TRW & Co · Commercial contracts
Claiming Late Payment Interest on Commercial Debts
Late payment interest can be claimed on most overdue business-to-business invoices under the Late Payment of Commercial Debts (Interest) Act 1998, even if the contract is silent. Statutory interest runs at 8% over the Bank of England base rate, with fixed compensation of £40 to £100 per invoice, and the Commercial Payments Bill would make it mandatory.
Key pointA contractual interest clause only displaces statutory interest if it is a "substantial remedy"; a token rate such as 0.5% over base can be void, leaving the purchaser liable at 8% over base instead.
At a glance
Statutory rate
Statutory interest is simple interest at 8% a year over the Bank of England base rate in force on the preceding 30 June or 31 December.
Fixed compensation
Suppliers can add £40, £70 or £100 per invoice depending on the debt size, plus further reasonable recovery costs above that fixed sum.
Default 30 days
Where no payment date is agreed, a debt becomes late 30 days after the later of receipt of the invoice and delivery of goods or services.
Contracting out limited
A contract can replace statutory interest only with a substantial remedy; terms excluding it or giving a token rate are void to that extent.
Reform in Parliament
The Commercial Payments Bill would cap payment terms at 60 days and make statutory interest mandatory; as of October 2026 it is not yet law.
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The short answer: can you charge late payment interest?
Yes. If another business pays you late for goods or services, you can usually claim late payment interest under the Late Payment of Commercial Debts (Interest) Act 1998, even if your contract says nothing about interest. Statutory interest runs at 8 percentage points above the Bank of England base rate, and you can add a fixed compensation sum of £40, £70 or £100 per invoice, plus further reasonable recovery costs.
The right applies only to business-to-business contracts, not to consumers. It can be replaced by a contractual interest clause, but only if that clause gives a "substantial remedy". And, as of October 2026, it is about to be strengthened: the Commercial Payments Bill, now in Parliament, would make statutory interest mandatory and cap payment terms at 60 days.
This guide explains how the current rules work, how to calculate and claim, how contract terms interact with the Act and what the proposed reforms would change.
The legal framework
The Late Payment of Commercial Debts (Interest) Act 1998 implies a term into every contract for the supply of goods or services where both purchaser and supplier act in the course of a business. "Business" includes professions, government departments and public authorities. Consumer credit agreements, mortgages and other security arrangements, and employment contracts are excluded.
Under that implied term, a "qualifying debt" (the whole or part of the contract price) carries simple interest from the day after the payment becomes due. The rate is set by the Late Payment of Commercial Debts (Rate of Interest) (No. 3) Order 2002 at 8% per year over the Bank of England's official rate. The reference rate is fixed twice a year: the base rate in force on 30 June applies to interest that starts to run between July and December, and the rate in force on 31 December applies to interest starting between January and June. Scotland has its own rate order.
The Act extends across the UK and was amended in 2013 to implement the EU Late Payment Directive, adding fixed compensation and controls on long payment terms. GOV.UK's guide to late commercial payments summarises the rules for suppliers.
When is a payment late?
Section 4 of the Act sets out when statutory interest starts to run:
- Agreed payment date. If the contract fixes a payment date, interest runs from the day after that date.
- No agreed date. If no date is agreed, the debt becomes late 30 days after the later of the customer receiving the invoice and the supplier delivering the goods or performing the services.
- Public authorities. Where the customer is a public authority, terms longer than 30 days are overridden and interest runs from the end of the 30-day period.
- Long terms between businesses. Where the customer is a business, terms longer than 60 days are overridden unless the agreed date is not "grossly unfair" to the supplier.
Advance payments have their own rules on when the debt is treated as created. Where a contract contains a verification or acceptance procedure, that procedure can also affect the start date.
How to calculate late payment interest
Statutory late payment interest is simple, not compound, and is calculated daily:
- Identify the due date. Use the agreed payment date or, if none, the end of the 30-day default period.
