When another business pays you late, you have statutory rights to claim interest on the overdue amount plus fixed compensation for debt recovery costs. These rights apply automatically to commercial contracts for goods and services - you do not need to have included them in your contract terms.

The Late Payment of Commercial Debts (Interest) Act 1998 gives you these rights to encourage prompt payment and compensate you for the cost of chasing unpaid invoices. These protections cannot be waived entirely by contract.

Your statutory rights to interest

You can charge interest on late payments at the statutory rate. This applies to all business-to-business (B2B) transactions and contracts with public authorities. Consumer transactions are not covered by this Act.

Statutory interest rate for late commercial payments

Statutory interest on late B2B payments is 8% above Bank of England base rate.

Under the Late Payment of Commercial Debts (Interest) Act 1998, businesses can claim statutory interest on late payments from other businesses (B2B transactions) and public authorities.

Interest rate formula:

Statutory interest = 8% + Bank of England base rate (calculated at the reference date)

When interest starts:

If payment terms agreed: day after the agreed due date
If no terms agreed for goods: 30 days after delivery or invoice (whichever is later)
If no terms agreed for services: 30 days after completion or invoice (whichever is later)
Public sector contracts: maximum 30 days from invoice or verification

Calculation method:

Interest accrues daily on the outstanding debt
Simple interest (not compound)
Continues until the debt is paid in full
Reference date for base rate: 30 June (H1) or 31 December (H2) before debt became late

Example calculation:

Debt of GBP 10,000 outstanding for 60 days with base rate at 5%:

Interest = GBP 10,000 x 13% x (60/365) = GBP 213.70

Statutory interest rate: 8% above Bank of England base rate
Interest type: Simple interest (not compound)
Accrual basis: Daily calculation
Default payment period (goods): 30 days from delivery or invoice (whichever later)
Default payment period (services): 30 days from completion or invoice (whichever later)
Maximum payment period allowed: 60 days (can only exceed if not grossly unfair)
Public sector maximum: 30 days from invoice or verification
Reference date for base rate (H1): 30 June preceding the date debt became late
Reference date for base rate (H2): 31 December preceding the date debt became late
Current base rate (Jan 2026): Check Bank of England for current rate

How to calculate what you are owed

Work out the daily interest rate, then multiply by the number of days the payment is overdue. The formula is straightforward:

Annual interest: Debt amount multiplied by (8% + current base rate)
Daily interest: Annual interest divided by 365
Total interest: Daily interest multiplied by number of days overdue

For example, if you are owed £5,000 and the base rate is 4.75%:

Annual interest = £5,000 x 12.75% = £637.50
Daily interest = £637.50 / 365 = £1.75
After 30 days late = £1.75 x 30 = £52.50

Remember to use the Bank of England base rate that applied on the reference date (30 June for debts becoming late in the first half of the year, 31 December for debts becoming late in the second half).

Fixed debt recovery costs

In addition to interest, you can claim a fixed sum to compensate for the cost of recovering the debt. This is a one-off amount per invoice, not per day of lateness.

Fixed debt recovery costs for late payment

Fixed sums recoverable on top of statutory interest for late B2B payments - GBP 40, GBP 70, or GBP 100 depending on debt size.

Under the Late Payment of Commercial Debts (Interest) Act 1998, creditors can claim a fixed sum for debt recovery costs on top of statutory interest. The fixed sum depends on the size of the debt.

Fixed recovery costs:

GBP 40 - for debts under GBP 1,000
GBP 70 - for debts between GBP 1,000 and GBP 9,999.99
GBP 100 - for debts of GBP 10,000 or more

When recoverable:

Becomes payable when statutory interest starts to run
One fixed sum per invoice/transaction (not per day)
Recoverable regardless of whether you claim the interest itself

Additional reasonable costs:

If your actual recovery costs exceed the fixed sum, you can also claim the additional reasonable costs incurred in recovering the debt. This might include:

Credit reference agency fees
Debt collection agency fees
Legal costs
Administrative costs

Note: You must be able to demonstrate these were reasonable costs actually incurred in pursuing the specific debt.

Fixed sum for debt under GBP 1,000: GBP 40
Fixed sum for debt GBP 1,000 to GBP 9,999.99: GBP 70
Fixed sum for debt GBP 10,000 or more: GBP 100
When fixed sum becomes due: Same date as statutory interest starts
Fixed sums per transaction: One fixed sum per invoice/debt
Additional costs above fixed sum: Reasonable recovery costs actually incurred
Evidence required for additional costs: Must demonstrate costs were reasonable and actually incurred

When payment becomes late

A payment is late if it has not been made by the agreed payment date. If no date was agreed in the contract, statutory default periods apply:

Public sector customers: 30 days from invoice or delivery (whichever is later)
Business customers (goods): 30 days from delivery or invoice (whichever is later)
Business customers (services): 30 days from completion or invoice (whichever is later)
Maximum contractual period (private sector): 60 days (unless not grossly unfair to exceed)

You can agree different payment terms in your contract, but they must be fair to both parties. Terms longer than 60 days for business customers may be challenged if they cannot be objectively justified.

