Late Payment Interest UK

Quick answer

Under the Late Payment of Commercial Debts (Interest) Act 1998, a UK business that is not paid on time by another business or a public authority is entitled to claim statutory interest on the late amount. The statutory rate is the Bank of England base rate plus 8 percentage points. The creditor can also claim a fixed sum for debt recovery costs (£40, £70, or £100 depending on the size of the debt) and, where costs exceed the fixed sum, reasonable recovery costs. Interest normally starts to run the day after the payment became late, unless the contract sets a different (but not grossly unfair) credit period.

What the 1998 Act does

The Late Payment of Commercial Debts (Interest) Act 1998 gives businesses a statutory right to interest on overdue commercial debts. It applies to contracts for the supply of goods or services where both the supplier and the purchaser are acting in the course of a business, and to contracts where the purchaser is a public authority. It does not apply to consumer contracts or to certain excepted categories such as consumer credit agreements and some construction contracts, which have their own payment regimes.

The Act implies a term into qualifying contracts that interest is payable on late payments. A payment is "late" when the agreed credit period has expired, or - if no credit period is agreed - at the end of a default period of 30 days after the later of the performance of the obligation or the day the debtor receives notice of the amount owed (section 4).

The statutory interest rate: base rate + 8%

The rate of statutory interest is set out in the Act and related orders as the official dealing rate of the Bank of England (the "base rate") in force on the relevant date, plus 8 percentage points. The reference rate is fixed twice a year - on 30 June and 31 December - and applies for the following six months. The statutory rate is deliberately high: it is intended to compensate the creditor and to deter late payment, rather than simply to reflect the cost of borrowing.

Because the base rate changes, the amount of interest owed on a debt can change between the six-month reference periods. If a debt spans a 30 June or 31 December reference date, the interest is usually calculated using the rate in force on each day, so you may need to split the calculation. This is why using a calculator that applies the current reference rate is safer than estimating.

Fixed compensation and recovery costs

In addition to interest, the Act entitles the creditor to a fixed sum for the reasonable costs of recovering the debt. The amounts are set out in section 5A:

• £40 for a debt of less than £1,000;
• £70 for a debt of £1,000 to £9,999.99;
• £100 for a debt of £10,000 or more.

These fixed sums are payable in addition to the interest and in addition to any other recovery costs that can be shown. If the creditor's reasonable recovery costs exceed the fixed sum, the creditor can claim the excess under section 5A(2A), provided the costs are reasonable. The fixed compensation applies per invoice or per debt, so a business owed several unpaid invoices can potentially claim the fixed sum for each one.

When interest starts to run

For contracts made on or after the commencement of the relevant provisions, statutory interest runs from the day after the "relevant day". The relevant day is normally the day after the credit period ends. If the contract specifies a credit period, that controls; if it does not, the default 30-day period applies. For public authority contracts, the payment period is capped at 30 days in most cases, and longer contractual terms that are "grossly unfair" to the supplier can be challenged. A term is grossly unfair if it deviates grossly from good commercial practice and is contrary to good faith (section 4 and related provisions).

Worked example: a £5,000 invoice

Use the late payment interest calculator UK to compute the exact interest using the current Bank of England reference rate, then add the fixed compensation for your debt band.

What the Act does not cover

The 1998 Act does not apply to consumer debts, and it has several carve-outs. Certain contracts are excluded entirely, including consumer credit agreements, mortgages, and some construction contracts. Interest under the Act is also subject to the general rule that a contractual right to a "substantial remedy" for late payment can displace the statutory right in some circumstances, although a term that tries to remove the statutory right without providing a substantial alternative is void (section 8). Businesses should check their own terms, because a contract that already provides meaningful late-payment interest may reduce reliance on the statutory scheme.

Public sector and the Prompt Payment Code

Public authority contracts are subject to stricter payment rules: in most cases the payment period cannot exceed 30 days, and interest and compensation run automatically if the authority pays late. Separately, the voluntary Prompt Payment Code, administered by the Office of the Small Business Commissioner, commits signatories to pay suppliers within agreed terms (and small suppliers within 30 days). Signing the Code is voluntary, but many large businesses and public bodies subscribe to it.

Step-by-step: claiming statutory late payment interest

1. Confirm the debt is a qualifying commercial debt (business-to-business or public authority) and not in an excluded category.
2. Identify the due date from your contract or the default 30-day period.
3. Count the days late from the day after the relevant day to the date of payment.
4. Apply the statutory rate (Bank of England base rate + 8%) for the correct reference periods.
5. Add the fixed compensation (£40/£70/£100) and any reasonable recovery costs.
6. Invoice the debtor for the interest and compensation, and keep records. Use the late payment interest calculator to produce the figure.

Key takeaways

• Statutory late payment interest is the Bank of England base rate plus 8 percentage points.
• The right comes from the Late Payment of Commercial Debts (Interest) Act 1998 and applies to commercial debts, not consumer debts.
• Interest normally starts after the agreed credit period or a 30-day default period.
• Creditors can also claim a fixed compensation sum of £40, £70, or £100, plus reasonable recovery costs.
• The base rate reference is fixed on 30 June and 31 December each year.

Related guides

• Invoice Due Date Net Terms
• Business Days vs Calendar Days
• FCA Complaint Response 8 Weeks

References

• Late Payment of Commercial Debts (Interest) Act 1998 (legislation.gov.uk)
• Late Payment of Commercial Debts (Interest) Act 1998, section 5A (legislation.gov.uk)
• Bank of England - Bank Rate
• Office of the Small Business Commissioner - Prompt Payment Code
• GOV.UK - Late commercial payments: charging interest and debt recovery