How to Calculate Late Payment Interest in the UK
Late payment interest can be added to overdue invoices in the UK, but many small businesses are unsure how it works or whether they should apply it at all.
This guide explains when you can charge late payment interest, how to calculate it correctly, and a few important things to consider before adding it to an invoice.
When Can You Charge Late Payment Interest?
If you are a business supplying goods or services to another business, you may be entitled to charge late payment interest under the Late Payment of Commercial Debts (Interest) Act.
This usually applies when:
The invoice is issued business to business
Payment terms are clear
The invoice is overdue
If your contract already states a late payment interest rate, that will normally apply. If not, the statutory rate can be used.
Late payment interest does not usually apply to consumer invoices.
What Is the Statutory Late Payment Interest Rate?
The statutory interest rate is:
8 percent above the Bank of England base rate
The base rate can change, so it is important to check the current rate before calculating interest.
Interest is calculated daily, not monthly.
Information You Need Before You Calculate Interest
To calculate late payment interest, you will need:
The invoice amount (excluding VAT)
The number of days the invoice is overdue
The applicable interest rate
Always base calculations on the net invoice value, not including VAT.
How to Calculate Late Payment Interest Step by Step
Here is the simple calculation method.
Step 1: Convert the interest rate into a daily rate
Take the annual interest rate and divide it by 365.
Step 2: Multiply by the invoice value
Multiply the daily rate by the invoice amount.
Step 3: Multiply by the number of overdue days
Multiply that figure by how many days the invoice is overdue.
Example Calculation
Invoice value: £2,000
Statutory interest rate: 8 percent plus base rate
Days overdue: 30
Daily interest rate = annual rate ÷ 365
Daily interest amount = invoice value × daily rate
Total interest = daily interest amount × days overdue
This gives you the total interest that can be charged for the overdue period.
Many accounting systems can calculate this automatically, but it is still important to understand how the figure is reached.
Can You Also Charge Compensation?
In addition to interest, UK businesses may also be entitled to claim a fixed compensation charge for late payment.
The amount depends on the invoice value:
£40 for debts up to £999.99
£70 for debts between £1,000 and £9,999.99
£100 for debts of £10,000 or more
This is a one off charge per overdue invoice.
Should You Always Charge Late Payment Interest?
While you may be entitled to charge interest, it is not always the best first step.
Many businesses choose to:
Use interest as a final escalation
Mention it in reminders but not apply it immediately
Waive interest once payment is received
The priority is usually to recover the original invoice value and maintain the customer relationship.
A calm, consistent credit control process often resolves payment issues before interest needs to be added.
How to Reduce Late Payments Going Forward
Late payment interest is helpful, but prevention is better. A few simple steps can reduce the need to calculate interest at all:
Clear payment terms agreed upfront
Invoices sent promptly and accurately
Regular, polite follow ups
Consistent credit control processes
Many businesses find that structured credit control support helps them get paid on time without damaging relationships or escalating issues.
Final Thoughts
Late payment interest can be charged in the UK when invoices are overdue, but it should be used carefully and correctly. Understanding how to calculate it ensures you stay compliant and confident when discussing overdue payments.
Late payment interest is useful, but prevention is better. A clear credit control process can help invoices get paid on time. You can learn more on our credit control services page.