Statutory Interest on Late Payments in the UK

Cash flow is the lifeblood of every small business. When customers pay late, it can put real pressure on your team, your suppliers and your growth plans.

The good news is that UK law gives you clear rights to charge interest on late commercial payments - even if your contract is silent. You can also add fixed-sum compensation and, in some cases, recover reasonable debt recovery costs.

In this guide, we’ll explain when statutory interest applies, how to calculate it, what to include in your contracts, and the sensible steps to chase overdue invoices while staying professional and compliant.

What Is Statutory Interest On Late Payments?

Statutory interest is the legal right to charge interest on late payments for business-to-business (B2B) supplies of goods and services, even if your contract doesn’t mention interest. It comes from the Late Payment of Commercial Debts (Interest) Act 1998 and subsequent regulations.

In short, if you’ve delivered goods or services to another business (or a public authority) and they don’t pay on time, you can usually add:

• Statutory interest at 8% above the Bank of England base rate; and
• A fixed-sum compensation amount (usually £40, £70 or £100, depending on the invoice value); plus
• “Reasonable costs” of recovering the debt, if those exceed the fixed sum.

This regime is designed to deter late payment and compensate you for the time value of money and your admin chasing the debt.

When Can You Charge Statutory Interest (And When Can’t You)?

Statutory interest applies to most commercial debts arising from a supply of goods or services where:

• The supplier and customer are acting in the course of business (B2B), or the customer is a public authority; and
• There’s an agreed price and the invoice is due.

Key points to know:

• Not for consumers: You can’t use statutory interest against consumers (B2C). If you sell to consumers, rely on clear contract terms and consumer law compliance instead.
• Public authorities: Payment periods to public authorities are capped at 30 days by law (and can’t usually be extended).
• Business customers: You and your business customer can agree a different payment period (e.g. 30, 45 or 60 days). Any extension beyond 60 days must not be “grossly unfair.”
• Contractual interest: If your contract sets a “substantial remedy” for late payment (for example, a clear interest rate and recovery costs), that can replace statutory interest. If it’s not substantial or is grossly unfair, the statutory regime can still apply.

If you’re regularly dealing with late payers, it’s smart to combine the statutory regime with well-drafted payment terms in your Terms of Trade. That way, you’re protected whether or not the statutory regime applies to a particular invoice.

When Does Interest Start, And What’s The Payment Deadline?

Interest starts the day after the last day your customer had to pay. The “last day to pay” depends on what you agreed and who you’re dealing with:

• If you agreed a payment date: Interest starts the day after that date (or the day after any agreed payment period expires).
• If you didn’t agree a date with a business customer: Payment is due 30 days from the later of (a) the invoice date or (b) the day after goods/services are received (sometimes receipt of a “notice of amount due” is relevant if that’s your process).
• If your customer is a public authority: Payment is due 30 days from receipt of invoice (or receipt/acceptance of goods/services if later). This 30-day longstop is mandatory.

In practice, good invoicing helps avoid ambiguity. Your invoices should clearly state payment terms, due dates and the consequence of late payment. If you’re unsure what must appear on your invoices, check your basic invoice requirements. Getting the basics right up front makes recovering late invoices much simpler later.

How To Calculate Statutory Interest, Fixed Sums And Recovery Costs

Here’s the straightforward method.

1) Statutory Interest Rate

The statutory interest rate is 8% above the Bank of England base rate. For the Late Payment Act, the “reference rate” is fixed for six-month periods:

• For debts becoming late between 1 January and 30 June, use the base rate as at 31 December of the previous year.
• For debts becoming late between 1 July and 31 December, use the base rate as at 30 June.

That reference rate then applies for the whole six-month period, even if the BoE changes its base rate mid-period.

2) The Daily Interest Amount

Calculate interest on the unpaid invoice amount from the first day the payment became late until the day it’s paid.

• Annual interest = invoice amount x statutory interest rate
• Daily interest = annual interest ÷ 365
• Total interest = daily interest x number of late days

Interest is typically calculated on the full unpaid amount of the qualifying debt. Note that statutory interest and compensation are not subject to VAT.

