This guide is maintained as a current resource for September 2026 and covers only the laws of England and Wales. Information is for general guidance, not legal advice. Consult a qualified solicitor for advice specific to your situation.
Detailed guide to late payment of commercial debts and interest in England and Wales, explaining the statutory right to interest under the Late Payment of Commercial Debts (Interest) Act 1998, how to calculate interest and compensation, when debts are classed as late, enforcement options, time limits and practical debt recovery guidance.
Late payment of commercial debts can have a significant impact on a business's cash flow, profitability and ability to meet its own financial obligations. In England and Wales, businesses have statutory rights when trading with other businesses to claim interest and compensation on overdue payments for goods and services. These rights are primarily set out in the Late Payment of Commercial Debts (Interest) Act 1998 and related regulations, and they operate alongside contractual terms agreed between parties. Understanding how and when to apply interest, how compensation is calculated, the process for claiming debt recovery costs, relevant time limits and practical enforcement options helps businesses manage their finances and pursue overdue invoices effectively.
The Legal Framework: The Late Payment of Commercial Debts (Interest) Act 1998
The Late Payment of Commercial Debts (Interest) Act 1998 (and subsequent amendments) establishes a statutory right for suppliers of goods or services in a business‑to‑business relationship to claim interest, compensation and reasonable debt recovery costs when a payment is overdue.
Scope of the Act
The Act applies to contracts for the supply or sale of goods or services where both supplier and purchaser are acting in the course of business. It generally does not apply to consumer contracts or certain financial agreements, although it covers the vast majority of B2B commercial transactions.
Statutory Interest
Under the Act, a creditor has a statutory right to claim simple interest on overdue debts from the date payment becomes late until payment is made or a claim is settled. The statutory rate is set at 8% above the Bank of England base rate.
Interest accrues from the relevant due date, which is usually the agreed payment date set out in the contract. If no payment date is agreed, the law provides a default period: payment becomes late 30 days after either the invoice is received or goods are delivered/services completed, whichever is later.
Credit Period Limits and Fairness
The statutory regime also interacts with agreed payment terms. For commercial contracts, parties may agree longer payment terms than the default 30 days, but where the supplier and purchaser are businesses, the maximum statutory credit period is 60 days unless the extended term is fair to both parties. For public authorities, the usual maximum is 30 days from invoice receipt.
Compensation for Late Payment
In addition to interest, the Act (supported by the Late Payment of Commercial Debts Regulations) allows creditors to claim a fixed sum of compensation to offset the administrative cost of chasing late payments. The amount depends on the size of the overdue debt:
- £40 where the unpaid debt is under £1,000;
- £70 for a debt between £1,000 and £9,999.99;
- £100 for debts of £10,000 or more.
This compensation can be claimed per invoice that is paid late.
Debt Recovery Costs
If a creditor incurs reasonable costs in recovering an overdue debt that exceed the fixed statutory compensation, those costs can also be recovered from the debtor. However, costs must be documented and justifiable; unreasonable or unsubstantiated charges may be challenged.
How Interest and Compensation Are Calculated
Interest
Interest is usually calculated on the amount of the unpaid principal debt from the relevant due date until the date the debt is settled or formally claimed. The calculation is simple interest (not compound). To determine the total interest:
- Identify the applicable Bank of England reference rate for the period the debt was overdue;
- Add 8% to that reference rate;
- Apply that annual percentage rate to the amount owed;
- Convert to a daily rate if calculating interest for a partial year.
For example, if the Bank of England base rate is 0.5%, the statutory interest rate is 8.5% (0.5% + 8%).
Compensation
Compensation is a fixed payment added to the creditor's claim depending on the value of the overdue invoice, with the tiers described above. It is designed to compensate the creditor for administrative and transaction costs associated with late payment.
Debt Recovery Costs
When pursuing greater costs than the statutory fixed sum (for example, involving solicitors or debt collection agencies), the creditor must prove that the amounts claimed are reasonable and incurred in the pursuit of the unpaid debt. This documentation is required if the matter proceeds to formal enforcement or litigation.
When You Can Claim
Agreed Payment Terms
If a contract specifies a payment date, interest and compensation provisions under the Act apply after that date. In commercial practice, standard terms of business often stipulate payment within 30 days of invoice or delivery, but this can be varied by agreement.
No Agreed Terms
Where no contractual payment deadline exists, the law treats payment as overdue 30 days after delivery of goods or completion of services or invoice receipt, whichever is later. Interest and compensation then begin to accrue from that point.
Excluding Statutory Rights
It is possible to contractually vary or exclude the statutory right to interest and compensation if the contract provides a substantial remedy for late payment - for example, an alternative interest rate agreed by both parties that is fair and reasonable. If a contract's late payment terms are insufficient or “nugatory,” those terms may be challenged as failing to provide a genuine remedy, and the statutory rights will apply.
Time Limits and Enforcement
Time Limits for Claims
Under general limitation principles in England and Wales, a creditor has up to six years from the date the cause of action accrues to bring a claim for unpaid debts, including interest, in court. This limitation period is set by the Limitation Act 1980 as it applies to contract and similar debt claims.
Enforcement Options
Businesses can pursue unpaid debts in several ways:
- Invoice and reminder letters including notice of statutory interest and compensation;
- Letter Before Claim under the Civil Procedure Rules;
- Court proceedings in the County Court or High Court depending on the amount, seeking judgment for the principal debt, interest and compensation;
- Debt recovery agencies where appropriate;
- Statutory demands and insolvency proceedings for uncontested debts in certain circumstances.
Where a creditor proceeds to court, the evidence of the overdue debt, contractual terms, calculations of interest and compensation, and documentation of recovery costs are critical.
Practical Considerations
Clear Contract Terms
Although the law provides default statutory rights, clear contractual terms help both parties understand their obligations and remedies if payments are delayed. This includes stating the payment period, consequences of late payment and whether statutory interest will be charged.
Communication and Chasing Debts
Prompt communication when payments become overdue - including reminders and notification of statutory interest claims - can encourage earlier settlement and preserve business relationships.
Negotiation and Dispute Resolution
Where there is a dispute over payment, early negotiation and possibly formal dispute resolution (mediation or arbitration) can prevent escalation to litigation.
Common Questions
Can I charge interest on overdue payments automatically?
Yes. If the debt falls within a qualifying commercial contract and payment is overdue either under agreed terms or statutory default periods, you have a legal right to charge statutory interest without needing to give notice before it starts to accrue.
Is statutory interest higher than contractual interest?
If a contract specifies a different agreed rate of interest for late payment and that remedy is considered substantial and reasonable, that rate will generally take precedence over the statutory rate. If not, the statutory rights apply.
Can I recover the costs of chasing a late payment?
Yes - you may claim the statutory fixed compensation and, if greater, reasonable debt collection costs subject to evidence of those costs and their necessity.
Final Thoughts
In England and Wales, businesses are protected by a statutory regime that enables them to pursue interest and compensation on overdue commercial debts. This framework, rooted in the Late Payment of Commercial Debts (Interest) Act 1998 and related regulations, provides automatic statutory rights when payment terms are not met. Businesses should understand when debts become late, how interest and compensation are calculated, and how to enforce these rights effectively. Clearly drafted contractual terms and proactive communication enhance credit management and support financial stability.
