Can you charge customers for late invoice payments?

If you run a business, it’s likely that you’ve encountered customers who don't pay you on time. And like the Big Bad in your favourite TV show, they keep coming back to ruin your day. So what can you do to stop them, or at least make them think twice before they mess with you? You might be able to charge these customers interest on their unpaid invoices.

Here’s a rundown of the rules around charging customers for their late payments.

When can you charge for late payment of an invoice?

Before you charge a customer interest on an unpaid invoice, you should get in touch with them to let them know that the payment is overdue. Mistakes happen - and the customer might be grateful for the reminder! 

If they still haven’t paid and you do decide to apply a charge, there are a few things to consider:

Customers who are individuals

You can’t charge interest or late-payment fees to individuals (for example, members of the general public) unless you have clearly communicated the intention to do so in your payment terms. The interest rate or any fees you intend to charge for late payment should be clearly indicated to your customers.

Customers that are businesses

If your customer is another business (this includes sole traders), you can specify an interest rate for late payments in your contract with them. Alternatively, you can charge statutory interest to business customers who pay an invoice late. However, you cannot charge statutory interest if you’ve agreed on a different rate of interest on the contract.

When is a payment defined as late?

If you specify a payment date on your invoice, the payment will be considered late after this date. The payment date must usually be within either:

• 30 days if your customer is a public authority
• 60 days if your customer is a business

If you do not specify a payment date on your invoice, the payment is defined as being late 30 days after either:

• the customer gets the invoice
• you deliver the goods or provide the service (if this is later)

More information is available on the government's website.

How much can you charge for late payment?

If you want to charge a business customer the statutory rate, this will be 8% plus the Bank of England (BoE) base rate. At the time of publication, the BoE base rate is 5%, but this can change regularly so make sure you check this before calculating.

For example, if a customer owes you £1,000 and the BoE base rate is 5%, giving a total interest rate of 13%, you can calculate how much interest you can charge in three steps:

1. Calculate the annual statutory interest, which in this example is £130 (£1,000 x 0.13 = £130).
2. Divide £130 by 365 to get the daily interest, which in this example is £0.36 a day (130 / 365 = 0.36).
3. Multiply by the number of days by which the payment is late to get your interest total. For example, if the payment is 100 days late, this would be £36 (100 x £0.36 = £36).

If you choose to charge a customer interest on an overdue invoice, you should send a new invoice and include a new line for the interest.

Charging debt recovery costs on late payments

If your customer is a business, you can also choose to charge a fixed sum for the cost of recovering a late payment. These charges are usually referred to as ‘debt recovery costs’ and you can charge them in addition to adding interest to an unpaid invoice.

The amount you’re allowed to charge depends on the amount of debt. These amounts are set by late-payment legislation and you can only charge the business once for each payment. You can see what you’re allowed to charge in the table below:

See who owes you what - at a glance

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Originally published 29 September 2021
Last updated 12 July 2023