Statutory Interest: Charging Interest On Overdue Invoices In The UK

Late payments can squeeze your cash flow and soak up your team’s time. The good news is that UK law gives small businesses a clear, simple tool to deter late payers and recover the cost of delays: statutory interest.

In this guide, we’ll explain when you can charge statutory interest, how to calculate it, what extra recovery costs you can add, and how to build strong payment terms so you’re protected from day one.

What Is Statutory Interest And When Can You Use It?

Statutory interest is the legal right to charge interest on overdue commercial invoices under the Late Payment of Commercial Debts (Interest) Act 1998, as updated by the Late Payment of Commercial Debts Regulations 2013.

It exists to encourage prompt payment in business-to-business transactions and to compensate you for the cost of late payment.

When It Applies

You can usually charge statutory interest when:

• You’ve supplied goods or services to another business (including a public authority).
• The invoice is overdue (based on the agreed payment terms or the legal default period).
• Your contract doesn’t provide a “substantial remedy” for late payment (more on this below).

When It Doesn’t Apply

Statutory interest generally doesn’t apply to:

• Sales to consumers (it’s for commercial debts only).
• Non-monetary debts (it’s tied to the price of goods/services).
• Situations where your contract already gives a substantial remedy for late payment (e.g. a reasonable contractual interest rate and realistic cost recovery).

If you’re unsure whether a debt qualifies, it’s wise to get tailored advice before you start adding interest to overdue invoices.

How Do You Calculate Statutory Interest On Overdue Invoices?

The statutory interest rate is simple: 8% per year above the Bank of England base rate. The relevant base rate is set on 31 December for debts owed between 1 January and 30 June, and on 30 June for debts owed between 1 July and 31 December.

The Formula

Interest = Debt amount × (Statutory rate) × (Days overdue ÷ 365)

Where “Statutory rate” = (Bank of England base rate + 8%).

Worked Example

Let’s say the base rate for the period is 5.25%. Your statutory rate is therefore 13.25% (5.25% + 8%).

• Invoice amount: £2,000
• Days overdue: 45
• Interest: £2,000 × 13.25% × (45 ÷ 365) ≈ £32.71

That interest keeps accruing daily until the invoice is paid in full.

When Does Interest Start To Accrue?

Interest starts the day after the “relevant day.” This is usually the due date in your contract. If there’s no agreed due date:

• For business-to-business transactions: the default is 30 days after the customer receives your invoice or the goods/services (whichever is later).
• For public authorities: the default is 30 days (and terms longer than 30 days are heavily restricted).

If you provide for acceptance procedures (e.g. a formal sign-off on delivered work), time typically starts from acceptance or deemed acceptance. Make sure your acceptance process is clear in your Terms of Trade or Business Terms so there’s no confusion about the clock.

What About Fixed Compensation And Recovery Costs?

On top of interest, the law lets you add a fixed sum to each overdue invoice to cover recovery costs:

• £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 can also claim your “reasonable recovery costs” to the extent they exceed the fixed sum. For example, if you instruct a debt collection agency or a solicitor and the costs are higher than the fixed amount, you can usually claim the difference as well (provided those costs are reasonable and directly related to recovering that specific debt).

Important: the fixed sums and statutory interest are not subject to VAT (they don’t attract VAT), and you don’t pay VAT on them when you collect. However, any recovery services you buy (like a debt collection fee) will usually attract VAT from the supplier, which is a separate matter for your own VAT accounting.

Contractual Interest Vs Statutory Interest

You’re free to set your own late payment terms in the contract, including a contractual interest rate and cost recovery. In many cases, this can be better than relying on the statutory regime because you can tailor the remedy to your pricing, sector and risk profile.

What Counts As A “Substantial Remedy”?

