Legal Guide · Commercial Debt Recovery

UK Late Payment of Commercial Debts Act 1998: Statutory Interest & Compensation, Explained

Santanu Sarma

Economics Researcher · Reviewed by UK Commercial Law Advisory Board

Updated: October 19, 2026

The Short Version

The formula, in one line:

Interest = (Debt × Statutory rate ÷ 365) × Days overdue

1. The Power of the 1998 Act

Most freelancers and small businesses assume they can only charge interest on a late invoice if their contract says so. In the UK, that assumption is wrong. The Late Payment of Commercial Debts (Interest) Act 1998 gives a supplier a statutory right to interest and to a fixed sum for recovery costs on late business-to-business debts. The right is implied into the contract by law, so it applies even if your terms and conditions never mention late payment.

Late Payment of Commercial Debts (Interest) Act 1998, section 1: It is an implied term in a contract to which the Act applies that any qualifying debt created by the contract carries statutory interest, subject to the provisions of the Act.

Who the Act covers

The Act applies to a contract for the supply of goods or services where both the supplier and the purchaser are acting in the course of a business. It also covers contracts where the purchaser is a public authority. In practice, that includes:

• A freelancer or sole trader invoicing a company.
• A limited company invoicing another limited company.
• A business supplying a local authority, NHS body, or other public sector buyer.

Who it does not cover

• Consumers. If you sell to a private individual who is not acting in the course of a business, the Act does not apply.
• Contracts governed by foreign law, where the choice of foreign law has a significant connection to the contract. The Act generally applies to contracts governed by UK law.

2. Calculating Statutory Interest (Base Rate + 8%)

How the rate is set

The statutory rate is 8% a year above the reference rate, and the reference rate is the Bank of England Base Rate on a fixed reference date:

Late Payment of Commercial Debts (Interest) Act 1998, section 6: The rate of statutory interest is 8% above the reference rate. The reference rate is the Bank of England base rate in force at the end of 30 June or 31 December immediately before the day on which statutory interest starts to run.

One point is often misunderstood. The rate does not float with the Base Rate while the debt is outstanding. It is fixed for that debt by the date its interest begins. A debt that falls overdue in August 2026 uses the 30 June 2026 Base Rate for its whole life, even if the Base Rate changes later.

Worked example: £2,500, 40 days late

As of October 2026, take an invoice that became overdue between 1 July and 31 December 2026. The Base Rate on 30 June 2026 was reported as 3.75%, so the statutory rate is 11.75%.

Daily interest = (£2,500 × 0.1175) ÷ 365 = £293.75 ÷ 365 = £0.8048 per day
Interest       = £0.8048 × 40 = £32.19
Fixed sum      = £70 (debt of £1,000 to £9,999.99)
Total claim    = £2,500.00 + £32.19 + £70.00 = £2,602.19

A rounding trap. If you round the daily figure to £0.80 and multiply by 40, you get £32.00, which understates the interest by 19p. Keep the full daily figure (or multiply first and divide by 365 last).

3. The Fixed Compensation Sums (£40, £70, £100)

Interest compensates you for the time value of the money. The fixed sum compensates you for the cost of chasing it.

Late Payment of Commercial Debts (Interest) Act 1998, section 5A: The supplier is entitled to a fixed sum for each qualifying debt: £40 where the debt is less than £1,000; £70 where it is £1,000 or more but less than £10,000; and £100 where it is £10,000 or more.

It is per invoice, not per client

The fixed sum attaches to each late debt. A client who pays five invoices late, each under £1,000, owes five fixed sums of £40, which is £200, not £40. The size of the sum depends on the size of that invoice.

Costs above the fixed sum

The fixed sum is a minimum, not a ceiling. If your reasonable costs of recovering the debt exceed it, you can claim the difference. Typical examples are a solicitor's letter before claim, or the fees of a collection agency.

4. The 30-Day Default Rule & Contracting Out

When an invoice becomes late

Interest does not start the day you send the invoice. It starts when the debt is overdue:

• If the contract sets a payment date, interest begins the day after that date.
• If it does not, the default is 30 days after the later of (a) the day you delivered the goods or performed the services, and (b) the day the purchaser had notice of the amount you were claiming (typically, the day they received your invoice).

Contracting out: the "substantial remedy" test

Parties are free to agree their own payment terms and their own interest rate. But a buyer cannot simply write the statutory right out of the contract. Under the Act (sections 8 and 9), a contract term that varies or replaces statutory interest is respected only if it provides a "substantial remedy" for late payment. Otherwise, the statutory interest is implied as if the term were not there.

In plain terms, you cannot replace 11.75% statutory interest with a token 0.5% a year in the small print and expect it to hold. A term that sets a very low rate, or that excludes interest altogether, is unlikely to be a substantial remedy.

5. How to Actually Claim It

Statutory interest does not arrive on its own. You have to ask for it, and you should do so clearly and in writing.

Email wording

Subject: Invoice [INV-2026-014] — overdue balance and statutory interest

Dear [Name],

Invoice [INV-2026-014] for £2,500.00 was due on [date] and remains unpaid. Under the Late Payment of Commercial Debts (Interest) Act 1998, statutory interest and fixed compensation now apply to the overdue amount.

As at [date], that is £32.19 interest (11.75% a year, £0.80 a day) and £70.00 fixed compensation, making £2,602.19 in total. Interest continues to accrue daily until payment. A statement of account is attached.

Please arrange payment by [date]. If there's a problem with the invoice, let me know straight away and we'll resolve it.

Regards,
[Your name]

6. Deep, Exhaustive FAQ

Do I need to warn the client before adding statutory interest?

No. The right to interest is implied by law and arises automatically from the day after the debt becomes overdue. You do not have to send a reminder or notice first. In practice, though, a warning is good business. Many clients pay promptly once they see the interest accruing.

Is VAT charged on statutory interest or compensation?

Generally no. Statutory interest and the fixed compensation sum are treated as compensation for the delay, not as payment for a supply of goods or services, so they are normally outside the scope of VAT. Do not add VAT to them.

Can I claim this retroactively on old invoices?

Yes, within the limitation period. Under the Limitation Act 1980, a claim for a simple contract debt generally must be brought within six years of the date it became due, so you can claim interest and the fixed sum on old unpaid invoices if the six years has not run out.

7. About the Author

Santanu Sarma is an economics researcher and the creator of GetInvoicePDF.com. His focus is on commercial frameworks for freelancers and small businesses: how payment terms, interest rules, and contract structure affect cash flow, and how independent professionals can use the law to get paid without damaging client relationships.

Primary sources

• Late Payment of Commercial Debts (Interest) Act 1998
• Late Payment of Commercial Debts Regulations 2002 and 2013
• Bank of England, Bank Rate history

This article is general information, not legal advice. Statutory rates depend on the date a debt became overdue, and legislation and government policy change. For a specific claim, confirm the current figures with the official source and consult a solicitor.