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Charging Interest on Late Payments

Receiving late commercial payments often interrupts company cash flow. Hence, when a payment becomes late, it can affect liquidity for your business.

This guide explains how much interest you can charge on overdue invoices and the current costs for recovering debt (according to late payment legislation).

When Can You Charge Interest on Invoices?

Charging late payment fees is legal in the United Kingdom. So, when does a commercial payment actually become delayed or overdue?

Account managers often have difficulties when other companies and customers fail to pay for their goods or service on time.

The Late Payment of Commercial Debts (Amendment) Regulations 2018 allows you to claim interest, and costs incurred, for recovering a debt.

In most cases, commercial transactions will have an agreed payment date. As a rule, it should be within 30 days for public authorities and up to 60 days for standard business transactions.

Here's exactly how it works:

You might already have an agreement of when the money should get paid. If not, the law makes a payment late after thirty (30) days (either):

Note: The law allows agreements of longer periods than thirty (30) days. But, periods that are longer than sixty (60) days must be fair to both businesses.

Statutory Interest Rate 2021

According to UK employment laws, businesses can legally charge an amount of 'statutory interest' when another business is late paying for goods or services.

The current statutory interest rate is 8% plus the Bank of England base rate for B2B transactions. But, statutory interest will not apply if an existing contract states a different rate of interest.

Note: Contracts with public authorities cannot use a lower interest rate. Always check the Bank of England base rate for current rates.

Calculating Interest on Late Payments

An Example:

A company owes your business £1,000 for goods sold and the current Bank of England base rate for B2B (business to business) transactions is 0.25%.

In this example, the total amount of statutory interest would be 8% plus 0.25% (8.25%).

  1. Multiply £1,000 by 0.825 to calculate the annual statutory interest (£82.50).
  2. Divide £82.50 by 365 to get the daily interest of 22p (£82.50 / 365 = 0.22).
  3. Being sixty (60) days late would make the amount claimable £13.56 (60 x 0.22 = £13.56).

Note: You should send out a revised invoice showing the new amount if you choose to charge additional interest to late commercial payments owed to your company.

Claiming Debt Recovery Costs on Late Payments

Often, trying to recover a late commercial payment will incur some extra costs. That is why you can also charge a fixed sum for recovering a business debt.

Thus, you can add this amount on top of any interest that you are claiming from the customer as compensation for a late payment.

The amount of debt owed will determine how much a business can charge to recover it.

Note: Late commercial payment legislation sets these amounts in statute. The same rules apply to suppliers and allows them to claim for reasonable costs each time they try to recover a debt.

Related Help Guides

Government Strengthens Prompt Payment Code

The introduction of new reforms to the Prompt Payment Code (PPC) should protect more jobs by cracking down on delayed invoices owed to small businesses.

As a result, all companies signed up to the PPC will have an obligation to pay small businesses within a period of thirty (30) days.

Important: The Department for Business, Energy and Industrial Strategy produces further guidance on the amended late payment legislation (it has been in force since the 16th of March 2013) and implements the European Directive 2011/7/EU.


UK Rules for Charging Interest on Overdue Invoices

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