3) Fixed-Sum Compensation

For each overdue invoice, you can add a fixed-sum late payment charge:

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

This is per qualifying invoice, not per customer. If multiple invoices are late, the fixed sum applies to each one.

4) Reasonable Recovery Costs (When Appropriate)

If your reasonable recovery costs exceed the fixed-sum compensation you’re entitled to, you can claim the extra amount. This often covers third-party debt collection agency fees or legal fees that are reasonably incurred to chase the debt. Keep a clear paper trail of your costs.

Worked Example

Imagine you supplied services to a business with a £6,000 invoice due on 15 March. No payment terms beyond the due date were agreed. The customer pays on 30 May, making the payment 76 days late.

• Assume the relevant reference rate is 8% + 5.25% = 13.25% (illustrative only; check the correct base rate for the six-month period).
• Annual interest: £6,000 x 13.25% = £795.00
• Daily interest: £795 ÷ 365 ≈ £2.18 per day
• Total statutory interest: 76 x £2.18 ≈ £165.68
• Fixed-sum compensation (invoice between £1,000 and £9,999.99): £70

Total late payment additions: £165.68 + £70 = £235.68. If you also incurred debt collection costs of £150, you may be able to claim an additional £80 (the difference between £150 and the £70 fixed sum), provided those costs are reasonable.

Can You Agree Different Payment Terms In Your Contract?

Yes - and you should. The statutory regime is a safety net, but your contract remains the primary source of rights and remedies between you and your customer.

Common approaches include setting a clear payment period, establishing a contractual interest rate (for example, a specified percentage above base rate), and allowing recovery of all reasonable collection costs on an indemnity basis. You can also set admin charges for late payment, though they must be reasonable and not a penalty.

However, there are guardrails:

• Substantial remedy test: If your contract tries to remove statutory interest and compensation, it must offer a “substantial remedy” for late payment. If your clause offers a token rate or is grossly unfair to the supplier, the statutory regime can still apply.
• Public authorities: You can’t sidestep the 30-day payment period for public authorities.
• Grossly unfair terms: Any term that is grossly unfair (considering the parties’ relative bargaining positions, good commercial practice, and other circumstances) can be challenged.

If your standard terms don’t currently include a strong late payment clause, consider an amendment to update the terms you use with customers going forward. For new engagements, make sure your Terms of Trade or service agreement sets out clear, enforceable payment provisions from day one.

Practical Steps To Recover Late Payments (Without Burning Bridges)

Late payment happens, even with the best customers. Here’s a practical, professional sequence many small businesses use.

1) Sense-Check The Invoice

Double check the basics: is the customer name correct, the PO quoted, the deliverables accepted, and the due date clear? A quick sense-check avoids misunderstandings and gives you confidence to escalate if needed. If you’re revisiting your process, it may help to refresh your understanding of UK invoice law and internal workflows.

2) Send A Friendly Reminder

Start with a polite reminder a day or two after the due date. Include the original invoice, the new requested payment date, and a short note that contractual or statutory interest may apply if payment remains outstanding. Keep the tone constructive - most late payments are admin slips.

3) Follow Up With A Formal Notice

If payment doesn’t arrive, send a firmer chaser. At this stage, you can state the statutory interest and any fixed compensation now due and provide a running total. Offer a short grace period to settle the invoice to avoid further costs.

4) Issue A Letter Before Action

Before starting court action, send a formal letter before action that complies with pre-action protocols. This letter sets out the debt, your legal basis for recovery (including interest, compensation and costs), and a final deadline to pay.

5) Consider Court, Mediation Or Debt Collection

If there’s still no progress, you have options:

• Issue a small claim for the debt plus interest and costs, following the relevant pre-action steps.
• Propose mediation if there’s a genuine dispute.
• Engage a reputable debt collection agency (you may be able to recover reasonable costs above the fixed sum). In some situations, you might also decide to sell a debt to a collection agency - just make sure the commercial trade-off makes sense.

