How does this late payment calculation work?

If you are a UK business waiting on an overdue invoice, the law allows you to claim two distinct types of penalties from your late-paying client: Statutory Interest and Fixed Compensation. Our calculator works out both of these figures for you instantly.

Here is the exact math behind the tool:

1. Calculating Statutory Interest The statutory interest rate is set at 8% plus the Bank of England (BoE) base rate for business-to-business (B2B) transactions. To calculate the exact amount owed, you take the gross amount of the debt (including VAT), multiply it by the combined interest rate, and then divide by 365 to get the daily interest rate. You then multiply that daily rate by the number of days the invoice is overdue.

Important Note on Reference Periods: The Bank of England base rate changes throughout the year, but for late payment calculations, the rate is fixed for six-month "reference periods."

• For invoices overdue between January 1st and June 30th, the reference rate is the BoE base rate from December 31st of the previous year.

• For invoices overdue between July 1st and December 31st, the reference rate is the BoE base rate from June 30th of the current year. Our calculator automatically checks the historical dates and applies the correct reference rates for you.

2. Calculating Fixed Compensation In addition to the daily interest, you are legally entitled to charge a one-off fixed compensation fee to cover your debt recovery costs. This is a flat rate determined by the size of the unpaid invoice:

• Up to £999.99: You can charge £40

• £1,000 to £9,999.99: You can charge £70

• £10,000 or more: You can charge £100

What is the UK Law regarding Late Payments?

The right to charge these fees is granted under the Late Payment of Commercial Debts (Interest) Act 1998.

This legislation was created by the UK government specifically to protect small businesses and freelancers from the crippling cash flow effects of late-paying corporate clients. It is important to note that this law applies strictly to B2B (business-to-business) transactions. You cannot use this legislation to charge late fees to individual consumers (B2C).

Under the Act, a payment is officially considered "late" if it is not paid within the agreed-upon credit period. If you did not explicitly agree on a payment date in your contract or on your invoice, the law sets a default "statutory" payment period of 30 days from the date the customer receives your invoice or the goods/services (whichever is later).

Because this is a statutory right, it applies by default. You do not need to have a "late payment fees" clause written into your contract to enforce it. The only exception is if your contract already includes a different, legally substantial remedy for late payment.

How to prevent late payments in the future

While it is great to know you have the legal right to charge interest, chasing debt is stressful, awkward, and takes you away from actually running your business. The best way to deal with late payments is to stop them from happening in the first place.

Here are a few ways to protect your cash flow:

• Shorten your terms: Stop defaulting to 30-day payment terms. Switch your standard terms to 7 days or 14 days.

• Take a deposit: For larger projects, always take 30% to 50% upfront before any work begins.

• Invoice immediately: Don't wait until the end of the month to send your bills. Invoice the moment the work is completed.

Tired of chasing late payments manually? Zippy Invoices takes the stress out of getting paid. Our software allows you to generate legally compliant UK invoices in seconds, set crystal-clear payment terms, and automatically send polite (but firm) payment reminders to your clients when a due date slips. Stop doing the math yourself and let Zippy handle your billing so you can focus on your work.