When a business customer pays late, the law lets the supplier add three things to the invoice: interest, a fixed sum, and in some cases the reasonable cost of recovering the debt. This guide explains when those rights apply. It is for small businesses and freelancers in England and Wales, and follows on from the series overview.
When the Act applies
The Late Payment of Commercial Debts (Interest) Act 1998 applies to a contract for the supply of goods or services "where the purchaser and the supplier are each acting in the course of a business" (section 2(1)). "Business" includes a profession and the activities of a government department or a local or public authority. Nothing in section 2 limits the Act to companies, so a freelancer or sole trader supplying a business customer is within it.
Where the Act applies, section 1 implies a term into the contract that a qualifying debt (a debt for all or part of the contract price) carries simple interest: interest on the debt itself, not interest on interest. Because the term is implied by statute, it does not depend on the invoice mentioning it.
The rate
The rate is set by order under section 6. For England and Wales, the Late Payment of Commercial Debts (Rate of Interest) (No. 3) Order 2002 sets it at 8 per cent a year over the Bank of England's official dealing rate, usually called base rate.
The reference rate is not simply the one in force on the day of the calculation. Article 4 of the Order fixes it twice a year: the official rate in force on 31 December is used for interest that starts to run between 1 January and 30 June, and the rate in force on 30 June for interest that starts to run between 1 July and 31 December. The Bank of England publishes the current rate and past rates on its website.
When interest starts to run
Statutory interest starts on the day after the relevant day for the debt (section 4(2)).
No agreed payment date. The relevant day is the last day of a period of 30 days beginning with the later of:
- the day the supplier performed the obligation the debt relates to; and
- the day the purchaser had notice of the amount of the debt, usually the invoice.
An agreed payment date. That date is normally the relevant day. Rules introduced by the Late Payment of Commercial Debts Regulations 2013, and recast in their present form in 2015, limit how far a long payment term can postpone statutory interest:
- Where the purchaser is a public authority, interest runs from the end of the 30-day period described above if that is earlier than the agreed date (section 4(2D)).
- Where the purchaser is any other business, the equivalent period is 60 days. If the agreed date falls after the end of that period, the agreed date stands unless it is grossly unfair to the supplier (section 4(2F)); if it is, interest runs from the end of the 60 days (section 4(2E)).
Whether a term is grossly unfair depends on all the circumstances, including whether it is a gross deviation from good commercial practice and contrary to good faith and fair dealing, and whether the purchaser has an objective reason for the longer period (section 4(7A)).
These provisions do not say that a payment term longer than 60 days is void. They fix the day from which statutory interest runs.
At the time of writing (October 2026) a Commercial Payments Bill, which includes provisions on payment terms and interest on late commercial debts, was before Parliament and had not become law; this guide describes the law in force.
Fixed sums and recovery costs
Once statutory interest begins to run, section 5A entitles the supplier to a fixed sum on each qualifying debt, in addition to the interest. At the time of writing (October 2026) the sums are:
| Size of the debt | Fixed sum |
|---|---|
| Less than £1,000 | £40 |
| £1,000 or more, but less than £10,000 | £70 |
| £10,000 or more | £100 |
Under section 5A(2A), added by the 2013 Regulations, if the supplier's reasonable costs of recovering the debt are not met by the fixed sum, the supplier is also entitled to the difference.
Contract terms that try to remove the right
Part II of the Act controls terms, agreed before the debt arises, that exclude or change the right to statutory interest. Once the debt exists, the parties are free to agree terms dealing with it (section 7(2)).
- A term is void to the extent that it purports to exclude statutory interest, unless there is a substantial contractual remedy for late payment (section 8(1)).
- Where the parties have agreed a substantial contractual remedy, such as a contractual interest clause, the debt does not carry statutory interest unless they agree otherwise (section 8(2)).
- A term that varies the right, for example by postponing the date interest starts, is allowed only if the right as varied, or the overall remedy, is substantial (sections 8(3) and 10(2)).
Section 9 sets the test. A remedy is treated as substantial unless it is insufficient either to compensate the supplier for late payment or to deter late payment, and it would not be fair or reasonable to allow it to be relied on. The court looks at the circumstances when the term was agreed, including the parties' relative bargaining strength and whether the term was imposed by one party to the detriment of the other.
Separately, section 5 allows statutory interest to be remitted or reduced where the supplier's own conduct means the interests of justice require it.
How the interest is calculated
GOV.UK guidance sets out the calculation in three steps:
- Annual interest: the debt multiplied by the statutory rate (8 per cent plus the reference rate).
- Daily interest: the annual figure divided by 365.
- Interest to date: the daily figure multiplied by the number of days the payment is late.
Where several invoices are overdue, each has its own start date and so potentially its own reference rate. The court expects a letter before action to show how the sum claimed is calculated. The time limit for claiming the debt is covered separately.
If the customer is a consumer, or the Act does not apply
Without the Act there is no statutory interest and no fixed sum. The contract may itself provide for interest on late payment, although in a consumer contract an unfair term is not binding on the consumer (section 62 of the Consumer Rights Act 2015).
Otherwise interest is a matter for the court. Under section 69 of the County Courts Act 1984, and section 35A of the Senior Courts Act 1981 in the High Court, a court giving judgment for a debt may include simple interest "at such rate as the court thinks fit" for all or part of the period from the date the cause of action arose. This is a discretion exercised in proceedings, not a right to add interest to an invoice. Neither section fixes a figure; GOV.UK guidance says that for debts outside the late payment rules the rate "is usually 8%" at the time of writing (October 2026). Interest cannot be awarded under these sections for a period during which interest on the debt already runs.
What a solicitor will want from you
- The contract, terms, purchase order or quote, and any clause about interest or payment periods.
- Every unpaid invoice, with its date, amount and payment terms.
- Evidence of when the goods were delivered or the work completed, and when the customer received each invoice.
- Whether the customer was acting in the course of a business.
- Your interest calculation for each invoice, and a record of what you have spent trying to recover the debt.
- Anything agreed since the debt fell due, and any part payment.
This guide is general information about the law of England and Wales. It is not legal advice. Whether the Act applies, the day interest runs from and the rate all depend on the contract and the dates in each case, and time limits apply to debt claims.
Frequently asked
What interest can a business add to a late invoice?
Where both parties were acting in the course of a business, the Late Payment of Commercial Debts (Interest) Act 1998 implies a term that the debt carries simple interest. The rate is set by statutory order at 8 per cent a year over the Bank of England's official rate, taken at the 30 June or 31 December before interest starts to run. A contract can replace this only with another substantial remedy for late payment.
When does statutory interest start to run?
It starts on the day after the 'relevant day'. If a payment date was agreed, that date is usually the relevant day; if none was agreed, it is the last day of a 30-day period beginning with the later of the supplier performing and the customer having notice of the amount. Agreed dates that fall after a 60-day period (30 days where the customer is a public authority) are subject to limits.
What are the fixed compensation sums for late payment?
Once statutory interest begins to run, section 5A of the Act gives the supplier a fixed sum: £40 for a debt under £1,000, £70 for a debt of £1,000 or more but under £10,000, and £100 for a debt of £10,000 or more. If the supplier's reasonable costs of recovering the debt are not met by the fixed sum, the supplier is also entitled to the difference.
Can I add statutory interest to a consumer's bill?
No. The Act applies only where the purchaser and the supplier are each acting in the course of a business. Where it does not apply, interest depends on what the contract says or, if a claim is issued, on the court's discretionary power under section 69 of the County Courts Act 1984 or section 35A of the Senior Courts Act 1981.