- Find the reference rate. Take the Bank of England base rate in force on the 30 June or 31 December immediately before interest starts to run, from the Bank of England.
- Add 8 percentage points. The total is the annual statutory rate, and it stays fixed for the life of that debt.
- Work out the daily figure. Multiply the debt by the annual rate and divide by 365.
- Multiply by days late. Count from the day after the due date until payment.
- Add fixed compensation. Add £40 for debts under £1,000, £70 for £1,000 to £9,999.99, or £100 for £10,000 or more, once per invoice.
- Add reasonable costs if higher. If your reasonable costs of recovery exceed the fixed sum, you may claim the difference.
- Issue a revised invoice or demand. Set out the principal, interest to date, daily rate and compensation clearly.
GOV.UK's worked example illustrates the method: on a £1,000 debt with a base rate of 0.5%, annual interest is £85, or about 23p a day. At current base rates the figure is higher; always use the reference rate that applied when interest started.
| Size of the debt | Fixed sum per invoice | Further costs |
|---|---|---|
| Less than £1,000 | £40 | Reasonable recovery costs above £40 |
| £1,000 to £9,999.99 | £70 | Reasonable recovery costs above £70 |
| £10,000 or more | £100 | Reasonable recovery costs above £100 |
The entitlement to compensation arises under section 5A once statutory interest begins to run, and it is treated as part of the implied term.
Contractual interest and the "substantial remedy" test
Parties can agree their own late payment interest clause instead of relying on the Act. Under section 8, a contractual remedy that is "substantial" displaces statutory interest. But a term that excludes statutory interest, or provides only a token rate, is void unless the overall remedy for late payment is substantial.
A remedy is not substantial if it is insufficient to compensate the supplier or deter late payment and it would not be fair or reasonable to allow it to oust statutory interest. The court considers commercial certainty, the parties' relative bargaining strength, whether the term was imposed through standard terms and whether the supplier received an inducement. In Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC), a contractual rate of 0.5% above base was held not to be a substantial remedy, so statutory interest applied instead.
| Feature | Statutory interest | Contractual interest clause |
|---|---|---|
| Rate | 8% over the reference rate | As agreed; must be substantial to oust the Act |
| Compensation | £40, £70 or £100 plus reasonable costs | As agreed; may be combined with fixed costs |
| Need for a clause | None; implied by law | Must be clearly incorporated |
| Risk | Can be reduced by the court for supplier misconduct | Void if not a substantial remedy; may be challenged as a penalty if excessive |
| Best for | Suppliers without negotiated terms | Parties wanting certainty, compounding or a different rate |
For most suppliers, the safest course is either to say nothing about interest or to state expressly that statutory interest and compensation apply. Our guide to business terms and conditions explains how to incorporate payment terms properly.
How to claim in practice
Claiming late payment interest does not require court proceedings. Most suppliers add it to a reminder or a revised invoice. If payment still does not arrive, a formal letter before claim should set out the principal, statutory interest to date and the daily rate going forward, and the fixed compensation.
If the debt is undisputed and over the statutory minimum, a statutory demand may be an option for companies. Otherwise, a money claim can be issued in the county court or, for larger sums, the High Court, including the statutory interest and compensation. Our guide to recovering unpaid invoices sets out the full route, and our debt recovery solicitors can act for you.
Statutory interest and court interest
Courts have a general discretion to award interest on debts, but where the 1998 Act applies, claimants usually plead late payment interest under the Act because the rate is higher and the entitlement is automatic. The Act does not let a supplier recover twice for the same period: section 3 provides that statutory interest does not run on a sum that already carries interest under another enactment, or where the supplier has exercised another legal right to interest on it. Choose one basis for each period and state it clearly in the particulars of claim.
Disputed invoices
Statutory interest attaches to the contract price when it falls due. If the customer disputes part of an invoice in good faith, the undisputed balance should still be paid on time, and interest can run on any amount later found to be due. Keep a clear record of what was invoiced, what was queried and when, so that late payment interest can be calculated on the correct sum.
