UK late payment interest: the 1998 Act explained

Who can claim statutory interest

The Act implies a term into contracts for the supply of goods or services where both the supplier and the purchaser are acting in the course of a business. That includes sole traders, freelancers, partnerships, companies and public bodies. It covers the whole of the UK: England, Wales, Scotland and Northern Ireland.

It does not apply when you sell to a consumer, that is, someone buying for personal use. It also doesn't apply to some regulated financial arrangements, such as consumer credit agreements or debts secured by a mortgage or charge.

You don't need your client's agreement and you don't need a clause in your contract. The right exists automatically as an implied term of every qualifying contract.

When interest starts to run

Statutory interest starts on the day after the payment was due. Which date counts as “due” depends on your terms:

• You agreed a payment date or period (for example “30 days from invoice”): interest runs from the day after that date.
• No date was agreed: the Act sets a default of 30 days after the later of delivery (or completion of the service) and the day the client received your invoice.

Since 2013 there are also limits on how long payment terms can be. Terms of more than 60 days between businesses are only allowed if they were expressly agreed and are not grossly unfair to the supplier. Public authorities generally have to pay within 30 days.

The interest rate: base rate plus 8%

The statutory rate is 8% per year above the “reference rate”. The reference rate is the Bank of England base rate, but not today's base rate. The Late Payment of Commercial Debts (Rate of Interest) (No. 3) Order 2002 fixes it like this:

• If interest starts to run between 1 January and 30 June, use the base rate in force on the previous 31 December.
• If interest starts to run between 1 July and 31 December, use the base rate in force on 30 June.

Once set, the rate is fixed for the life of that debt. If the Bank of England raises or cuts rates while the invoice is unpaid, your statutory rate does not change. Two invoices that became late in different half-years can carry different rates.

How to calculate the interest

Statutory interest is simple interest, not compound. The daily formula is:

Interest = amount owed × (base rate + 8%) × days late ÷ 365

Use 365 even in a leap year. Count the days from the day after the due date up to and including the day you are calculating to (or the day you are paid). You cannot charge interest on the interest itself.

Fixed compensation: £40, £70 or £100

Once statutory interest starts to run, you are also entitled to a fixed sum for the cost of recovering the debt. It is set by the size of the debt:

Debt under £1,000

£40

£1,000 to £9,999.99

£70

£10,000 or more

£100

The fixed sum applies per invoice, not per client, so three late invoices can mean three fixed sums. If your reasonable costs of recovering the debt are higher than the fixed sum (for example, a collection agency's fee), you can also claim the difference.

The amounts are in pounds sterling. If you invoice a UK business in another currency you may still be entitled to compensation, but you'll need to convert it at a fair rate.

What if your contract says something different?

You and your client can agree your own remedy for late payment, such as a contractual interest rate. If that remedy is substantial, it replaces statutory interest. A clause that excludes late-payment interest altogether, or sets a rate so low it isn't a substantial remedy, is void, and statutory interest applies instead.

In practice: if your terms say nothing, statutory interest applies. If they set a clear, reasonable rate, use your contractual rate. If you have a contract with your client, PayNudge can read the payment clauses for you.

How to claim it in practice

1. Put it in your terms. Adding a line such as “We charge interest and compensation on late payments under the Late Payment of Commercial Debts (Interest) Act 1998” to your invoices sets expectations early.
2. Tell the client once it's late. State the amount owed, the rate, the daily interest and the fixed sum. Clear numbers are far more persuasive than a vague threat.
3. Send an updated statement if the debt keeps running, because interest accrues every day.
4. Escalate with a letter before action if there's still no payment. See our guide to letters before action.

You have a long time to claim: six years from the date the debt became due for contract claims in England, Wales and Northern Ireland, and generally five years in Scotland. Many freelancers choose to waive interest as goodwill once the client pays. That's fine, and mentioning your right to it is often what gets the invoice paid.

Common questions

Can I charge interest if I'm a sole trader?

Yes. The Act covers any business supplier, regardless of size or legal form, as long as your client is also acting as a business.

Does it apply to clients outside the UK?

It applies where UK law governs the contract. For EU clients, the EU Late Payment Directive gives similar rights. See our EU guide.

What about partial payments?

Interest only runs on the amount still unpaid. The simplest safe approach, and the one our calculator uses, is to charge interest on the amount outstanding today for the whole late period, which never overstates what you're owed.

Will claiming interest damage the relationship?

It depends on how you raise it. Introduce it as information, not a threat, and keep it for later reminders. Our guide on chasing overdue invoices shows how.