Late Payment of Commercial Debts (Interest) Act 1998 — explained for freelancers and SMEs

What the Act does, in one paragraph

The Late Payment of Commercial Debts (Interest) Act 1998 gives every business in the UK an automatic right to charge statutory interest and a fixed debt recovery cost on any business-to-business invoice that's paid late. You don't need to have mentioned it in your contract. You don't need to have mentioned it on your invoice. The right applies the moment the payment period expires — whether that period was contractually agreed or set by the Act's default of 30 days.

The Act has been amended twice (in 2002 and 2013) to bring UK law in line with successive EU Late Payment Directives, but its core protection has stayed the same: late payers should compensate suppliers for both the time value of money and the cost of chasing.

Who does it cover?

The Act covers "commercial debts" — money owed under a contract for the supply of goods or services between two parties acting in the course of a business. In practice that means:

• Freelancers and contractors billing a business client (whether a limited company, partnership, or another sole trader)
• Limited companies and sole traders billing each other
• Public-sector contracts — central and local government bodies are explicitly within scope

It does not cover invoices to consumers (individuals not acting in the course of a business). For consumer invoices you rely on your contractual terms — typically a stated interest rate and recovery costs agreed in writing.

What you're entitled to claim

There are three components, and you can claim all of them on the same invoice:

1. Statutory interest

Interest at 8% above the Bank of England base rate, calculated on a per-annum basis, accruing daily from the day after the payment due date. With the BoE base rate currently at 3.75%, the statutory rate is 11.75%.

The formula: invoice amount × 11.75% ÷ 365 × days overdue.

2. Fixed sum for debt recovery costs

A fixed sum per overdue invoice, regardless of how long it's overdue:

• Invoices under £1,000 — £40
• Invoices £1,000 to £9,999.99 — £70
• Invoices £10,000 or more — £100

The Act refers to this as the "fixed sum (debt recovery cost)" — not a "penalty" or "fine". The wording matters if a client pushes back: it's not punitive, it's statutorily fixed compensation for the cost of recovering the debt.

3. Additional reasonable costs (s.5A(2A))

Inserted by the 2013 amendment, this gives you the right to claim any further reasonable costs of recovering the debt — debt collection agency fees, solicitor's letters before action, court fees — to the extent they exceed the fixed sum. You'd typically only claim this if the debt actually escalates to a third party.

When the right starts

Interest and the fixed sum become claimable from the day after the payment due date. The due date is whichever of these applies:

1. The date agreed in the contract — provided it's not "grossly unfair" (anything more than 60 days for B2B is presumed unfair unless expressly justified)
2. 30 days from delivery / performance / invoice — the statutory default if no payment period was agreed, whichever is latest

Once the due date passes, interest starts accruing daily and the fixed sum becomes claimable in one go. You do not need to send any formal notice to "activate" the right — it's automatic.

Common myths and misconceptions

"I can only charge interest if it's in my contract"

False. The statutory right exists independently of your contract. You can be entirely silent in your contract and on your invoice, and still claim interest on every overdue B2B invoice.

"I can only charge if the client agreed to it"

False. The Act gives you the right by statute. Your client doesn't need to have agreed — they only need to be a business that's paid you late.

"It's a £40 penalty for late payment"

Imprecise. The fixed sum varies by invoice value (£40 / £70 / £100) and the Act calls it a "fixed sum for debt recovery costs", not a penalty. Calling it a penalty can put clients on the defensive; the statutory language is more measured and harder to argue with.

"It'll cost more to claim than I'll get back"

Usually false. The fixed sum alone covers most of the time a freelancer would spend chasing. Interest on top adds up faster than most people realise — a £5,000 invoice 60 days late is around £96 in interest at the current rate, on top of the £70 fixed sum. And with an automated tool like Hielda, your time cost is zero.

How to actually use the Act

You have three practical options, in increasing order of effort and effectiveness:

Option 1: Mention it in chase emails

The simplest thing is to reference the Act in your chase emails. A line like "under the Late Payment of Commercial Debts (Interest) Act 1998, this invoice is now accruing statutory interest at 11.75% per annum plus a fixed debt recovery cost of £70" changes the conversation. Most accounts departments recognise the Act and process the invoice rather than argue.

Option 2: Send a formal demand letter

For invoices that stay unpaid past gentle reminders, a formal demand letter — citing the Act and stating exact amounts owed — is the standard pre-action step before escalating to County Court or a debt recovery agency. We have a free template you can copy and edit.

Option 3: Use a tool that does it for you

The friction in claiming under the Act is rarely the law — it's the writing, the calculating, the awkwardness, and the follow-through. Hielda automates the whole sequence: tracking due dates, sending escalating chase emails, calculating daily interest, citing the Act, and applying the fixed sum. You stay out of the conversation entirely.

Limitations and edge cases

• Six-year limit. Like most contract claims, you have six years from the breach (i.e. the missed payment) to bring a claim.
• "Grossly unfair" contract terms. Contracts can specify payment periods longer than 30 days, but anything excessive may be unenforceable. A 90- or 120-day net term for a £200 invoice probably won't stand up if challenged.
• Disputed invoices. If a client has a bona fide dispute about the goods or services delivered, interest doesn't accrue on the disputed portion until the dispute is resolved. (You should still issue the invoice and document the dispute.)
• Partial payments. Interest is calculated on the outstanding balance, so partial payments reduce the accruing interest from that date forward.

Bottom line

The Late Payment Act is one of the strongest pro-supplier protections in UK law, but it's chronically under-used because most freelancers and small businesses don't know it exists or feel uncomfortable invoking it. You're leaving money on the table if you're not claiming under it on every overdue B2B invoice. The amounts are modest per invoice but they add up — and far more importantly, they shift the dynamic. A client who knows the meter is running pays faster than one who doesn't.