How to Calculate Statutory Interest on Overdue Invoices: A UK Small Business Guide

If you're a freelancer, sole trader, or run a small business in the UK, knowing how to calculate statutory interest on overdue invoices could be the difference between recovering money and writing off bad debt. The Late Payment of Commercial Debts (Interest) Act 1998 gives you a legal right to charge interest on invoices paid late — and the calculation is simpler than you might think.

In 2026, with the Bank of England base rate at 4.50%, the statutory interest rate stands at 12.50% (8% plus the base rate). But understanding the rules, the calculation method, and when interest starts accruing will protect your cash flow and give you confidence when chasing overdue payments.

What is Statutory Interest on Overdue Invoices?

Statutory interest is a legal right, not something you need to negotiate. Under the Late Payment of Commercial Debts (Interest) Act 1998, businesses have the automatic right to charge interest on invoices that aren't paid within agreed terms — or 30 days after invoice date if no terms are specified.

This applies to:

• B2B transactions (business-to-business payments)
• Any invoice you issue for goods or services
• Invoices from freelancers to business clients
• Small businesses to large corporations

Importantly, you don't need to include an interest clause in your contract. The right exists automatically — though making it visible on your invoice and terms helps reinforce your position and sometimes encourages faster payment.

The Current Statutory Interest Rate for 2026

The statutory interest rate has two components:

• Base rate: 8% per annum (fixed)
• Bank of England base rate: 4.50% (as of 2026)
• Combined rate: 12.50% per annum

This 12.50% rate is higher than it was during the years of historically low interest rates (2008–2021), when statutory interest sat between 0.5% and 2.5%. The current rate reflects the Bank of England's inflation-fighting measures and makes late payment more costly for debtors — which, in theory, encourages quicker settlement.

The base rate is reviewed quarterly by the Bank of England and published in The London Gazette. The statutory rate automatically adjusts on January 1st and July 1st each year.

How to Calculate Statutory Interest: The Formula

The calculation is straightforward once you know the three components:

Statutory Interest = Invoice Amount × (Annual Rate ÷ 365) × Number of Days Late

Let's break that down:

• Invoice Amount: The value of the unpaid invoice (excluding VAT)
• Annual Rate: 12.50% (in 2026)
• Number of Days Late: Days from the due date until the date of payment (or claim)

Important: You calculate interest on the invoice amount before VAT. VAT is a separate liability and doesn't accrue interest for the purposes of this calculation.

Step-by-Step Calculation Example

Let's work through a real example.

Scenario: You invoiced a client for £5,000 (plus £1,000 VAT) on 1st April 2026, with payment due 30 days later (1st May). The payment didn't arrive until 30th June.

Step 1: Establish the invoice amount
£5,000 (before VAT)

Step 2: Confirm the due date
1st May 2026 (30 days from invoice)

Step 3: Count the days late
From 1st May to 30th June = 60 days

Step 4: Apply the formula
£5,000 × (12.50% ÷ 365) × 60 days
£5,000 × (0.1250 ÷ 365) × 60
£5,000 × 0.0003424 × 60
£5,000 × 0.02055
= £102.74

So you can legally claim £102.74 in statutory interest, plus the original £5,000.

When Does Interest Start Accruing?

Interest starts accruing on the day after the due date. If payment terms aren't specified in your contract or invoice, the statutory due date is 30 days after the invoice date.

The interest accrues daily and compounds (though compounding only matters if you don't claim it immediately). Interest continues to accrue until payment is received — there's no upper limit or cap on how much interest you can claim, though claiming reasonable interest is far easier to enforce than exorbitant claims.

Key Rules Under the Late Payment of Commercial Debts (Interest) Act 1998

The Act gives you rights, but there are important boundaries:

Who Can Claim?

Businesses can claim interest on invoices to other businesses. Sole traders and freelancers are included. Consumer debts (business to private person) are excluded.

What Debts Qualify?

The debt must be for goods or services supplied. It covers:

• Invoices for freelance work
• Service contracts (design, marketing, consulting)
• Product sales
• Professional fees

Can You Contract Out?

Yes — but with limits. If you agree to different payment terms (e.g., 60 days), those terms override the 30-day default. However, you cannot contract out of the right to statutory interest entirely if the agreed terms are unreasonable. In practice, large corporates sometimes demand longer terms (45, 60, or 90 days) and this is often accepted, but they can't demand zero interest rights.

What About "Reasonable Excuse"?

