What Is Late Payment Legislation?
The Late Payment of Commercial Debts (Interest) Act 1998 gives UK businesses the right to charge interest and compensation when invoices are paid late by other businesses or public bodies.
Key Takeaways
- The Late Payment Act gives SMEs an automatic right to charge 8% over base rate interest on overdue invoices.
- Fixed compensation of £40, £70, or £100 is also payable per late invoice, depending on the debt amount.
- The Act applies to commercial debts — business-to-business and business-to-public authority transactions.
- You can include late payment rights in your standard terms to make enforcement easier.
What the Late Payment Act provides
The Late Payment of Commercial Debts (Interest) Act 1998 (as amended) is a powerful but underused piece of legislation that gives UK businesses an automatic right to claim interest and compensation when another business or public authority pays a commercial debt late. Interest accrues at 8% above the Bank of England base rate per annum from the date payment was due. In addition to interest, you are entitled to a fixed compensation payment: £40 for debts below £1,000, £70 for debts between £1,000 and £9,999, and £100 for debts of £10,000 or more. These are statutory rights — they apply by operation of law and do not require prior agreement with the debtor, though including them expressly in your terms of business makes enforcement cleaner.
Which transactions the Act covers
The Act applies to commercial contracts for the supply of goods and services between businesses or between a business and a public authority. It does not apply to consumer debts (where different legislation applies) or to contracts that are excluded by regulation. Where a contract is between a large business and an SME (defined as having fewer than 250 employees and an annual turnover not exceeding €50 million), the default payment period is 30 days and cannot be contractually extended beyond 60 days. For contracts between two large businesses, a longer payment period may be agreed if it is not grossly unfair to either party. Contractual terms that purport to remove or restrict the statutory interest right are void if they are grossly unfair — a protection introduced specifically to prevent large businesses from using their bargaining power to eliminate SME rights.
How to claim late payment interest in practice
To claim late payment interest and compensation, you do not need to go to court — you simply add the interest and compensation to a further invoice or include it in a letter before action. The calculation is: principal debt × (8% + current base rate) ÷ 365 × number of days overdue. For example, on a £5,000 invoice paid 45 days late when the base rate is 4.75%, the interest would be approximately £81.16, plus £70 fixed compensation. Many SMEs find that simply including a reference to the Late Payment Act in their standard terms and in their payment reminder emails significantly accelerates payment without the need to formally claim the interest — the knowledge that interest is accruing focuses attention.
The Prompt Payment Code
The Prompt Payment Code (PPC) is a voluntary scheme administered by the Chartered Institute of Credit Management on behalf of the government, under which signatories commit to paying 95% of invoices from SMEs within 30 days. Major corporates and government departments that sign the PPC are listed publicly. If you supply to larger businesses, checking whether they are PPC signatories can give you some leverage in payment disputes — a business that violates the PPC risks being removed from the register and the associated reputational damage. However, the PPC is voluntary and has no statutory enforcement mechanism; the Late Payment Act remains your primary legal tool for enforcing payment.