Late Payment of Commercial Debts Act 1998: What It Means for Your Unpaid Invoices

If a client owes you money and you're wondering what your legal rights are, the answer is simpler than you think. The Late Payment of Commercial Debts (Interest) Act 1998 gives every UK business the automatic right to charge interest and claim compensation on overdue invoices — and you don't need a contract clause, a solicitor, or your client's agreement to do it.

This guide explains exactly what the Act says, how it applies to you, and how to use it to recover what you're owed.

What Does the Act Do?

The Act creates two powerful statutory rights for businesses dealing with late-paying clients:

  1. The right to charge interest on any overdue business-to-business invoice, at a rate significantly higher than commercial lending rates
  2. The right to claim fixed compensation for the cost of chasing payment, on top of any interest

These rights apply automatically. They don't need to be agreed, negotiated, or even mentioned. If your client is a business and they haven't paid on time, the Act is already on your side.

Who Does the Act Apply To?

The Act applies to all business-to-business (B2B) commercial transactions where goods or services have been supplied. This includes:

It does not apply to consumer transactions (B2C). If you sell directly to individual consumers, you'd need contractual terms to charge interest on late payments.

How Much Interest Can You Charge?

The statutory interest rate is 8% above the Bank of England base rate. As of March 2026, the base rate is 3.75%, making the total statutory rate:

8% + 3.75% = 11.75% per annum

This is a simple annual rate, accrued daily — not compound interest. The formula is:

Invoice amount × 11.75% ÷ 365 × days overdue

Worked Examples

Example 1: A £1,500 invoice, 45 days overdue

Example 2: A £500 invoice, 120 days overdue

Example 3: A £15,000 invoice, 30 days overdue

Don't want to do the maths yourself? Use our free calculator — enter your invoice details and get the exact figure in seconds.

Fixed Compensation: The Part Most People Miss

On top of interest, the Act entitles you to fixed compensation for the inconvenience of chasing payment. The amounts are set by statute:

Debt AmountCompensation
Up to £999.99£40
£1,000 to £9,999.99£70
£10,000 or more£100

Key details about compensation:

When Does Interest Start Accruing?

Interest begins on the day after the agreed payment date. If no payment terms were agreed, the default is 30 days from whichever is later:

This means even if you didn't set payment terms, the law implies a 30-day window — and interest kicks in automatically after that.

Do You Need It in Your Contract?

No. This is the most important thing to understand about the Act. Your statutory right to charge interest and claim compensation exists regardless of what your contract says — or whether you have a contract at all.

However, there's a nuance: if your contract does include its own late payment interest clause (a "substantial remedy"), that clause may replace the statutory right. The catch is that the contractual rate must be a "substantial remedy" — if it's unreasonably low, you can challenge it and fall back on the statutory rate.

In practice, most freelancers and small businesses don't include late payment clauses in their contracts, so the statutory right applies by default.

Can Your Client Opt Out?

No. A contract term that attempts to exclude or limit the statutory right to interest is void unless it provides a "substantial remedy" for late payment. Your client cannot simply write "no interest on late payments" into their terms and conditions — the Act overrides that.

This protection was specifically designed to prevent larger businesses from bullying smaller suppliers into waiving their rights.

How to Actually Use the Act

Knowing your rights is one thing. Using them effectively is another. Here's the practical approach:

Step 1: Calculate what you're owed

Use our free calculator to get the exact interest and compensation figures. Having precise numbers based on statute law makes your communication much more credible.

Step 2: Send a firm follow-up email

Reference the Act by name. State the interest and compensation amounts. Give a clear 7-day deadline. Most late-paying clients don't know about the Act — mentioning it by name is often enough to prompt payment.

Step 3: Send a Letter Before Action

If they don't pay after the follow-up, send a formal Letter Before Action. This is the legal prerequisite before court action. Most debts are paid at this stage — the threat of a County Court Judgment on their credit file is powerful leverage.

Step 4: File a county court claim

If the LBA doesn't work, file online at moneyclaim.gov.uk. For debts under £10,000, it's the Small Claims Track — no solicitor needed, court fee added to the judgment if you win. Read our complete guide to Small Claims Court for unpaid invoices.

Common Myths About the Late Payment Act

"I can't charge interest because it wasn't in my contract"

Wrong. The Act applies automatically. No contract clause needed.

"Charging interest will damage the client relationship"

A client who doesn't pay you on time is already damaging the relationship. Mentioning the Act shows you know your rights and take your business seriously. In most cases, it accelerates payment without any lasting friction.

"It only applies to big companies"

Wrong. It applies to every B2B transaction regardless of business size — sole traders, freelancers, partnerships, and limited companies are all covered equally.

"You have to go to court to claim interest"

No. You can claim interest and compensation directly from your client. Most pay when they realise the legal position. Court is only necessary if they refuse.

"The amounts are too small to bother with"

The interest alone on a £5,000 invoice overdue by 90 days is £144.86, plus £70 compensation. That's £214.86 — and it increases every day. Over a year, the interest on that invoice would be £587.50. The Act is designed to make late payment expensive.

The Act's Broader Purpose

The Late Payment Act was introduced because late payment is a systemic problem in the UK economy. The government's own research shows that over £23 billion is owed in late payments to UK small businesses at any given time. It is the single biggest cause of cash flow problems and business failure among SMEs.

The Act exists to shift the balance of power. Before 1998, a small supplier whose biggest client paid 90 days late had no practical remedy. Now, that supplier has a clear statutory right to compensation — and a straightforward route to enforcement through the courts.

Using the Act isn't aggressive or unusual. It's exercising a right that Parliament specifically created to protect businesses like yours.

Key Takeaways