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Claiming interest on late payments: what you need to know

If you’re a business owner, it’s highly likely that at some stage, you’ll have encountered a scenario where you were not paid in a timely manner for your product or services. This guide will cover the basics of what you need to know about your right to claim interest on late payments, and how to go about doing so to help you avoid a  business dispute escalating. 

Can you legally charge interest on overdue invoices? 

Firstly, it’s important to be aware that all businesses have a statutory right in law to claim interest on late payments. Because late payments can have a detrimental knock-on effect on both your company’s finances and on the relationship you have with a late paying client, you should think carefully about making your stance on this clear right at the outset of your dealings with the other business. 

Also, you should be aware that this legal right does not apply to sales to consumers – only to other businesses and to clients from the public sector. 

Incorporating the right to claim interest into your contracts

It’s advisable to set out clearly what happens in the event a client is late in paying you within the terms of your contracts, and seek the other company’s agreement before proceeding to work together. However, you’re not permitted to impose any unfair terms and if the contract relates to business-to-business transactions, agreement for payment should be within 60 days of the transaction being made. It’s open to you and the other company to agree to longer than this – but it must be fair to both businesses. 

If you’re dealing with a client from the public sector, the above timeframe is typically reduced to within 30 days for payment. 

If you decide not to agree payment terms, the statutory right will apply in any event. 

When is a payment classed as late?

This will of course largely depend on the specific set of circumstances at hand. If you haven’t agreed between yourselves a date for payment within the confines of the timeframes discussed above, then the law states that the payment is late 30 days after either: 

  • The client receives your invoice 
  • You deliver the goods or provide the service (if this is later) 

In the above scenario, you’re entitled to charge interest 30 days after you provided the service or delivered the goods, or 30 days after you notified your client of the amount of the debt owing to you (whichever is later). We would encourage you to send a written invoice and keep a copy, as opposed to notifying your customer of your charges via more informal means alone. 

To reiterate, it’s best practice to formulate agreements in writing as part of your contracts, with clear parameters as to when payment is due, when it’s classed as late and how any interest on late payments is calculated. 

What’s the rate of interest that you are entitled to claim?

The interest you’re permitted by law to charge another business if they’re late with settling your payment is statutory interest – this is 8% plus the Bank of England base rate. If the rate of interest in your scenario is different if that’s what you and the other company have agreed, you cannot then claim statutory interest in addition to this. 

In relation to public sector contracts, you cannot use a lower interest rate than the statutory rate. 

Which base rate should you use?

If you’re claiming interest on a debt that has become late between 1 January and 30 June, you should use the base rate as it was on the preceding 31 December. If the time period for the late payment falls between 1 July and 31 December, then you would use the base rate as it was on 30 June. 

How do you calculate the interest owed?

Calculation of the interest you’re entitled to charge on late payments is not complicated. Here is a  late interest payment guide from the UK Government explaining how you calculate interest owed. 

It’s worth noting that any part payment received from your client will go towards reducing the interest owed first, unless you and they agreed otherwise. Also, you’re entitled to charge interest on the total amount of the debt (including any VAT), but you won’t have to pay VAT on this interest. 

Do I need to provide notice to the debtor before charging interest? 

You should let your client, who is now technically a debtor, know that you’re claiming interest on the late payment or payments in accordance with your right to do so under the late payment legislation. 

How to notify the debtor 

Whilst you can give this notification orally, it’s definitely recommended that you put it in writing instead because this means you’ll have proof that the correct notice was given and on a particular date. You should provide all of the information that’s set out below under ‘How do I claim interest on an overdue invoice?’  

How do I claim interest on an overdue invoice? 

As previously mentioned, it’s a good idea to set out your right to claim interest in your standard terms and conditions, or in the agreements you execute with your customersThis then leaves it open for you to charge interest if you choose to, and it may act as an incentive for clients to settle their invoices in a timely fashion if they see this in black and white. Your invoices should also clearly state the payment due date and the right to charge interest beyond that date. Additionally, ensure that you make claiming interest on late payments an integral part of your credit control system. 

