Charging interest
on late payments

Yes, in most business cases. The Late Payment of Commercial Debts (Interest) Act 1998 gives a business the right to charge interest when another business pays late, and to add a fixed sum towards the cost of recovering the debt. You do not have to have mentioned interest in your terms. You can also choose not to claim it, which many small businesses do to keep a relationship going.

Who you can charge

Statutory interest applies to contracts between businesses, including sales to public sector bodies. It does not apply to sales to consumers. With a private customer, you can charge interest only if the contract clearly said so and the term is fair.

It also does not apply where your contract sets its own rate of interest for late payment. If your terms say 2% a month, that rate replaces the statutory one. You cannot use a lower rate than the statutory one in a contract with a public authority.

How much interest

The rate is 8% a year plus the Bank of England base rate. The base rate you use is not today's: it is the base rate in force on the 30 June or 31 December immediately before the day interest starts to run, and it stays fixed for that debt. Interest starts the day after the payment was due.

To work it out, multiply the debt by the rate to get a year's interest, divide by 365 for a day's interest, and multiply by the number of days late. GOV.UK's example uses a £1,000 debt at a 0.5% base rate: £85 a year, about 23p a day. The late payment interest calculator applies the right base rate for your due date automatically.

Fixed compensation

On top of interest, you can charge a fixed sum for each late payment, set by the debt's size:

You can charge it once per payment. If recovering the debt costs you more, you can also claim reasonable costs beyond the fixed sum.

How to claim it

Send the customer a new invoice for the interest and compensation. Show the original invoice number, the amount, the due date, the days late, the rate used and the daily figure, so the customer can check the sum. GOV.UK suggests sending a new invoice when you decide to add interest. If the debt goes further, include the same figures in a letter before action.

When interest stops

Interest keeps running every day until the debt is paid. If the customer pays the original invoice but not the interest, the interest invoice is a debt in its own right. Compensation does not grow with time: it is one fixed sum per late payment, however late.

Should you charge it?

Claiming interest is a right, not an obligation. Some businesses mention it in their terms and claim it only from persistent late payers; others waive it when a good customer pays late once. Telling customers up front that you will charge it is often enough to change their behaviour.

Interest on your own tax

This is interest between businesses. Interest HMRC charges on late tax is different: a different rate, set under different rules. See HMRC late payment interest.

A worked example

A graphic designer's £2,400 invoice to a marketing agency was due on 31 March 2026 and paid on 30 April. Interest started on 1 April, so the reference date is 31 December 2025, when the base rate was 3.75%. The rate is 11.75% a year: about £0.77 a day, £23.18 for the 30 days, plus £70 compensation, £93.18 in all.

The statutory rate over the last three years

Because the base rate is fixed on each 30 June and 31 December, the statutory rate changes at most twice a year. These are the rates that apply to debts where interest started in each half-year.

Statutory late payment interest rate by half-year

• Jan to Jun 202413.25%
• Jul to Dec 202413.25%
• Jan to Jun 202512.75%
• Jul to Dec 202512.25%
• Jan to Jun 202611.75%
• Jul to Dec 202611.75%

Interest and compensation on typical invoices

For a debt falling due in the first half of 2026, at 11.75% a year:

The late payment interest calculator works out the exact figure for any amount and dates, using the right base rate for your debt.

Writing the interest invoice

Show everything the customer needs to check your figures, so there is nothing to query:

• the original invoice number, date, amount and due date
• the date interest started, the day after the due date
• the reference date and base rate used, and the statutory rate
• the number of days and the daily interest
• the interest to date, the fixed compensation and the total

Number the interest invoice in your normal sequence. If the customer pays the original invoice but ignores the interest invoice, the interest remains owed, and it can be included in a letter before action and a court claim; see small claims for an unpaid invoice.

Contract rates instead of statutory interest

You can set your own late payment rate in your terms, such as 2% a month. If you do, it replaces statutory interest. The Act protects suppliers from terms that give too little: a contractual remedy must be substantial, and one that is not can be set aside in favour of statutory interest. And with a public authority you cannot agree a lower rate than the statutory one. For most small businesses, relying on statutory interest is simpler than drafting a rate of your own. The guide on the Late Payment of Commercial Debts Act covers the rules in more depth.

Deciding whether to claim

Claiming is a right, not a duty, and small businesses weigh it case by case. A useful way to decide:

• A good customer, late once. A reminder usually does it. Waiving interest costs little and keeps goodwill.
• A customer who is regularly late. Tell them that from now on you will add statutory interest and compensation, then do it. Most start paying on time.
• A customer who has stopped responding. Claim interest and compensation from the start of the formal stages; they strengthen a letter before action.
• A large customer squeezing small suppliers. The law was written for exactly this. Claiming is reasonable, and the Small Business Commissioner can help with payment complaints against larger businesses.

Whichever you choose, keep your own records of how late each customer paid. The pattern tells you which terms to offer next time; see invoice payment terms.

Consumers are different

The Act does not cover sales to consumers. If you want to charge a household customer interest on late payment, it must be a clear term of your contract, agreed before the work, and it must be fair under consumer law. Many trades simply ask households for payment on completion, or a deposit up front, rather than relying on interest.

Interest and your tax

Interest and compensation you receive from customers are part of your business income, so record them with your other income. If you are VAT registered, statutory interest and compensation are generally outside the scope of VAT, as they are not payment for a supply; show them without VAT on the interest invoice.

Common questions

Can I charge interest from the invoice date? No, from the day after the payment was due.

What if the base rate changes while the debt is unpaid? The rate stays fixed for that debt at the rate set by its reference date.

Can I charge compensation on every reminder? No. The fixed sum is charged once for each late payment, whatever the number of reminders.

Should I mention interest in my payment terms? It is not required for business customers, but it helps: see invoice payment terms and how to chase an unpaid invoice.

Interest alongside other recovery steps

Interest is one part of a sequence, not a substitute for chasing. The usual order is a reminder, a call, a firm reminder with a pay-by date, then the interest and compensation invoice, then a letter before action. The how to chase an unpaid invoice guide sets out the timings, and the invoice due date calculator confirms the day the debt became late, which is the day before interest starts. For the law itself, see statutory late payment interest and late payment compensation.