How Does the Late Payment Act Help Businesses Recover Overdue Invoices?
Yes, you can charge interest on an unpaid invoice. Within this guide we will break down in clear terms The Late Payment of Commercial Debts (Interest) Act 1998, also known as the Late Payment Act.
The impact of late payments can be felt across the UK in different ways. The financial impact alone is estimated to be £11 billion per year. £11 BILLION per year… Chasing these debts impacts internal resources. Plus, it is estimated to cost businesses 133 million hours of employee time chasing overdue invoices. To put this into perspective: there are 8,766 hours in one year.
– Source: The Department for Business & Trade: Late Payments Research
Then, there’s the unmeasurable impact: stress.
While this can’t be measured, it is felt.
“When will I get my money?”
“Can I pay my bills?”
“Can I pay my staff?”
When under financial stress, business owners face difficult questions and choices.
The financial strain, unevenly distributed resources, and stress cause 38 businesses per day to close their doors. The ones who suffer the most are SMEs. Small and Medium-sized Enterprises with under 250 employees and less than £50m turnover. In July 2025, the Government set out plans to crack down on late payments through its Small Business Plan.
No matter the size of your business, you can charge statutory interest on unpaid invoices. The Late Payment Act sets this out in clear terms.
Let’s start with how much you can charge.
Key Takeaway
The Late Payment of Commercial Debts (Interest) Act 1998 allows UK businesses to charge statutory interest and fixed compensation on overdue commercial invoices. The legislation exists to encourage prompt payment, protect cash flow, and help businesses recover some of the costs associated with late-paying customers.
How Much Interest Can I Charge on an Unpaid Invoice?
How much interest you can charge is calculated by The Late Payment Act using a simple formula.
This is simple interest; it is not compounded over time.
The rate is intentionally generous to encourage prompt payment and compensate you for the payment delay.
Interest runs from the day after the invoice becomes overdue until the day you are paid.
To calculate statutory interest:
Statutory Interest = Bank of England Base Rate + 8% per year
- The Bank of England base rate on 31 December
→ Used for debts that become overdue between 1 January and 30 June
- The Bank of England base rate on 30 June
→ Used for debts that become overdue between 1 July and 31 December
This helps keep the process fair and predictable. See The Late Payment of Commercial Debts (Interest) Act 1998.
Calculate the interest by applying:
Debt × Statutory Interest Rate × (Number of Days Late ÷ 365)
Statutory Interest Scenarios in Practice
For illustration purposes only, we’ll utilise:
- Bank of England base rate on 31 December = 5%
- Bank of England base rate on 30 June = 5.25%
| Scenario | Invoice Amount | Due Date Period | Base Rate Reference | Statutory Rate (Base + 8%) | Days Late | Interest Calculation | Interest Owed | Fixed Compensation | Total Additional Amount |
|---|---|---|---|---|---|---|---|---|---|
| 1. January–June Overdue | £10,000 | Overdue in February | 31 December (5%)* | 13% | 61 days | £10,000 × 0.13 × (61 ÷ 365) | £217.23 | £100 | £317.23 |
| 2. July–December Overdue | £5,000 | Overdue in August | 30 June (5.25%)* | 13.25% | 60 days | £5,000 × 0.1325 × (60 ÷ 365) | £108.88 | £70 | £178.88 |
| 3. Smaller Invoice Example | £1,200 | Overdue in March | 31 December (5%)* | 13% | 30 days | £1,200 × 0.13 × (30 ÷ 365) | £12.82 | £70 | £82.82 |
Implementing the Late Payment Act Before Late Payments Occur
Understanding your statutory rights is important. Implementing them before invoices become overdue is smarter.
The Late Payment Act should not first appear in your communication when frustration has already set in. In a B2B environment, it works best when it forms part of your payment terms, not your escalation strategy.
