Late-paying customers: how to charge interest and recover overdue invoices in the UK

Ask a small business owner what keeps them up at night and the answer is rarely tax. It is customers who do not pay on time. Late payment starves a business of cash, forces it to borrow and consumes hours of awkward chasing. The law gives you real tools to fight back, and most businesses never use them. This guide explains the right to charge interest and compensation, how to build payment terms that work, and a step-by-step process for recovering overdue invoices without destroying the relationship.

The legal right to charge interest

Under the Late Payment of Commercial Debts (Interest) Act 1998, a business that supplies goods or services to another business, or to a public authority, can claim statutory interest on late payments. It applies automatically unless your contract sets a different but substantial remedy.

Interest rate. The Bank of England base rate plus 8%, using the base rate in force on the day the debt became overdue. If the base rate is 4%, the statutory rate is 12%.

Fixed compensation. In addition to interest, you can claim a fixed sum for each late invoice.

Debt	Compensation
Under £1,000	£40
£1,000 to £9,999.99	£70
£10,000 or more	£100

You can also claim reasonable debt recovery costs beyond the fixed sum, if they are higher. Our late payment interest calculator computes the exact amount for any invoice.

When does an invoice become late?

The debt becomes overdue on the day after the due date in your contract. If there is no agreed payment period, statutory interest starts 30 days after the customer receives the invoice or the goods and services, whichever is later. The Act does not apply to consumers, only to business customers and public bodies.

Writing payment terms that work

Prevention beats cure. Your terms should be clear, short and visible on every quote and invoice.

• State the payment period in days from invoice date, not vague language such as "prompt payment".
• State the late payment consequences: that you will charge statutory interest and compensation.
• Include your bank details and a payment reference.
• Invoice promptly. Late invoicing is the biggest cause of late payment.
• Send to the right person. The accounts payable contact, not just the person who ordered.
• Consider deposits and staged payments for large or new customers.
• Agree purchase order numbers where the customer requires them.

If you want help getting the process right, our invoicing and credit control service raises and chases invoices for you.

Credit control before there is a problem

Good credit control starts before you do the work.

1. Check new customers. A basic credit check on a company shows its filing history and any county court judgments.
2. Set credit limits and review them regularly.
3. Ask for a deposit when risk is high.
4. Be clear on the date of work completion so there is no dispute.

A step-by-step chasing process

Most late payments are forgetfulness or process delay, not unwillingness. A calm, consistent sequence works best.

Step 1: A friendly reminder a few days before the due date. An email saying the invoice is due on a given date and attaching a copy.

Step 2: A reminder on the day it becomes overdue. Polite and factual. Ask if there is any query.

Step 3: A phone call about seven days later. A conversation often finds the real reason: a missing purchase order, an approval stuck with someone on holiday.

Step 4: A formal reminder at 14 days overdue. State the amount, the statutory interest accruing and the compensation due.

Step 5: A final demand at around 30 days overdue. Give a deadline, typically seven days, and state that you will pursue the debt including through the courts.

Step 6: A letter before action. A formal letter following the Pre-Action Protocol for Debt Claims, setting out the debt and giving 30 days to respond before you issue a claim.

Step 7: Court action. For debts up to £100,000 you can start a claim online through Money Claim Online. Court fees are added to the claim and recoverable from the debtor if you win.

Keep a record of every contact in your accounting software, so you can show what you did.

Using the aged debtors report

The most useful report in credit control is the aged debtors list, which shows who owes you, how much and for how long. Review it weekly. Anything over 30 days deserves a conversation, and anything over 60 days deserves escalation. Many accounting packages send automatic reminders based on this report. Our monthly checklist includes reviewing it, and our guide to cash flow forecasting shows how to plan around expected receipts.

Should you actually charge the interest?

You have the right to, not the obligation. Many businesses state their right in their terms and use it as leverage: "If this is paid today, we will waive the interest." Others charge it systematically to deter habitual late payers. Charging it to a large customer that pays slowly can damage the relationship, while a small supplier that is consistently ignored may have no choice. Decide a policy, apply it consistently and make sure your invoices reflect it.

Dealing with disputes

Sometimes the customer is not ignoring you but disputing the invoice. Handle it quickly.

• Ask them to state the dispute in writing
• Respond promptly with evidence such as delivery notes, emails and the contract
• Offer to resolve part of the invoice if some of it is undisputed
• Do not accept delay as a tactic. Insist on payment of the undisputed amount

If you remain stuck, mediation can be cheaper and faster than court. The Small Business Commissioner offers a free complaints service for small businesses with disputes about payment from large businesses.

Bad debts and VAT

If a debt becomes uncollectable, you can usually claim bad debt relief for VAT you have paid on it, six months after the due date and after you write the debt off in your accounts. For income tax and Corporation Tax, a specific bad debt written off is generally an allowable expense. Make sure your bookkeeping records the write-off with a clear note. See our VAT guide.

Common mistakes

• Sending invoices late
• Having no written payment terms
• Chasing only when cash is short
• Being aggressive in the first reminder
• Not keeping records of reminders
• Not charging interest on a persistent late payer
• Allowing customers to run up big debts before pausing work

A reminder email that works

Tone matters. A good first overdue email is short and friendly: "Hi, I noticed invoice 1042 for £2,400, which was due on 14 November, has not yet been paid. Could you let me know when we can expect payment, or if there is anything I can help with? A copy is attached. Thanks." It assumes good faith, states the facts and invites a reply. Only if that is ignored do you move to the firmer wording about statutory interest and compensation. Most late payers respond to the first or second email, and a consistent, polite routine keeps the relationship intact.

Frequently asked questions

What interest can I charge on late invoices?

8% above the Bank of England base rate, plus fixed compensation of £40, £70 or £100.

Does the Late Payment Act apply to consumers?

No. It applies only to commercial debts between businesses and public authorities.

How long should I wait before taking legal action?

Typically after a final demand and a letter before action giving 30 days to respond, but pursue disputes sooner.

Can I add debt recovery costs?

Yes. You can claim reasonable recovery costs beyond the fixed compensation if they are higher.

Can you chase my invoices for me?

Yes. Our credit control service does it for a flat £15 an hour. Get an instant quote.