Alex is Sprintlaw's co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
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If you run a small business or startup in the UK, you’ve likely faced late payments from clients or customers at some point. It’s incredibly frustrating – not to mention the impact it can have on your cash flow, your ability to pay staff and suppliers, and your peace of mind.
Fortunately, UK law gives businesses a clear way to deal with late-paying customers: charging statutory interest and recovering debt collection costs. But when are you entitled to do this, and how can you set things up so you’re legally protected and get paid faster?
Getting your legal basics sorted can make all the difference. In this guide, we’ll break down everything you need to know about late payment interest in the UK, how it works, what the rules are, and share clear steps for protecting your business from day one.
What Is Statutory Interest on Late Payments?
Statutory interest is the legal right to charge interest on overdue invoices in business-to-business transactions, even if your contract doesn’t mention it. This right is set out under the Late Payment of Commercial Debts (Interest) Act 1998.
The goal is simple: to encourage timely payment and compensate you when customers delay settling their bills. Statutory interest is not just a penalty – it actually helps offset your financial losses when clients pay late.
Here’s how it works in practice:
- Interest rate: 8% above the Bank of England base rate
- Applies to: Most business-to-business contracts for the supply of goods and services
- Additional recovery: Fixed sums for each late invoice, plus reasonable costs if your debt recovery costs go beyond the fixed amount
That means if your customer pays you late, you can charge them interest at this rate – unless your contract already provides for a “substantial remedy” that isn’t obviously unfair or excessive.
Knowing when and how to apply statutory interest can help you stay on top of late payments and prevent them derailing your business plans. Let’s look at the details.
When Does Statutory Interest Apply?
Statutory interest isn’t automatic in every late payment situation, so it’s important to understand when you can use it. Here are the main conditions:
1. The Debt Must Be Commercial
Statutory interest only applies to business-to-business transactions – where both sides are acting in the course of business. If you’re dealing with consumers (private individuals buying for personal use), these rules don’t apply.
2. The Debt Must Be for Goods or Services
The rules kick in for agreements involving the supply of goods or services. It doesn’t matter whether it’s a physical product or digital service – as long as it’s a business contract, you may be entitled to claim.
3. The Invoice Must Be Overdue
You can’t claim statutory interest until the invoice is officially late. By law, unless the contract says otherwise, payment is due:
- 30 days after: Receiving the invoice, or
- 30 days after: Receipt of goods/services (if later than the invoice date)
For contracts with agreed payment terms, those terms take priority – as long as they are not “grossly unfair”.
4. No Adequate Contractual Remedy Exists
If your contract already allows for interest on overdue invoices, that will apply instead of statutory interest – unless it’s so minimal that it doesn’t provide a “substantial remedy” for your business. (We’ll explain more about this below.)
5. Some Exceptions Apply
Certain contracts are excluded from the late payment interest rules, such as some financial services contracts, mortgages, or where another specific law takes priority. Always check your situation before relying on the statutory scheme.
To get a clearer sense of your rights, you can read more in our guide Consumer Protection Laws UK, which covers other types of payment situations.
What Is the Current Rate of Statutory Interest?
The statutory interest rate is set at:
- 8% above the Bank of England base rate
This rate changes if the Bank of England updates its base rate, so it’s wise to check the current figure before invoicing your customer for interest.
Example: If the Bank of England base rate is 5.25%, statutory interest will be 13.25% per annum. You can apply this interest for every day the invoice remains unpaid after the due date.
How Is Statutory Interest Calculated?
Here’s a quick formula for calculating statutory interest on a late invoice:
Interest owed = (Debt amount) x (Statutory interest rate) x (Number of days late) / 365
So, if your client owes you £2,000, pays 40 days late, and the interest rate is 13.25%, your calculation would be:
- £2,000 x 0.1325 x 40 / 365 = £29.04
You would be entitled to charge your client £29.04 in interest on top of the £2,000 debt.
Can You Claim Debt Recovery Costs Too?
Yes – under the Late Payment of Commercial Debts (Interest) Act 1998, you can also claim a fixed sum for debt recovery costs for each overdue payment:
- £40 for debts up to £999.99
- £70 for debts from £1,000 to £9,999.99
- £100 for debts of £10,000 and above
If your actual debt collection costs are higher than this fixed amount, you may also recover the “reasonable” extra costs directly related to recovering the debt.
It’s a useful tool to have in your kit – particularly for small businesses that want to recoup at least some of the costs of chasing late payers. For more about handling negative payment situations, see our advice on Dealing with Negative Online Reviews and business cash flow.
What About Interest Clauses in Commercial Contracts?
Many businesses include their own “interest on late payment” clauses in contracts or terms and conditions. These set out what will happen if a client misses a payment deadline, and can sometimes have extra details or different rates than statutory interest.
Why Include a Contractual Interest Clause?
- Clear rules for your clients: Lets customers know upfront you expect timely payment – and will act if they’re late.
