You’ve chased the invoice three times. It’s now weeks overdue. Did you know you have a legal right to charge interest on that late payment? Most small businesses don’t realise this — or feel awkward using it. Here’s what the law says and whether it’s worth doing.
Your Statutory Right
Under the Late Payment of Commercial Debts (Interest) Act 1998, UK businesses can charge interest on overdue invoices to other businesses. This isn’t something you need to negotiate or put in your contract — it’s automatic.
The key word is “commercial.” This right applies to business-to-business (B2B) transactions. You can’t charge statutory interest to individual consumers — different rules apply there.
How Much Can You Charge?
The statutory interest rate is the Bank of England base rate plus 8%. With the base rate at 4.75% (as of late 2024), that means you could charge 12.75% annual interest on overdue amounts.
Interest is calculated from the day after payment was due, running until the debt is cleared. The formula:
Amount owed × interest rate ÷ 365 × days overdue
So on a £1,000 invoice that’s 30 days late at 12.75%:
£1,000 × 0.1275 ÷ 365 × 30 = £10.48 interest
It’s not a fortune on smaller invoices, but it adds up — and sends a clear message.
Compensation on Top
As well as interest, you can claim a fixed sum for debt 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
This is compensation for the hassle of chasing, and you can claim it even if your actual costs were lower (or nothing). On smaller invoices, this fixed amount often exceeds the interest itself.
Do You Need to State This on Your Invoice?
No. Statutory rights apply automatically whether you mention them or not. However, adding a note like “We reserve the right to charge interest on overdue invoices under the Late Payment of Commercial Debts Act” reminds clients and shows you know your rights.
Some businesses include the specific rate: “Late payments may incur interest at 8% above Bank of England base rate plus statutory compensation.”
Should You Actually Use It?
This is where it gets practical. Just because you can charge interest doesn’t mean you always should.
Reasons to charge:
- Repeat offenders who ignore payment terms
- Large overdue amounts hurting your cash flow
- Clients who take advantage of your flexibility
- Situations where the relationship is already strained
Reasons to hold back:
- A normally reliable client who’s late once
- Small amounts where the admin outweighs the benefit
- Clients you want to keep long-term
- Genuine hardship situations
Many businesses use interest as a warning rather than actually invoicing it. Mentioning in your chaser email that you “may need to apply statutory interest if payment isn’t received by [date]” often prompts action without souring the relationship.
How to Apply the Charges
If you decide to charge, send a separate invoice or add a line to your next invoice showing:
- The original invoice number
- Days overdue
- Interest calculated
- Compensation amount
Keep your calculation clear so the client can verify it.
The Bigger Picture
Late payment interest isn’t about squeezing extra money from clients. It’s about protecting your business and encouraging respect for your payment terms. Even if you rarely use it, knowing your rights gives you confidence when chasing — and that confidence comes through in your communications.
For current Bank of England base rate, check bankofengland.co.uk.