From a B2B implementation perspective, this means:
Referencing Statutory Interest in Your Terms
Your Terms and Conditions should clearly state that statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998 may be applied to overdue invoices.
This sets expectations at the outset.
It removes surprise.
It reinforces professionalism.
Even though the statutory right exists without written terms, visible reference strengthens your commercial position.
Reinforcing Payment Clarity on Invoices
Clarity prevents confusion, confusion prevents delayed payments.
Invoices should clearly display:
- The due date.
- The payment method.
- Any agreed payment period.
- A short reference to late payment interest and compensation rights.
Training Your Credit Control Process
Statutory interest should be built into your internal process, not treated as an afterthought.
Consistency matters. Sporadic enforcement weakens credibility.
Your credit control process should include:
- Monitoring due dates consistently.
- Issuing reminders promptly.
- Calculating interest accurately.
- Communicating calmly and factually.
Framing It Correctly
The Late Payment Act is not about punishment.
It exists to protect businesses from the financial strain of slow payment. When referenced calmly and professionally, it often encourages payment without damaging the relationship.
In commercial settings, clarity is rarely offensive. Surprise usually is.
What Happens if an Invoice Isn't Paid on Time?
When an invoice isn’t paid on time, the Late Payment Act gives you a multi-part set of rights:
1. Statutory Interest Begins
Interest starts to accrue from the day after the payment due date. This is a right, not a courtesy.
2. Fixed Compensation for Recovery Costs
In addition to interest, you’re entitled to claim fixed compensation to reflect the cost of pursuing late payment.
| Invoice Size | Fixed Compensation |
|---|---|
| Under £1,000 | £40 |
| £1,000 – £9,999 | £70 |
| £10,000 and over | £100 |
These amounts are designed to cover reasonable recovery costs without requiring complex calculations. The Government’s guidance sets them out as part of the debt recovery framework businesses can use.
3. Reasonable Additional Costs
If your actual costs of pursuing payment are higher than the fixed amounts, the legislation allows you to recover reasonable additional costs, provided you can justify them. This is especially relevant when legal or third-party recovery support is involved.
4. A Commercial Lever, Not Just a Statistic
When communicated thoughtfully, statutory interest and compensation often prompt payment without formal escalation.
This is because it reframes the conversation from:
“Please pay.”
to
“This is the legally recognised cost of not paying.”
That shift matters in a commercial setting.
Commercial Tips for Using Statutory Interest
Understanding your legal rights is one thing. Using them in a way that supports ongoing commercial relationships is another.
Here are a few practical considerations:
Reference Your Rights Early
Including references to statutory interest in your payment reminders and statements sets expectations without aggression.
Use Commercial Language
Rather than: “I will charge interest if you don’t pay.”
Try: “This invoice is now overdue. Under UK commercial debt legislation, a statutory interest rate of Bank of England base rate plus 8% applies from [date].”
Be Transparent
Sharing a clear calculation builds professionalism and reduces disputes.
Keep Communication Calm and Structured
Your customers are more likely to respond when the tone is factual, not confrontational.
These approaches are consistent with how the Government frames statutory interest.
Why This Matters for Your Business
Late payment is more than a numbers problem.
It affects your:
- ability to pay your own suppliers.
- cash flow certainty.
- planning and forecasting.
- internal resource allocation.
- stress levels.
By understanding and applying the Late Payment Act, you are protecting not just your invoices. By protecting your invoices, you’re protecting your business.
Take care of the pennies…
This statutory framework exists precisely to balance commercial relationships and to give suppliers a clear way to respond when payment terms aren’t honoured.
That’s not punitive.
Its commercial realism backed by law.
Final Thought
The Late Payment Act is available for you to implement as part of your credit control and debt recovery strategy.
And importantly, it does so without damaging ongoing commercial relationships when communicated with clarity and respect.
For UK businesses looking to manage cash flow strategically, statutory interest isn’t just a right.
It’s a resource.
Contact us when you need to put it in place.