What is Late Payment Interest?
Late payment interest is a charge applied to overdue invoices. Under UK law, businesses can charge interest at 8% above the Bank of England base rate on late commercial payments, plus a fixed compensation fee.
Late payment interest is a financial charge you can apply when a client fails to pay an invoice by the agreed due date. In the UK, freelancers and businesses have statutory rights to charge interest on overdue commercial debts.
Under the Late Payment of Commercial Debts (Interest) Act 1998:
- Interest rate: 8% per year above the Bank of England base rate (currently 4.5%, making the total rate 12.5%)
- Fixed compensation fees:
- £40 for debts up to £999.99
- £70 for debts between £1,000 and £9,999.99
- £100 for debts of £10,000 or more
- You can also claim reasonable recovery costs if you use a debt collector or solicitor
How to calculate late payment interest:
- Take the total amount owed
- Multiply by the statutory rate (e.g., 12.5%) and divide by 365
- Multiply by the number of days the payment is overdue
- Example: £1,000 invoice, 30 days late = £1,000 x 12.5% / 365 x 30 = £10.27 interest plus £70 compensation
Important points:
- These rights apply automatically to business-to-business transactions — you do not need a contract clause
- You can choose not to charge interest, but having the right protects you
- Mentioning your late payment policy on invoices encourages timely payment
- A contract can specify different (reasonable) interest terms
Most freelancers treat late payment interest as a last resort — a polite reminder and follow-up call usually resolve the issue. But knowing your rights gives you leverage when dealing with persistently late payers.
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Frequently Asked Questions
Can I charge late payment interest without a contract?
Yes. Under UK law, the Late Payment of Commercial Debts (Interest) Act 1998 gives you an automatic statutory right to charge interest on late business-to-business payments, even without a contract clause. The rate is 8% above the Bank of England base rate.
Should I mention late payment interest on my invoices?
Yes. Adding a note such as 'Late payments will incur interest at 8% above the Bank of England base rate under the Late Payment of Commercial Debts Act 1998' serves as a deterrent and reminds clients of your legal rights.
How do I actually charge a client late payment interest?
Send a formal letter or email stating the overdue amount, the number of days late, the calculated interest, and the fixed compensation fee. Include reference to the Late Payment of Commercial Debts Act. Most clients pay promptly once they see the formal notice.
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