Throughout, keep records of all communications, statements and costs. This will be critical if the matter escalates.

What To Include In Your Contracts And Invoices

Prevention beats cure. Clear, well-drafted documents reduce late payment and make recovery faster if it happens.

Core Contract Clauses

• Payment Terms: Set the payment period (e.g., 14/30 days), invoicing milestones, and mechanics (PO required, e-invoicing system, etc.).
• Late Payment Interest: Specify the contractual rate (for example, a stated percentage above the Bank of England base rate), when it accrues, and how it is calculated.
• Recovery Costs: Reserve the right to recover reasonable costs of collection (legal and agency fees) on an indemnity basis.
• Suspension/Retention: Ability to suspend services or withhold delivery for non-payment, and set off rights where appropriate.
• Dispute Process: A short, pragmatic process for raising and resolving invoice disputes promptly.

If you don’t currently have robust customer-facing terms, consider putting a tailored set of Terms of Trade or Terms of Sale in place and making sure they’re incorporated into every order. Strong, consistent terms help your team enforce payment expectations fairly and lawfully.

Invoice Content And Process

• Clear Due Dates: Don’t rely only on “Net 30” - state a calendar due date.
• Reference Details: Include PO numbers, project codes or acceptance references to avoid “we can’t find it” delays.
• Late Payment Note: A short line stating that contractual or statutory interest may apply to overdue sums can focus attention.
• Clean Workflow: Assign ownership for credit control and use reminders at sensible intervals (e.g., 3, 7 and 14 days post-due).

If your invoicing is being rejected for technicalities, revisit your invoice requirements and make any process tweaks to get approved faster next time.

FAQs: Quick Answers To Common Late Payment Questions

Can I Charge Interest If My Contract Is Silent?

Yes, if it’s a qualifying B2B or public sector debt under the Late Payment Act, statutory interest and compensation can apply by default.

Can I Charge Both Contractual And Statutory Interest?

Usually you charge one regime. If your contract sets a substantial remedy (for example, a commercial interest rate and recovery costs), you rely on that. If your contract is silent or provides an unfairly low remedy, the statutory regime can step in.

Is The Fixed-Sum Compensation Per Customer Or Per Invoice?

Per invoice. Each overdue invoice gives rise to its own fixed-sum entitlement.

Do I Pay VAT On Statutory Interest Or The Fixed Sum?

No. Interest and statutory late payment compensation are not subject to VAT.

What If The Customer Disputes The Invoice?

If there’s a genuine dispute (for example, scope or quality), try to resolve it quickly. You can still send a formal chaser or pre-action letter that sets out your position. Where needed, escalate to mediation or court. If you’re updating your contracts to reduce future disputes, consider tightening your scope, acceptance and change control through a contract contract amendment.

Key Takeaways

• For B2B and public sector invoices, UK law lets you add statutory interest at 8% above the Bank of England base rate, plus fixed-sum compensation and, where appropriate, reasonable recovery costs.
• Interest typically starts the day after payment was due. If no date was agreed, payment is usually due 30 days after invoice/receipt of goods and services (and always 30 days for public authorities).
• Calculate interest using the six‑monthly “reference rate,” add the fixed-sum (£40/£70/£100) per invoice, and record any extra reasonable recovery costs.
• Strong contract terms matter. A clear, fair late payment clause in your Terms of Trade can provide a substantial remedy and reduce disputes.
• Follow a professional recovery process: reminders, a firm chaser, and a compliant letter before action before court. Keep records of all steps and costs.
• Tighten your invoicing workflow. Clear due dates, correct references and consistent follow‑ups (aligned with UK invoice law) help prevent late payment and speed up recovery.

If you’d like tailored help updating your contracts, calculating statutory interest on a tricky invoice, or planning a recovery strategy, our team can help. Reach us on 08081347754 or team@sprintlaw.co.uk for a free, no‑obligations chat.