Late payment is one of the biggest cash flow problems for small trade businesses, especially those working for contractors, letting agents and commercial clients. The Late Payment of Commercial Debts (Interest) Act 1998, as amended, gives small businesses a legal right to charge interest and claim compensation when another business pays late.
When a payment counts as late
If you agreed payment terms in your contract, the payment is late once that date passes. If you did not agree terms, the default is 30 days after the later of:
- the date the customer received your invoice, or
- the date you supplied the goods or services.
There are limits on how long payment terms can be. For deals between businesses, terms longer than 60 days are only allowed if they are not grossly unfair to the supplier. The government has also announced plans to tighten late payment rules further, so check GOV.UK for any changes.
Statutory interest: 8% plus the base rate
Unless you agreed a different interest rate in your contract, you can charge statutory interest at 8% a year plus the Bank of England base rate. The base rate you use is the one in force on a fixed reference date:
- for debts that became late between 1 January and 30 June, use the base rate on the previous 31 December
- for debts that became late between 1 July and 31 December, use the base rate on the previous 30 June
So if the reference base rate was 4%, statutory interest would be 12% a year. Interest is simple interest, not compounded, and runs from the day after the payment was due until it is paid.
Working out the daily interest
- Multiply the debt by the interest rate to get the yearly interest.
- Divide by 365 to get the daily interest.
- Multiply by the number of days the payment is late.
Example: a £2,400 invoice is 45 days late and the reference base rate is 4%.
| Step | Calculation | Result |
|---|---|---|
| Rate | 8% + 4% | 12% |
| Yearly interest | £2,400 × 12% | £288.00 |
| Daily interest | £288 ÷ 365 | £0.79 |
| Interest for 45 days | £0.789 × 45 | £35.51 |
Our free late payment interest calculator does this sum for you, with the base rate as an input so you can use the right one.
Fixed compensation: £40, £70 or £100
As well as interest, you can claim a fixed sum for the cost of recovering the debt. The amount depends on the size of the debt:
| Debt | Fixed compensation |
|---|---|
| Up to £999.99 | £40 |
| £1,000 to £9,999.99 | £70 |
| £10,000 or more | £100 |
In the example above, the £2,400 debt attracts £70 compensation, so the total claim would be £2,400 + £35.51 + £70 = £2,505.51.
You can also claim reasonable recovery costs above the fixed sum, such as debt collection fees, if the fixed amount does not cover them. You cannot claim interest and compensation if you have agreed a different contractual remedy that is substantial.
Should you actually charge it?
The right to charge interest is a useful tool, but using it has relationship costs. Some practical guidance:
- Mention it in your terms from day one. "We may charge statutory interest and compensation on late payments under the Late Payment of Commercial Debts (Interest) Act 1998." It sets expectations without sounding aggressive.
- Use it as leverage before using it as a charge. A reminder that says "interest of £0.79 a day is now being added" often gets paid faster than a demand for the full amount.
- Charge persistent late payers. If a contractor always pays at 90 days, interest compensates you for funding their cash flow.
- Waive it strategically. Offering to waive the interest if they pay this week is a fair way to get the money in.
A sensible chasing schedule
| When | What to send |
|---|---|
| Due date + 1 day | Friendly reminder with a payment link |
| + 7 days | Second reminder, mention your late payment terms |
| + 14 days | Statement showing interest and compensation accrued |
| + 30 days | Final notice before further action, then consider a letter before action |
If the customer still does not pay, the next steps are usually a formal letter before action, then a money claim through the courts. GOV.UK explains the process for making a money claim.
Interest on invoices to homeowners
The Act does not cover consumers. If you want to charge interest to domestic customers, it must be agreed in your terms before the work, the rate must be fair, and it must be clearly brought to their attention. Most trades find it more effective to take a deposit, invoice on completion and make paying by card easy.
How Cuppaflow helps
Cuppaflow sends polite overdue reminders automatically, shows an overdue ageing report so you can see who owes what and for how long, and for business customers can add statutory late payment interest and the correct fixed compensation to an overdue invoice. Invoices include a pay-by-card link so the customer can settle the moment they read the reminder, with the money going straight to your own Stripe account.
Spend less time on paperwork
Cuppaflow handles quotes, jobs, invoices and payments for trade businesses, with your brand on everything. Try every feature free for 14 days, then plans start at £19 a month.