Remember time limits. A claim for a contract debt in England and Wales must generally be issued within six years of the date the cause of action arose; see our guide to limitation periods.
Many suppliers do not claim statutory interest for fear of damaging the relationship. A middle path is to state on every invoice that statutory interest and compensation will apply, then waive it selectively. That preserves the right, signals seriousness and gives you something to concede in negotiation.
The Commercial Payments Bill: what is changing
As of October 2026, the Commercial Payments Bill is before Parliament. It was introduced in the House of Lords in May 2026, following a consultation that ran from July to October 2025 and a government response in March 2026, and had reached Lords third reading by 20 October 2026. It must still pass the House of Commons and receive Royal Assent. The government's overview factsheet says the bill would:
- impose maximum payment terms of 60 days, with strictly limited exemptions;
- make late payment interest at 8% over base rate mandatory, so it cannot be contracted out of;
- give suppliers a right to a fixed sum where a customer raises a dispute late or without enough detail;
- prohibit retentions under construction contracts, with timing subject to further consultation;
- give the Small Business Commissioner powers to investigate persistent late payers, adjudicate payment disputes between small and larger businesses, and impose directions and financial penalties.
The government has said there will be a lead-in period and that the measures will not apply retrospectively. No commencement dates have been set. Businesses should treat the reforms as likely but not yet law, and review standard terms now so they are ready.
What purchasers should do
Businesses that buy on credit should audit their payables processes. Long approval chains, purchase-order mismatches and month-end payment runs are common causes of avoidable late payment interest. Large companies already report payment performance publicly, and the reforms would add scrutiny of persistent late payers, so the reputational as well as the financial cost of late payment is rising.
An illustrative scenario
This scenario is illustrative only; the parties are generic.
A London design agency invoices a retail group for a completed project. The contract sets payment at 30 days and is silent on interest. The retailer pays four months late, citing an internal approval delay.
The agency is entitled to statutory interest from the day after the 30-day due date, at 8% over the base rate in force on the relevant reference date, plus £100 fixed compensation because the invoice exceeds £10,000. Its in-house time spent chasing is unlikely to count as extra recoverable cost, but external collection fees may. After a short letter setting out the figures, the retailer pays the principal and negotiates a reduction in interest. If the bill becomes law, a later dispute raised without detail might also trigger the new fixed sum.
Risks and common mistakes
Agreeing a weak interest clause
Some purchasers' standard terms set interest at a nominal rate, such as 1% over base. Suppliers sometimes assume this removes the right to statutory interest. If the clause is not a substantial remedy, it is void to that extent and statutory interest applies. Purchasers, conversely, should not rely on a token rate to cap their exposure. Under the proposed reforms, contracting out of statutory interest would no longer be possible at all.
Claiming from consumers
The Act applies only where both parties act in the course of a business. Sole traders and partnerships are businesses, but individuals buying for personal use are consumers. Interest can be claimed from consumers only if the contract provides for it and the term is fair under consumer protection law. Applying statutory rates and fixed sums to consumer invoices is a common error that can undermine a later court claim.
Using the wrong reference rate
The rate does not move with every change to base rate. It is fixed for each debt by reference to the base rate on 30 June or 31 December immediately before interest starts. Using today's base rate for an old debt, or compounding interest, will overstate the claim and can damage credibility with the debtor and the court. Keep a simple calculation schedule for each invoice.
Supplier conduct reducing interest
Under section 5, the court can remit statutory interest in whole or part where the supplier's conduct makes that just, for example delay in invoicing or in pursuing the debt, or failure to correct an invoice the customer properly queried. Issue accurate invoices promptly, respond to queries and keep a record of chasing so the claim is not reduced.
Cross-border contracts
Section 12 contains anti-avoidance rules. The Act does not apply where parties choose UK law but the contract has no significant connection with the UK and, without that choice, foreign law would apply. Conversely, it does apply despite a choice of foreign law where UK law would otherwise govern and the contract has no significant connection with any other country.