Contract terms and the substantial remedy test

Your customer cannot simply contract out of your late payment rights. If a contract tries to exclude or limit statutory interest, that term is only enforceable if it provides a substantial contractual remedy for late payment.

Substantial contractual remedy test

Contractual terms purporting to exclude or limit statutory late payment rights must provide a substantial remedy to be enforceable.

The Late Payment of Commercial Debts (Interest) Act 1998 allows parties to agree contractual terms about late payment, but only if those terms provide a substantial remedy for late payment. Terms that do not meet this test are void and the statutory rights apply instead.

The substantial remedy test:

A contractual term that purports to exclude, restrict, or postpone the right to statutory interest or compensation is void unless it provides a substantial contractual remedy for late payment.

Factors determining whether remedy is substantial:

The benefits and detriments the term gives to each party
Whether it is fair and reasonable to include the term in the contract
The circumstances existing at the time the contract was made

Examples of terms likely to be void:

Terms excluding all interest on late payment
Interest rates significantly below statutory rate (e.g., 2% flat)
Terms that only provide interest after unreasonably long delay periods
Terms imposed by dominant party in unfair bargaining position

Public sector contracts:

The Late Payment of Commercial Debts Regulations 2013 (implementing EU Directive 2011/7/EU) impose stricter requirements:

Maximum payment period of 30 days for public authorities
Cannot contractually extend beyond 30 days
Verification procedure cannot exceed 30 days unless expressly agreed and not grossly unfair

Grossly unfair terms:

Terms are automatically void if they are grossly unfair to the creditor, having regard to:

Good commercial practice
The nature of the goods or services
Whether debtor has objective reason for deviating from statutory position

Void terms: Terms excluding/limiting statutory rights without substantial remedy
Test for substantial remedy: Fair and reasonable considering benefits and detriments to each party
Grossly unfair terms: Automatically void regardless of substantial remedy test
Public sector maximum payment period: 30 days (cannot contract out)
Private sector maximum payment period: 60 days (unless not grossly unfair to exceed)
EU Directive implemented: Directive 2011/7/EU on combating late payment
UK implementing regulations: Late Payment of Commercial Debts Regulations 2013
Effect of void term: Statutory rights apply as if term did not exist

Public sector payment requirements

If you supply goods or services to public authorities (central government, local authorities, NHS trusts), special rules protect you. The public sector has stricter payment obligations than private businesses.

Prompt payment requirements for public contracts

Mandatory payment terms for public sector contracts under the Procurement Act 2023.

Maximum payment period: 30 calendar days from valid invoice
Government target for SME invoices: 90% paid within 5 days
Supply chain payment terms: 30 days must flow through to subcontractors

The Procurement Act 2023 implies 30-day payment terms into every public contract and sub-contract, even if not explicitly stated. Suppliers can claim statutory interest if not paid within this period.

Supplier bidding requirements (contracts over £5 million/year)

From October 2025, suppliers must demonstrate they pay their own invoices within an average of 45 days to bid for major government contracts.

Prompt Payment Policy

The Prompt Payment Code

The Prompt Payment Code is a voluntary code of practice administered by the Small Business Commissioner. Signatories commit to paying suppliers within agreed terms and following good payment practices.

Code administrator: Small Business Commissioner
Nature: Voluntary code, but public commitment
Maximum payment terms for signatories: Aim for 30 days, maximum 60 days
Reporting requirement: Signatories must report payment performance
Public register: Yes - signatories listed on GOV.UK
Removal from code: Possible if performance is poor

Why the Code matters to you:

If your customer is a Code signatory, you have evidence of their payment commitments
You can check if a potential customer is a signatory before extending credit
Persistent late payers can be removed from the Code, which is reputationally damaging
Large companies bidding for government contracts over £5 million must demonstrate good payment practices

The Code does not create legal rights, but it does create public accountability. A customer who signs the Code and then pays you late may face consequences from the Small Business Commissioner.

Large company payment reporting

Large companies and LLPs must publish reports on their payment practices and performance twice a year. This gives you information about potential customers before you extend credit.