If a debtor can prove they had a "reasonable excuse" for the delay (rare, and heavily fact-dependent), they may avoid some or all of the interest. In practice, "the cheque got lost in the post" is not a reasonable excuse; genuine disputes about invoice accuracy sometimes qualify.

How to Claim Statutory Interest

Include It in Payment Demand Letters

When chasing an unpaid invoice, include a polite but firm letter stating the original invoice amount, the number of days overdue, the calculated interest, and the total amount due. Example:

"This invoice is now 45 days overdue. Under the Late Payment of Commercial Debts (Interest) Act 1998, statutory interest of £XXX has accrued at 12.50% per annum. Please remit £XXXX (original invoice plus interest) immediately."

Use a Statutory Demand

If the debt exceeds £750 and isn't disputed, you can issue a Statutory Demand — a formal legal notice demanding payment within 21 days. Failure to respond can lead to insolvency proceedings.

Small Claims Court

Debts under £10,000 can be claimed in the Small Claims Court. The process is straightforward and low-cost. Courts almost always award statutory interest on top of the invoice amount, as it's a legal right, not damages.

Reference It in Contracts

Make the interest clause visible in your terms and conditions. Many clients who've had interest charges explained to them pay faster — it's not just the money, it's knowing you're serious.

Interest vs. Late Payment Penalties: The Difference

Under the Late Payment of Commercial Debts (Interest) Act 1998, you can claim two separate charges:

• Statutory Interest: 12.50% per annum (calculated as above)
• Fixed Debt Recovery Costs: A flat fee of £40 (debts under £100), £70 (£100–£999), or £100 (£1,000+) to cover administrative costs of chasing the debt

So in our £5,000 example, you could claim £5,000 + £102.74 interest + £100 fixed costs = £5,202.74.

This isn't a penalty — it's legally recognized compensation for the inconvenience and cost of chasing late payment.

Common Mistakes When Calculating Statutory Interest

Including VAT in the Calculation

You can't charge interest on VAT. Interest only applies to the net invoice amount. Many freelancers make this error.

Not Counting the Right Number of Days

Interest starts on the day after the due date, not on the due date itself. And you count every calendar day, including weekends and bank holidays.

Forgetting the Fixed Recovery Costs

Statutory interest is only part of your entitlement. Don't forget to add the fixed debt recovery costs.

Claiming Interest Before the Invoice is Due

You can't charge interest on an invoice until it's actually late. Some businesses mistakenly try to add pre-emptive interest, which has no legal standing.

How Payment Terms Affect the Calculation

Your contract or invoice terms override the 30-day default. For example:

• Net 30 (30 days): Interest starts on day 31
• Net 60 (60 days): Interest starts on day 61
• 2/10 Net 30: 2% discount if paid within 10 days, otherwise interest starts after 30 days

Longer payment terms mean interest accrues more slowly, but it still accrues. Some UK small businesses now specify Net 14 or even Net 7 to accelerate cash flow — entirely within your rights.

Practical Tips to Reduce Late Payment in the First Place

Prevention is better than claiming interest:

• Make terms visible: Put payment terms clearly on your invoice
• Mention the interest clause: "Statutory interest of 12.50% per annum applies to invoices overdue by more than 30 days"
• Request faster payment: If cash flow is tight, ask for Net 14 instead of Net 30
• Take deposits: For freelance/service work, 50% upfront reduces risk
• Follow up early: Send a reminder 3–5 days before the due date
• Invoice immediately: The sooner you invoice, the sooner the clock starts

What If the Debtor Disputes the Invoice?

If a client claims the invoice is wrong or the work wasn't done properly, interest doesn't accrue during the genuine dispute period. However, once you've resolved the dispute (or proved the debt is valid), interest continues from the original due date. You're not disadvantaged by a legitimate dispute, but frivolous objections don't stop the clock.

Final Thoughts: Know Your Rights

The Late Payment of Commercial Debts (Interest) Act 1998 exists to protect small businesses and freelancers. It levels the playing field when large corporates try to extend payment terms indefinitely. Knowing how to calculate statutory interest on overdue invoices — and having the confidence to claim it — is one of the most effective tools in your cash flow management toolkit.

The calculation is simple: invoice amount × (12.50% ÷ 365) × days late. Add the fixed recovery costs. Include it in your demand letter. Small Claims Court will back you up if needed.

Your time and money matter. Claim what you're legally entitled to.