Can You Charge Interest on Late Payments in the UK?

Late-paying customers can put real pressure on your cash flow, especially when you’re a small business juggling wages, suppliers, tax, and everything else that keeps the lights on.

The good news is that, in many cases, you can legally add interest to an overdue invoice in the UK. The key is understanding when you can do it, how you should do it, and what you need in place to avoid unnecessary disputes.

Below, we’ll walk through the practical and legal side of charging interest on late payments, including statutory interest, contractual interest, how to calculate it, and the steps you should take before escalating.

Is Adding Interest To Overdue Invoices Legal In The UK?

Yes - adding interest to overdue invoices can be legal in the UK, but the rules depend on:

• who your customer is (a business, a public authority, or a consumer), and
• what your contract says (including your terms and conditions).

For most small businesses chasing unpaid invoices, the most relevant framework is the Late Payment of Commercial Debts (Interest) Act 1998. This law gives businesses a statutory right to charge interest (and compensation) on late payments for commercial debts.

In plain English: if you supplied goods or services to another business (or a public authority) and they pay late, you may be entitled to add interest even if your contract doesn’t explicitly say so.

However, things can get trickier if:

• your customer is a consumer (B2C work),
• your contract already includes a different interest clause, or
• there’s a genuine dispute about whether the invoice is payable (for example, alleged defective work).

It’s also worth making sure your invoices and payment terms are tidy and consistent. If you’re unsure what needs to be on an invoice, having a quick look at invoice requirements can help you tighten up your process before late payments become a pattern.

When Can You Charge Interest Under The Late Payment Act?

The Late Payment Act usually applies where:

• you’re selling goods or providing services in the course of business, and
• your customer is another business or a public authority, and
• payment is late under the agreed terms (or if no terms are agreed, late under the default rules).

What Counts As “Late”?

Payment is generally late when it’s not made by the agreed payment due date.

If you and the customer didn’t clearly agree a due date, the law applies default rules. In many cases, the “default” payment deadline is:

• 30 days after the later of: (i) the date the customer receives your invoice (or payment request), and (ii) the date you deliver the goods or complete the service.

There are also special rules for public authorities. As a general rule, public authorities are expected to pay within 30 days (and longer terms are heavily restricted).

In practice, the cleanest approach is to avoid ambiguity by setting clear payment terms up front and using consistent paperwork.

Does Statutory Interest Apply If Your Contract Mentions Interest?

Sometimes. If your contract already has an interest clause, you’ll usually follow the contract - as long as the contractual remedy is “substantial” (in other words, it’s not an unfair or meaningless alternative that deprives you of a real remedy for late payment).

This is one reason it’s smart to have properly drafted terms and conditions that deal with payment timing, interest, and recovery costs. It’s much easier to enforce a system you’ve already agreed than to argue about it later.

What About Consumers (B2C)?

If your customer is a consumer, the Late Payment Act generally isn’t the tool you rely on in the same way. You can still potentially charge interest, but you’ll usually need:

• a clear contractual term allowing interest, and
• terms that are fair and transparent (consumer protection law can bite if terms are excessive or hidden).

If you do B2C work (for example, home services, wellness businesses, creatives, trades), it’s worth getting your payment terms checked to make sure they’re enforceable and won’t cause pushback.

How Much Interest Can You Add To Overdue Invoices (And How Do You Calculate It)?

This is where many business owners get stuck, because you want to be firm - but you also want to be accurate.

Statutory Interest Rate (The Usual Rule)

Under the Late Payment Act, statutory interest is typically calculated at:

Bank of England base rate + 8% per year

The base rate can change, so the applicable rate depends on the relevant period. Many businesses also add (where eligible) a fixed compensation amount, which we’ll cover below.

When Does Interest Start Running?

Interest generally starts running from the day after the payment due date, and continues until the debt is paid.

A Simple Calculation Example

Let’s say:

• Invoice amount: £2,000
• Payment terms: 14 days
• Invoice is 30 days late
• Assume base rate is 5.25% (example only)

Statutory interest rate = 5.25% + 8% = 13.25% per year

Annual interest on £2,000 at 13.25% = £2,000 × 0.1325 = £265/year

Daily interest = £265 ÷ 365 = about £0.73/day

Interest for 30 days late = £0.73 × 30 = about £21.90

That might not sound huge on one invoice - but across multiple invoices (or long delays), adding interest to overdue invoices can make a real difference, and it also signals that your business takes payment discipline seriously.

Can You Add “Late Fees” Instead?

Sometimes businesses try to add a flat “late fee” (for example, £50 if payment is overdue). Whether that is enforceable depends on how it’s structured and whether it’s reasonable.

As a general rule, interest (calculated properly) is usually more defensible than a random penalty. If you want to charge flat fees or admin costs, it’s worth getting legal advice so you don’t accidentally create an unenforceable penalty clause.

Can You Claim Compensation And Debt Recovery Costs Too?

Yes, in many B2B situations you may be able to claim more than just interest.

Under the Late Payment Act, you can often claim a fixed sum compensation amount per overdue invoice (in addition to interest):

• £40 for debts up to £999.99
• £70 for debts between £1,000 and £9,999.99
• £100 for debts of £10,000 or more

You may also be able to recover reasonable costs of debt recovery in some circumstances, particularly where your recovery costs exceed the fixed compensation amount (for example, certain legal or debt collection costs that are reasonably incurred).

What you can claim (and how you should claim it) can depend on the exact facts, your contract terms, and whether the customer is disputing the invoice. If you want a deeper dive on the legal basis, this guide on charging interest on money owed is a helpful starting point.