For exporters and importers trading between the UK and Bangladesh, the Gulf or Asia, the practical question is enforcement. A late payment interest award in an English judgment or arbitration award must then be enforced where the debtor's assets are. Our guide to enforcing a UK judgment in Bangladesh explains that process.
Checklist and next steps
- Confirm the contract is business-to-business and identify the payment date.
- Check whether the contract has its own interest clause and whether it is a substantial remedy.
- Calculate statutory interest using the correct reference rate, and add fixed compensation per invoice.
- Send a clear demand showing principal, interest, daily rate and compensation.
- Keep invoices accurate and chasing records complete.
- Review standard terms against the Commercial Payments Bill, especially payment terms over 60 days.
Our commercial contracts solicitors can update your terms, and our contract disputes team can pursue overdue debts. Contact our London office to discuss a claim.
Frequently asked questions
01What is the statutory late payment interest rate in the UK?
For business-to-business debts, statutory interest is 8% a year above the Bank of England base rate. The base rate used is the one in force on 30 June for interest that starts to run between July and December, and on 31 December for interest starting between January and June. The rate is then fixed for that debt. It is simple interest, calculated daily, and runs from the day after the payment was due until it is paid.
02Can I charge late payment interest if it is not in my contract?
Yes. The Late Payment of Commercial Debts (Interest) Act 1998 implies a term into business-to-business contracts for goods and services, so statutory interest and fixed compensation apply even if the contract says nothing. You cannot claim statutory interest where the contract provides a different interest rate that amounts to a substantial remedy. If the contractual rate is too low to be a substantial remedy, that clause is void and statutory interest applies instead.
03How much compensation can I claim for a late invoice?
Once statutory interest starts to run, you are entitled to a fixed sum for each invoice: £40 if the debt is under £1,000, £70 if it is between £1,000 and £9,999.99, and £100 if it is £10,000 or more. If your reasonable costs of recovering the debt exceed the fixed sum, you can also claim the difference. The fixed sum can be claimed only once per payment, in addition to statutory interest.
04Can I claim late payment interest from a consumer?
Not under the 1998 Act, which applies only where both parties are acting in the course of a business. If you want to charge interest to consumers, the right must be in the contract and the term must be fair under the Consumer Rights Act 2015. Sole traders and partnerships acting for business purposes are businesses, so the Act can apply to them, but individuals buying for personal use are consumers.
05What will the Commercial Payments Bill change?
The bill, introduced in May 2026 and still before Parliament as of October 2026, would cap payment terms at 60 days with limited exemptions, make statutory interest at 8% over base rate mandatory, give suppliers a fixed sum where a dispute is raised late or without detail, ban construction retentions and give the Small Business Commissioner powers to investigate, adjudicate and fine. The government has promised a lead-in period, and the measures will not apply retrospectively.
06How long do I have to claim late payment interest?
A claim for a contract debt, including statutory interest, must generally be issued within six years of the date the cause of action arose under the Limitation Act 1980. Interest continues to accrue until payment or judgment. In practice, claim interest when you first chase the debt, because delay can weaken your position and the court can reduce statutory interest where the supplier's conduct, such as slow invoicing, makes that just.
Sources and official materials
- Late Payment of Commercial Debts (Interest) Act 1998 — Statutory interest, compensation and contracting-out rules
- Late Payment of Commercial Debts (Rate of Interest) (No. 3) Order 2002 — Rate of 8% over the official dealing rate
- GOV.UK: Late commercial payments — Payment periods, interest and recovery costs
- Commercial Payments Bill: overview factsheet — Government summary of proposed reforms
- UK Parliament: Commercial Payments Bill [HL] — Bill stages and documents
- Bank of England: Bank Rate — Current and historic base rates
General information only, current as at 21 October 2026. It is not legal advice and does not create a solicitor–client relationship. It reflects the law of England and Wales unless stated otherwise; Scotland and Northern Ireland have separate legal systems, and the law changes frequently. Check current official sources and take advice on the facts of your matter.