Reporting threshold (companies): 2 of: £36m+ turnover, £18m+ balance sheet, 250+ employees
Reporting frequency: Every 6 months within 30 days of reporting period end
Where published: GOV.UK payment practices reporting service
Information disclosed: Average payment time, percentage paid late, payment terms offered

Before taking on a large customer, check their payment practices report. If they routinely pay invoices late or impose long payment terms, factor this into your credit decisions.

Claiming interest and costs

You can claim statutory interest and debt recovery costs whether or not they are mentioned in your contract. Follow a structured approach:

Confirm the payment due date

Establish when payment was due - either the date in your contract, or the statutory default period. Your invoice should clearly state payment terms. If terms were not agreed, the statutory period applies.
Send a payment reminder

Contact your customer to request payment. Note the date - interest runs from the day after payment was due, not from when you asked. A phone call followed by an email creates a paper trail.
Calculate the total amount owed

Add up: the original invoice amount + statutory interest (calculated to date) + fixed compensation (£40, £70, or £100 depending on debt size). Use the Bank of England base rate from the relevant reference date.
Send a formal claim letter

Write to your customer stating the original amount, the interest accrued, the fixed compensation, and the total now due. Cite the Late Payment of Commercial Debts (Interest) Act 1998. Give a reasonable deadline (7-14 days) to pay.
Consider alternative dispute resolution

If they dispute the debt or refuse to pay, mediation can be faster and cheaper than court. The Small Business Commissioner can also help resolve payment disputes with larger businesses.
Take legal action if necessary

For debts under £10,000, use the Money Claim Online service. For larger amounts, consider instructing a solicitor. The court can award you the interest and costs you claimed.

The Small Business Commissioner

The Small Business Commissioner helps small businesses resolve payment disputes with larger businesses. This is a free service.

You can make a complaint to the Commissioner if:

Your business has fewer than 50 employees
You are owed money by a larger business
You have already tried to resolve the dispute directly

The Commissioner cannot force payment, but their involvement often prompts resolution. They can also name businesses that fail to engage with the complaints process.

Practical considerations

Before claiming interest, consider your business relationship and the circumstances:

First-time lateness: A phone call or gentle reminder may preserve the relationship while still prompting payment. You can always claim interest later if they do not pay.
Repeat late payers: You are within your rights to claim interest - doing so may encourage better payment behaviour. Consistent late payment suggests a deliberate strategy.
Disputed invoices: If the customer disputes the amount or quality, resolve that first. Interest only applies to undisputed amounts that are genuinely due.
Cash flow problems: If your customer is struggling financially, claiming interest may push them into insolvency. Consider whether a payment plan is more likely to recover the debt.
Large customers: Some businesses fear losing contracts by enforcing payment terms. The law is on your side, but weigh the commercial impact. Consider whether you want to continue supplying customers who pay late.

Preventing late payment

While you have strong rights when payments are late, prevention is better than cure:

Clear terms: State payment terms prominently on quotes, order confirmations, and invoices
Credit checks: Check new customers before extending credit - use Companies House payment reports and credit reference agencies
Invoice promptly: Send invoices immediately on delivery or completion. Delays in invoicing lead to delays in payment.
Chase early: Follow up within days of the due date, not weeks. Squeaky wheel gets the grease.
Retain title: For goods, include a retention of title clause so you can recover goods if not paid
Deposits: For new customers or large orders, request payment in advance or staged payments

Record keeping

Keep clear records to support any claim for late payment interest:

Original contract or order confirmation showing agreed terms
Delivery note or proof of service completion
Invoice with clear payment terms and due date
Record of when payment was received
Copies of all correspondence chasing payment
Bank of England base rate at the relevant reference date

If you go to court, you will need to prove when the debt became due and how you calculated the interest claimed.

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Late payment: your rights as a business

Your statutory rights to interest

How to calculate what you are owed

Fixed debt recovery costs

When payment becomes late

Contract terms and the substantial remedy test

Public sector payment requirements

The Prompt Payment Code

Large company payment reporting

Claiming interest and costs

Confirm the payment due date

Send a payment reminder

Calculate the total amount owed

Send a formal claim letter

Consider alternative dispute resolution

Take legal action if necessary

The Small Business Commissioner

Practical considerations

Preventing late payment

Record keeping

Compliance Assistant

🧪 Business Context Testing

◉ Content Graph

Your statutory rights to interest

How to calculate what you are owed

Fixed debt recovery costs

When payment becomes late

Contract terms and the substantial remedy test

Public sector payment requirements

The Prompt Payment Code

Large company payment reporting

Claiming interest and costs

Confirm the payment due date

Send a payment reminder

Calculate the total amount owed

Send a formal claim letter

Consider alternative dispute resolution

Take legal action if necessary

The Small Business Commissioner

Practical considerations

Preventing late payment

Record keeping

Related guides in Tax & Finance

Business Context Testing

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