Practically, it’s usually best to communicate clearly and keep your approach consistent. For example, if you’re claiming interest and compensation, include a short breakdown so the customer can see how you got to the figure.

A Practical Step-By-Step Process For Adding Interest To Overdue Invoices

Even when you’re legally entitled to charge interest, how you go about it matters. A heavy-handed approach can damage relationships (and sometimes even reduce your chances of getting paid quickly).

Here’s a sensible process many small businesses follow.

1) Make Sure Your Invoice And Terms Are Clear

Before you escalate, check the basics:

• Is the invoice addressed to the correct legal entity?
• Is the due date clear?
• Do your terms mention interest and recovery costs (where relevant)?
• Do you have written evidence of what was agreed?

If you need to tighten your contracts, doing it now can help prevent repeat issues in future jobs.

2) Send A Friendly Payment Reminder

Late payment is sometimes admin error, not malice. A calm reminder often fixes it.

Keep it short, attach the invoice again, and ask them to confirm the payment date. If you want a clear structure, having a solid payment reminder letter format can save you time.

3) Follow Up With A Firmer Overdue Notice (And Mention Interest)

If the reminder is ignored, your next message can be more direct. This is often the right moment to mention that you reserve the right to charge interest and compensation for late payment.

If you’re going to add interest to an overdue invoice, make sure you:

• state the basis (contractual interest or statutory interest),
• state the interest rate, and
• state the date from which interest is accruing.

4) Issue A Final Demand Before Legal Action

If payment still doesn’t arrive, a final demand can show you’re serious without immediately filing a claim.

This type of letter should be clear, factual, and deadline-driven. You can also include an updated balance that includes the interest accrued to date. A structured final demand letter can be a good way to approach this step professionally.

5) Consider A Letter Before Action

If you’re ready to escalate, a letter before action is often the next step. This is a formal notice that you intend to start court proceedings if the debt isn’t paid by a set date.

A well-drafted letter before action should:

• set out what is owed (including interest and compensation, if claimed),
• explain the legal basis for your claim, and
• give a final deadline to pay before you file a claim.

This is also a point where it’s wise to get legal advice, especially if the debtor is disputing the invoice or raising complaints about your work.

6) Enforce Your Rights (If You Need To)

If the customer still won’t pay, you may be looking at a court claim (often via the small claims process, depending on the debt size).

Depending on the situation, interest might be claimed based on:

• your contractual interest clause,
• statutory interest under the Late Payment Act (for qualifying commercial debts), and/or
• interest awarded by the court in litigation (for example, under the County Courts Act 1984 in some claims).

Before taking that step, it’s worth thinking about:

• Do you have written proof of the contract and delivery of the work?
• Is there any risk of a counterclaim?
• Is the customer solvent (i.e. are they able to pay)?

From a process perspective, many businesses find it helpful to standardise their approach to chasing late invoices so every debtor gets the same treatment and timelines. This general guide on chasing overdue payments can help you set a consistent internal workflow.

How Do You Protect Your Business From Late Payments In The First Place?

Being able to charge interest is helpful, but prevention is even better. The goal is to get paid on time, without having to argue about it.

Here are a few practical legal and operational fixes that can make a big difference.

Use Strong Payment Terms (And Don’t Hide Them)

If you want to charge interest contractually (or even just to make the position crystal clear), your customer should see the terms before they buy.

Depending on how you sell, that might look like:

• terms linked on your website checkout,
• terms attached to your quote, or
• terms incorporated into your service agreement.

It’s also worth keeping your terms readable. Overly aggressive or confusing clauses can lead to disputes (or simply slow down payment because your customer’s finance team pushes back).

Ask For Deposits Or Stage Payments

If you do project work, consider structuring invoices so you’re not carrying the full cash flow burden until the end. For example:

• 50% upfront + 50% on completion, or
• monthly milestone invoices for longer projects.

This reduces the risk of one big unpaid invoice - and makes interest on overdue invoices less of a “last resort” situation.

Keep A Clear Paper Trail

If you ever need to enforce an invoice, documents matter. Keep copies of:

• quotes and accepted proposals,
• purchase orders,
• delivery confirmations, and
• emails confirming scope changes.

Even if you have a great relationship with your customer, staff changes happen and memories fade. A solid written record protects you.

Have A Plan For When Customers Don’t Pay

Many small businesses delay chasing because it feels awkward. But a clear internal process removes the emotion from it.

A simple policy might be:

• Day 1 overdue: friendly reminder
• Day 7 overdue: second reminder + call
• Day 14 overdue: overdue notice + mention interest
• Day 21 overdue: final demand
• Day 28 overdue: letter before action

This kind of consistency also helps if you’re dealing with multiple customers and want your accounts process to feel professional rather than improvised.

Key Takeaways

• Adding interest to overdue invoices is often legal in the UK, especially for B2B debts and public authority contracts.
• For many commercial invoices, you may be able to claim statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998, commonly calculated at Bank of England base rate + 8%.
• If no due date is agreed, there are default rules (often 30 days from the later of invoice receipt and delivery/completion), and public authorities are generally expected to pay within 30 days.
• You may also be entitled to claim fixed compensation of £40/£70/£100 per late invoice (depending on the debt size) and, in some cases, reasonable recovery costs - but you should present your calculations clearly.
• The cleanest way to avoid disputes is to set clear payment terms up front, supported by properly drafted terms and conditions and consistent invoicing practices.
• Before escalating, follow a sensible process: reminder → overdue notice → final demand → letter before action → enforcement if needed.
• If your customer is a consumer (B2C) or the invoice is disputed, get tailored advice before charging interest or issuing formal letters.

If you’d like help putting strong payment terms in place, updating your contracts, or taking action on a non-paying customer, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.