- Easier to enforce: If interest terms are spelled out in writing and agreed, you have a stronger position if you have to take further action.
- Tailored to your business: You decide the rate, how and when it's applied, and can set stricter (but reasonable) terms if needed.
How Do Contractual Clauses Interact with Statutory Interest?
If your contract includes an interest clause that provides a “substantial remedy” for late payment, the statutory rate won’t apply.
However, if your clause sets no interest, or a token rate (for example, 0.5% per annum), you can still claim statutory interest if the contractual remedy is considered inadequate by a court.
On the other hand, if your contract tries to set a rate that’s unreasonably high – say, 40% interest on late payments – a court could judge this to be a “penalty clause” and refuse to enforce it. The law aims for fairness both ways.
For guidance on writing enforceable contracts for your UK business, check out our article How To Write Website Terms & Conditions or speak with us about the right service agreements for your needs.
What Are the Legal Limits on Charging Interest for Late Payment?
Interest terms (whether statutory or contractual) are subject to certain legal checks. Here are the main things you need to know:
- “Substantial remedy” rule: A contract must offer a remedy for late payment that’s fair – not a token or punitive amount. If not, statutory interest can apply.
- Unfair contract terms: Under the Consumer Rights Act 2015 and other legislation, terms in small business contracts must not be “unfair,” or they may be unenforceable.
- Excessive interest rates: Courts won’t enforce a rate that is clearly disproportionate or intended as a penalty rather than genuine compensation.
- Express exclusions: You can agree to exclude statutory interest in your contract if you provide a fair alternative (such as an agreed interest clause).
It’s a balancing act – you want to protect your own cash flow, but also stay onside with contract law and fair business practices. For this reason, we always recommend professional legal advice when setting your payment and interest policies.
How Do You Enforce Late Payment Interest in Practice?
It’s one thing to be legally entitled to charge interest or recovery costs. Actually recovering them is another, so here are some steps you should consider:
1. Set Expectations Upfront
Include interest-on-late-payment clauses in your contracts, terms and conditions, and on your invoices. If your customers know you have a policy of charging interest, they’re often more likely to pay on time.
2. Invoice Promptly and Clearly
Send invoices promptly, specify the payment due date clearly, and detail what will happen if payment is late. Use tools or accounting software to track overdue payments.
3. Send Reminders
Follow up early with polite reminder emails or calls – often, a gentle nudge is all that’s needed. Reference your interest policy in your communications if needed.
4. Demand Letter
If payment is still overdue, consider sending a formal letter requesting immediate settlement, including the late payment interest and any fixed charges. It helps to reference the Late Payment of Commercial Debts (Interest) Act 1998 here.
5. Consider Further Action
If your customer still refuses to pay, you can consider formal debt recovery (using the court or a debt collection agency). Always weigh the costs, customer relationship, and likely outcome before taking this step.
Our detailed guide on Ensuring Your Clients Pay offers more tips on collecting invoices and protecting your business.
How Can You Prevent Late Payment Problems?
While statutory interest is helpful, it’s far better to avoid late payments in the first place. Here are some simple steps to safeguard your business:
- Have strong contracts: Use well-drafted contracts with clear payment, interest, and dispute resolution terms. Check out our guide on contracts and obligations for more.
- Set payment expectations: Make sure customers understand your payment terms before you begin any work or deliver goods.
- Invoice efficiently: Send invoices quickly. Consider automated reminders and tracking for overdue payments.
- Screen customers: Where practical, run credit checks on new business customers or ask for deposits with new clients.
- Seek professional legal help: Have your contracts and credit procedures reviewed by a lawyer, to make sure you’re protected from day one. Our Contract Review team can assist with this.
Key Takeaways
- Statutory interest lets UK businesses charge 8% above the Bank of England base rate on late business-to-business payments (under the Late Payment of Commercial Debts (Interest) Act 1998).
- You can also claim fixed debt recovery costs (£40, £70, £100) depending on the invoice amount, and reasonable extra costs if applicable.
- Use clear contractual interest clauses to set expectations and open your options should a payment be late, but make sure your clauses are fair and legally enforceable.
- If a contract doesn’t specify interest on late payment, you can fall back on the statutory rate – unless your contract offers a fair “substantial remedy”.
- Be proactive: include interest terms in your standard contracts, invoice promptly, and communicate clearly about payment deadlines and consequences.
- If you need to recover unpaid debts, follow up in writing and consider seeking professional legal support for more complex cases.
- Getting your legal basics right from the start is your best defence against late payments – protecting your cash flow and helping your business grow with confidence.
If you’d like tailored advice on late payment interest, drafting strong payment terms, or recovering debts, reach out to our friendly Sprintlaw team for a free, no-obligations chat. You can contact us at 08081347754 or team@sprintlaw.co.uk – we’re here to help you stay protected and focus on growing your business with confidence.