Once a payment due date has passed and interest starts to accumulate, you should write to your client with the following details: 

  • Confirmation that payment is now overdue and reiteration of when the due date was. 
  • How much is due to be paid to you. 
  • The original invoice number (enclose a copy of the relevant invoice). 
  • The daily rate of interest your client will be charged and how that’s calculated. 
  • Details of how the sum owed should be paid (for example, details of your business bank account, the transaction ID they should use, etc.) 

Once the amount outstanding (including any interest) has been settled up, send a final bill to your customer with details of all interest charged.  

What if a client has more than one overdue invoice? 

The law allows you to claim interest and compensation for debt recovery costs (see ‘A note on debt recovery costs’) on each overdue invoice if each one relates to a separate order for goods or services. You also have the option to add together multiple claims for late payment interest and compensation in one claim but if you do that, you should still calculate these figures for each individual overdue invoice and put them in writing to make it clear to your client which claim relates to which order/invoice. 

What if your client still doesn’t pay? 

Unfortunately, the above actions may not always secure payment and you might be left with no alternative but to take matters further. This could involve enforcement action to recover the money you’re owed, or passing the claim to a debt management company to pursue (if you do this, you must notify your client in writing that the debt has been assigned to a third party). If you have legal expenses insurance, we recommend that you contact your insurers for advice in the event that you encounter a client who’s refusing to pay as your policy may cover your recovery costs. 

A note on debt recovery costs 

In addition to claiming interest on late payments, you’re entitled in law to claim reasonable debt recovery costs. These are fixed sums, and the one-off amount chargeable depends on the amount of the debt owed per invoice: 

Amount of debt What you can charge 
  Up to £999.99   £40 
  £1,000 to £9,999.99   £70 
  £10,000 or more   £100 

If your actual debt recovery costs are higher than this (for example, in cases where you have to instruct a debt collection agency for assistance), you can claim additional reasonable recovery costs. Evidence of how these figures claimed can be justified should be kept in case they’re challenged by your client. 

Are you obliged to charge interest? 

You’re not legally obliged to charge your clients interest on late payments. It’s advisable to check what other businesses in the same industry as you do, and make a judgment call based on how you feel it may affect customer relationships as a whole. However, if late payment is a persistent problem that you encounter, then a tightening of your credit control systems ought to be considered. If in doubt about whether you should charge interest on late payments, we would recommend that you contact your trade association for some advice. 

Can interest on late payments be waived or reduced? 

The answer to this is yes to both. Ultimately, as a business, you have the right to decide whether to waive interest on late payments altogether or to charge a lower rate than what you’re technically entitled to charge. 

Can I charge interest on late payments from international clients? 

You can, but it’s important to highlight that actually recovering interest on late payments from clients based outside of the UK might not be straightforward. This is because the late payment legislation enshrined in UK law doesn’t cover other countries and, in fact, many other countries don’t have any legislation in place to support UK suppliers with this. Two exceptions are Scandinavia and The Netherlands, but it’s advisable to get advice from an expert in cross-border disputes when determining whether the recovery of interest is likely depending on where your international client is based and the applicable law. 

What should I do if the client disputes the debt owed? 

If the client disputes the debt as a whole, you’ll need to establish the reason for this before deciding what to do. You might wish to let your client know that you’d prefer to come to an agreement regarding the debt. If the issue is because they have a problem with the quality of the goods or services provided for example, you might need to seek some external support from an expert in your field or specialist lawyer to try and resolve the dispute before considering what more formal avenues of dispute resolution might be best if that becomes necessary. This is because disputes relating to quality issues can become quite complicated and it’s always worthwhile to start collating evidence at this point in case you need it. 


Adding interest to late payments and making your clients aware that this is part of your business’ terms and conditions when you begin working together – and reminding them that this is the case when invoices are generated – can be a useful tool in prompting timely payment of invoices. However, we know that situations involving client relationships and overdue payments can be stressful. Our specialist solicitors can help with a wide range of matters, from getting the right terms and conditions drafted to suit your company’s needs to assisting with business disputes when things don’t turn out as planned. 

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