If your contract offers a “substantial remedy” for late payment, the statutory regime won’t apply. The test is whether your clause reasonably compensates you for late payment and encourages timely payment. Factors that help:

• Using a commercially sensible rate (e.g. a set % above base rate).
• Clear entitlement to recover reasonable enforcement costs.
• Payment terms that aren’t “grossly unfair” to the supplier (the 2013 Regulations prevent unfair terms that undercut your rights).

If your clause is too weak (for example, 1% per year with no cost recovery), a court could find it is not a substantial remedy, which may re-open the door to statutory interest and compensation.

Practically, it’s worth having professionally drafted Terms of Trade or Business Terms that set clear payment periods, interest and recovery costs, suspension rights for non-payment, and acceptance/defects processes. A short chat about Contract Drafting can ensure your clause is enforceable and does what you need.

Can You Use Both?

Generally, you don’t stack statutory interest on top of a contractual remedy. It’s one or the other. Most businesses choose a strong contractual clause to keep everything consistent across their customers and avoid tracking base rate changes. Others prefer to rely on the statutory regime because it’s straightforward and widely understood. Either approach is fine if it gives you a substantial remedy.

Step-By-Step: Adding Interest To Overdue Invoices

Here’s a practical process you can follow when an invoice goes overdue. Keeping it calm, consistent and documented puts you in a strong position if you need to escalate.

1) Check Your Payment Terms And The “Relevant Day”

• Confirm the agreed due date (or default period if none was agreed).
• Check if you’re relying on a contractual interest clause or statutory interest.
• Make sure your invoice shows the essentials, as strong invoice requirements help avoid disputes later.

2) Send A Polite Reminder

• Start with a friendly chaser (people do forget). Keep it short and include the due date and current balance.
• If you’re applying interest, state that interest is now accruing under your terms or the Late Payment of Commercial Debts (Interest) Act 1998 and specify the current daily rate.
• Use a consistent internal timeline for follow-ups. Good credit control habits matter as much as your legal rights.

For tone and timing ideas, it’s worth reviewing practical tips in our guide to invoice law and chasing overdue payments.

3) Add The Fixed Compensation And Calculate Interest

• Apply the correct fixed sum (£40/£70/£100) per overdue invoice.
• Calculate interest from the day after the relevant day up to today, using the current statutory rate or your contractual rate.
• Add a line on the statement of account showing the interest and compensation applied.

4) Send A Formal Late Payment Notice

• Issue a statement with the total due, the interest calculation, the fixed compensation, and a clear deadline for payment (e.g. 7 days).
• Keep records of delivery (email plus read receipt, and/or recorded post if appropriate).

5) Letter Before Action

If there’s still no progress, the next step is a formal Letter Before Action. This sets out the debt, the legal basis for interest and costs, and warns that you’ll issue proceedings if payment isn’t made by a specific date. This is also a pre-action requirement in most cases.

Our practical guidance on preparing a Letter Before Action can help you get the tone and content right. If you need to go further, you’ll also want to think about breach of contract allegations and any evidence you’ll rely on.

6) Court Claim (If Required)

Most debts settle before court once a clear legal position is set out. If you do issue a claim (e.g. via Money Claim Online), you can typically include:

• The principal debt.
• Statutory or contractual interest up to the date of the claim (and continuing).
• The fixed compensation and reasonable recovery costs (where applicable).
• Court fees and any fixed legal costs that the rules allow.

If the other side disputes your claim, be prepared to show your contract, proof of delivery/acceptance, your invoices, chasing emails, and your interest calculations. It can also be worth assessing whether you have additional claims for compensation for breach if the late payment caused wider losses.

Best Practices: Set Your Payment Terms Up For Success

Preventing late payment starts with clear, enforceable terms and simple processes. A few best practices go a long way.

Use Clear, Enforceable Payment Clauses

Your contract should spell out:

• Payment period (e.g. 14 days from invoice date, or 30 days EOM).
• When the clock starts (invoice, delivery, acceptance – be specific).
• Late payment remedy (contractual interest rate and recovery costs, or reference to statutory interest).
• Right to suspend services for non-payment (with notice).
• Invoicing process and dispute window (e.g. raise disputes within 7 days).

