Late Payment Penalties in the UK: Your Rights and How to Charge Interest

Late payments are one of the biggest challenges facing freelancers, small businesses, and sole traders in the UK. According to recent data, over 50,000 businesses close each year partly due to cash flow problems caused by late-paying clients. The good news is that UK law gives you robust rights to charge interest and claim compensation when a client pays late. Here's everything you need to know.

The Late Payment of Commercial Debts (Interest) Act 1998

The cornerstone of late payment rights in the UK is the Late Payment of Commercial Debts (Interest) Act 1998. This legislation applies to all business-to-business (B2B) transactions and gives suppliers an automatic, statutory right to charge interest on overdue invoices — even if your contract or invoice doesn't mention late payment penalties.

The Act was later strengthened by the Late Payment of Commercial Debts Regulations 2013, which transposed the EU Late Payment Directive into UK law. Despite Brexit, these regulations remain part of UK law and continue to protect businesses.

Statutory Interest Rate

Under the Act, you can charge statutory interest at 8% per year above the Bank of England base rate. The base rate is set by the Bank of England and reviewed periodically. To calculate the daily interest on an overdue invoice:

• Take the total invoice amount and multiply by the combined rate (8% + base rate)
• Divide by 365 to get the daily interest charge
• Multiply by the number of days the payment is overdue

For example, if the base rate is 4.5% and you're owed £5,000, the annual interest would be £5,000 x 12.5% = £625, or roughly £1.71 per day. Over 60 days late, that's £102.74 in interest alone.

Fixed Compensation Amounts

On top of statutory interest, you are entitled to claim a fixed compensation amount for the inconvenience of chasing payment. The amount depends on the size of the debt:

• £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

This compensation is payable per invoice, not per debtor. If a client has three overdue invoices of £500 each, you can claim £40 on each one — £120 in total. You can also claim reasonable debt recovery costs if they exceed the fixed compensation amount.

When Can You Start Charging Interest?

Interest begins to accrue from the day after the agreed payment due date. If your invoice states "Net 30," interest starts on day 31. If no payment terms are specified in the contract or on the invoice, the default period under the Act is 30 days from either the date the invoice was received or the date the goods or services were delivered, whichever is later.

This is why it's critical to always include clear payment terms on every invoice you send. Ambiguity only benefits the late payer.

The Late Payment Directive

The EU Late Payment Directive (Directive 2011/7/EU) was the original driver behind the 2013 regulations. While the UK has left the EU, the directive's provisions were retained in UK law through the European Union (Withdrawal) Act 2018. This means the protections remain fully enforceable. The directive introduced the fixed compensation amounts and reinforced the principle that payment terms exceeding 60 days should be the exception, not the norm.

How to Add Late Payment Clauses to Your Invoices

While the statutory right exists regardless of what your invoice says, including an explicit late payment clause makes your position stronger and signals professionalism. Your invoice should include:

• Clear payment terms: "Payment due within 30 days of invoice date" or "Due on receipt"
• Late payment notice: "Late payments will incur statutory interest at 8% above the Bank of England base rate, plus fixed compensation under the Late Payment of Commercial Debts (Interest) Act 1998"
• Your preferred payment method and bank details to remove any excuse for delay

The Debt Recovery Process

If a client still doesn't pay despite your invoice terms, follow this escalation process:

• Friendly reminder (1-7 days overdue): Send a polite email or message referencing the invoice number and due date. Often, late payment is simply an oversight.
• Formal reminder (7-14 days overdue): Send a firmer follow-up stating that interest will be applied if payment is not received within 7 days.
• Letter before action (14-30 days overdue): Send a formal demand letter stating you will pursue legal action if not paid within 14 days. Include the statutory interest and compensation accrued.
• Small claims court (30+ days overdue): For debts up to £10,000 in England and Wales, you can file a claim online through Money Claims Online (MCOL). The court fee ranges from £35 to £455 depending on the amount claimed.
• County court judgment (CCJ): If the debtor doesn't respond to the claim, you can request a default judgment. A CCJ damages the debtor's credit rating, which is often enough motivation for them to pay.

Tips to Prevent Late Payments

Prevention is always better than enforcement. Here are practical steps to reduce late payments:

• Always state payment terms prominently on every invoice — use terms like "Net 30" or "Due on Receipt"
• Send invoices promptly — the sooner you invoice, the sooner you get paid
• Offer multiple payment methods including bank transfer and card payment to make it as easy as possible
• Consider shorter payment terms — "Net 14" or "Due on Receipt" for new clients or smaller amounts
• Request deposits or milestone payments for larger projects to reduce your exposure
• Use professional invoices — a well-formatted, clear invoice is taken more seriously than a casual email

How InvoiceForge Helps You Get Paid on Time

InvoiceForge makes it simple to create professional invoices with clear payment terms built in. Every invoice you generate includes properly formatted payment terms, your bank details, and all the elements that signal professionalism to your clients. When a client receives a polished, well-structured invoice with explicit terms, they're far more likely to pay promptly.

You can customise your payment terms, add notes about late payment penalties, and generate PDF invoices that look credible and authoritative — all in under 30 seconds, completely free.