contractual interest depends on what the parties agreed. The wording matters. A clear interest clause is usually easier to apply than a vague or inconsistent term.
The key difference between statutory and contractual interest
The main difference is the source of the right to charge interest.
Statutory interest comes from legislation. Contractual interest comes from the contract between the parties.
In practical terms:
- Statutory interest may apply where the debt qualifies under UK late payment rules.
- Contractual interest applies where your agreement includes a valid late payment interest clause.
- If your contract already deals with late payment interest, that contract wording may affect whether statutory interest is available.
- If the contractual remedy is considered a substantial remedy for late payment, it may replace the statutory position.
This is why it is important to check your contract before adding interest to an overdue invoice.
When statutory interest may apply
Statutory interest is most commonly relevant where:
- The debt is between businesses
- The invoice relates to goods or services supplied
- The payment is overdue
- The payment terms have passed
- There is no clear contractual interest clause, or the contract does not provide a substantial remedy
- The debt is not a consumer debt
For many business invoices, statutory interest can be a practical way to calculate late payment charges without needing a complicated interest clause.
You can estimate statutory late payment interest using the UK Late Payment Interest Calculator.
When contractual interest may apply
Contractual interest may apply where your contract includes a specific clause dealing with late payment.
A contractual interest clause should ideally state:
- When interest starts to run
- The rate of interest
- Whether the rate is annual, monthly, or daily
- Whether interest compounds or is simple interest
- Whether recovery costs or compensation can also be claimed
- Whether interest continues after judgment or termination
If your terms are unclear, the customer may dispute the calculation. Clear wording reduces confusion and makes your position easier to explain.
Can you choose between statutory and contractual interest?
Not always.
If your contract contains a late payment interest clause, you should check whether that clause is intended to replace statutory interest. In some cases, the contract may provide a different remedy for late payment.
If the contractual remedy is valid and substantial, you may need to follow the contract rather than using statutory interest. If the contractual term is unclear or does not provide a substantial remedy, statutory rights may still be relevant.
Because this can depend on the specific wording, businesses should be cautious before assuming they can simply choose the higher amount.
Which one is better for small businesses?
For many small businesses, statutory interest is simpler because the calculation is based on a recognised formula: the Bank of England base rate plus 8%.
However, contractual interest can be useful if your business wants a tailored approach. For example, you may want your terms to state exactly when interest starts and how it is calculated.
A good practical approach is:
- Use clear payment terms on every invoice
- Include a late payment interest clause in your terms and conditions
- Keep a record of when the invoice was issued and when payment became due
- Use a calculator to estimate the interest amount
- Explain the charge clearly in any reminder email or follow-up letter
If you are unsure which type of interest applies, review the contract before sending a revised invoice or formal demand.
Statutory interest example
Suppose a business invoice for £2,000 is overdue. If statutory interest applies, the annual interest rate is calculated as:
Bank of England base rate + 8%
The amount of interest will depend on:
- The invoice amount
- The applicable base rate
- The number of days overdue
- The payment due date
- The calculation date
For a quick estimate, use the UK Late Payment Interest Calculator.
If you also want to check the fixed recovery cost amount, use the UK Late Payment Compensation Calculator.
Contractual interest example
Suppose your terms say:
“Interest will be charged on overdue invoices at 4% above the Bank of England base rate, calculated daily from the due date until payment.”
In that case, your interest calculation should follow the contract wording. The rate may be lower or higher than the statutory rate, depending on what was agreed.
If the contract says interest is charged monthly, compounded, or calculated in a different way, you should follow the wording carefully.
Can you also claim late payment compensation?
For qualifying commercial debts, statutory late payment compensation may also be available. This is a fixed amount based on the size of the unpaid debt:
- £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 interest. It is intended to help recover some of the cost of chasing overdue payment.
You can estimate the fixed amount using the UK Late Payment Compensation Calculator.
How to explain interest to a late-paying customer
When adding interest to an overdue invoice, keep the wording clear and professional. Avoid sounding aggressive.
You may want to include:
- The original invoice number
- The invoice amount
- The due date
- The number of days overdue
- The interest basis used
- The interest amount
- Any fixed compensation amount
- The updated total due
- A deadline for payment
If you need wording, see the Overdue Invoice Reminder Email Template UK.
Common mistakes to avoid
Businesses often make mistakes when charging late payment interest. Common issues include:
- Charging interest before the invoice is actually overdue
- Using statutory interest on a consumer debt
- Ignoring a contractual interest clause
- Applying the wrong base rate
- Counting the wrong number of overdue days
- Showing a raw calculation without explaining it
- Adding compensation where the debt does not qualify
- Using unclear or inconsistent payment terms
Before escalating a debt, make sure your figures are accurate and your wording is consistent with your contract.
Statutory interest vs contractual interest: quick comparison
Statutory interest is usually simpler and based on UK late payment rules. Contractual interest depends on the agreed terms between the parties.
If there is no clear interest clause, statutory interest may be the practical starting point for qualifying commercial debts. If there is a clear contractual clause, the contract should be reviewed first.
For small businesses, the safest approach is to keep payment terms clear, calculate interest carefully, and explain any late payment charge in plain language.
Related tools and guides
- UK Late Payment Interest Calculator
- UK Late Payment Compensation Calculator
- UK Late Payment Interest Formula Explained
- Overdue Invoice Reminder Email Template UK
- Late Payment Interest for Small Businesses in the UK
- How to Add Late Payment Interest to Invoice
Disclaimer
This guide is for general information only and does not constitute legal advice. Late payment rights can depend on the contract, the type of debt, and the circumstances of the transaction. If you are unsure whether statutory or contractual interest applies, consider taking professional advice.