These clauses should sit alongside your scope, pricing changes, warranties, liability limits, IP/licensing and termination rights. If you’re refreshing your template, consider a quick Contract Drafting or Contract Review to ensure everything works together and complies with current law.

Invoice Cleanly And Consistently

• Include all required details so your customer can process payment without delay. Our guide to invoice requirements has a helpful checklist.
• Send invoices promptly and to the right contact (and portal, if they use one).
• Add your late payment clause to your invoices/footers for visibility.

Keep A Tight Credit Control Rhythm

• Automate reminders at 3–5 days before due, on due date, and 3–7 days after due.
• Pick up the phone early – friendly calls often resolve things faster than email chains.
• Move to a formal statement and then a Letter Before Action on a clear timetable.

Know Your Sector Norms (But Keep It Fair)

The law allows longer payment periods in B2B deals, but terms must not be “grossly unfair” to the supplier. In practice, setting 30 days as standard and being firm about enforcement tends to reduce aged debt. If a large customer insists on 60 days, consider interim milestones or partial upfront payments to smooth cash flow.

FAQs About Statutory Late Payment Interest

Do I Need To Tell The Customer I’m Charging Statutory Interest?

Legally, you don’t need to warn in advance to rely on the Act. Practically, it’s best to notify the customer when you start applying interest and fixed compensation, showing your calculation on a statement of account. This maintains transparency and often prompts payment.

Can I Charge Interest On Part-Paid Invoices?

Yes. Interest accrues on the outstanding balance from the relevant day and reduces as payments come in. Keep your running calculation up to date and show how you have applied payments.

Is Statutory Interest Compounded?

No. Statutory interest accrues on a simple (non-compound) basis. If you prefer compounding, you’d need a contractual clause that provides for it (and it must still be reasonable).

Does Statutory Interest Apply Across The UK?

Yes. The regime applies throughout the UK. The Bank of England base rate is used for calculating the statutory rate for England & Wales, Scotland and Northern Ireland. Always check you’re using the correct base rate period for your calculation.

What If The Customer Disputes The Invoice?

Genuine disputes may pause or complicate recovery. Make sure your acceptance and dispute procedures are clear in your Terms of Trade and that you keep solid delivery and sign-off evidence. Where a dispute is raised late and appears tactical, your interest and compensation rights still stand, but it’s sensible to assess the merits before escalating.

Can I Terminate For Non-Payment?

Often, yes – provided your contract allows it and you’ve followed any notice/cure steps. It’s prudent to have a straightforward termination for non-payment clause alongside your late payment remedy so you can stop work before losses mount. If you need to bring a relationship to an end, ensure you follow any procedural requirements and, if necessary, prepare the appropriate notices with legal support.

Key Takeaways

• Statutory interest lets you charge interest at 8% above the Bank of England base rate on overdue commercial invoices, plus a fixed compensation amount per invoice and reasonable recovery costs.
• You can rely on statutory interest when your contract doesn’t provide a substantial remedy for late payment. A well-drafted contractual remedy can be used instead and often gives you more control.
• Interest starts the day after the due date (or legal default period) and is calculated on a simple interest basis; keep your calculations clear and up to date.
• Have clear payment terms in your Terms of Trade or Business Terms, including interest, recovery costs, acceptance procedures and suspension/termination rights.
• Follow a consistent credit control process: friendly reminders, apply interest and fixed sums, then a formal Letter Before Action if required.
• If you need to escalate, you can include interest, fixed compensation and reasonable recovery costs in your claim, alongside any additional compensation for breach that applies.
• Setting up strong terms and clean invoicing processes from day one will reduce aged debt and make late payment recovery faster and less stressful.

If you’d like help drafting robust late payment clauses or assessing a disputed invoice, we’re here to help. You can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.