Adding Late Payment Interest to Unpaid Invoices

Unpaid invoices can put serious pressure on your cash flow. To help recover losses and encourage prompt payment, UK businesses have the legal right to charge interest on overdue payments. Under the Late Payment of Commercial Debts (Interest) Act 1998, you can add interest at 8% above the Bank of England base rate. This applies from the day after the payment was due.

At Professional Saver, we know how frustrating late payments can be, especially for professionals and small business owners. With over 40 years of experience supporting businesses through specialist insurance cover, we’re also committed to sharing practical knowledge that helps our clients maintain healthy business finances. We explain when and how to add late payment interest to overdue invoices, and what it means for your business.

What Is Late Payment Interest?

Late payment interest is a charge businesses can add to overdue invoices. It helps cover the cost of delays in getting paid. Late payments can hurt your cash flow, increase admin work, and force you to borrow money to fill the gap. Adding interest is a way to recover some of that impact.

Why Is Late Payment Interest Important?

The right to charge interest comes from the Late Payment of Commercial Debts (Interest) Act 1998. This law protects smaller businesses from clients who delay payments, often without good reason. It applies to commercial contracts for goods or services when no other interest terms are agreed upon. By giving businesses this right, the law encourages a culture of prompt payment and helps reduce the financial strain late invoices can cause, especially for small firms and freelancers. Having professional indemnity insurance in place can help protect your business in such cases.

When Can You Charge Late Payment Interest?

You can charge statutory interest from the day after the agreed payment date has passed. If you haven’t agreed on a payment date with your client, the law states that payment is generally considered late 30 days after either:

• The customer receives the invoice
• You deliver the goods or provide the service (if this happens later)
• The customer verifies or accepts the goods or service (if this is required by contract)

Public authorities typically consider the payment late after 30 days. This shorter timeframe recognises that government bodies should be exemplary in their payment practices.

It’s worth noting that you can choose to set different payment terms in your contracts, but if these terms are considered “grossly unfair” to the supplier, they may be unenforceable. Terms extending beyond 60 days in business-to-business transactions are often scrutinised more closely in this regard.

How Much Interest Can You Charge on Late Payments?

The statutory interest rate for late commercial payments in the UK is 8% plus the Bank of England base rate. This combined rate applies to the outstanding amount of the unpaid invoice.

For example, if the Bank of England base rate is 4.25% (as of June 2025), the statutory interest rate would be 12.25% (8% + 4.25%). This rate is deliberately higher than typical commercial interest rates to discourage late payment.

Here’s how to calculate the interest on an overdue invoice:

1. Take the amount owed
2. Multiply it by the interest rate (as a decimal)
3. Divide by 365 (days in a year)
4. Multiply by the number of days the payment is late

For example, if a client owes you £1,000 and is 45 days late with the current base rate at 4.25%:

1. £1,000 × 0.1225 (12.25%) = £122.50 annual interest
2. £122.50 ÷ 365 = £0.3356 daily interest
3. £0.3356 × 45 days = £15.10 total interest due

This table shows the interest due on various invoice amounts over different periods with the current base rate of 4.25% (statutory interest rate 12.25%):

How Do You Add Late Payment Interest to Your Invoices?

Adding late payment interest to overdue invoices requires a systematic approach to ensure clarity and legal compliance. Follow these steps:

1. Check your original invoice and contract terms: Confirm the original payment due date and verify that your contract permits charging interest (though the statutory right exists even without explicit terms).
2. Calculate the interest due: Use the formula described earlier based on the current Bank of England base rate plus 8%.
3. Create a late payment invoice: This should clearly state that it’s for late payment interest and include:
   • A reference to the original invoice
   • The original amount due
   • The number of days the payment is overdue
   • The interest rate applied
   • The total interest amount being charged
   • Your payment details
4. Send the late payment invoice: Send this alongside a polite but firm reminder about the original outstanding amount.
5. Record the additional invoice: Ensure you accurately record this in your accounting system as interest income.

Remember to update your calculations if the Bank of England base rate changes. For statutory interest, the reference rate is set every six months (1 January and 1 July), based on the base rate on the last day of the previous period.

Do You Need to Warn Clients About Late Payment Interest?

While you’re not legally required to warn clients before charging statutory interest, communicating your payment terms in advance is generally considered a good business practice. This transparency helps maintain positive business relationships and reduces the likelihood of disputes.

Consider including a clear statement about late payment interest in:

• Your contracts and terms of business
• Your initial quotes and proposals
• The payment terms section of your invoices
• Your client onboarding materials

A simple statement could read: “We reserve the right to charge statutory interest (currently 8% plus the Bank of England base rate) on overdue payments in accordance with the Late Payment of Commercial Debts (Interest) Act 1998.”

What About Debt Recovery Costs?

In addition to interest, you can also claim a fixed sum for the costs of recovering a late commercial payment. These fixed sums are set by law and depend on the size of the debt:

• £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

These amounts are designed to compensate for the administrative costs of chasing payment. If your actual costs of recovering the debt are higher than the fixed sum, you can claim reasonable costs exceeding this amount, provided they relate directly to recovering the debt.

When Should You Consider Not Charging Interest?

While you have the legal right to charge interest on late payments, there are circumstances where you might choose not to exercise this right:

• For valued long-term clients with otherwise good payment history
• When the late payment was due to genuine extenuating circumstances
• If the administrative effort of calculating and claiming the interest outweighs the benefit
• When you’re more concerned about maintaining the relationship than recovering a relatively small interest amount

If you decide not to charge interest immediately, you might still want to remind clients of your right to do so as a gentle encouragement for prompt payment in future.

How Can Professional Saver Help Protect Your Business?

While late payment interest helps recover some costs associated with delayed payments, comprehensive business insurance remains essential for protecting professionals against larger financial risks. Professional Saver offers tailored insurance packages for a wide range of professionals starting from just £54 per year, with public liability insurance of up to £5 million.

For professionals concerned about financial protection, we recommend combining good invoicing practices with appropriate insurance coverage. Our policies can include professional indemnity, public liability, and legal expenses insurance, providing comprehensive protection against various business risks. Get a quote today for an insurance solution to help safeguard your professional practice.

Dean Laming

Dean Laming is a Chartered Insurance Broker with more than 25 years insurance experience. Through various underwriting, operational and management roles, Dean has built up extensive knowledge of how to run a business and is now Managing Director of Professional Saver, part of the wider Henry Seymour Group.

All articles by Dean Laming