Two Kinds of Late Payment Interest
When people search for late payment interest they usually mean one of two things.
- Interest you can charge a customer. If another business pays your invoice late, the Late Payment of Commercial Debts (Interest) Act 1998 gives you a legal right to add interest and a fixed compensation sum.
- Interest HMRC charges you. If you pay income tax, corporation tax, VAT or PAYE late, HMRC adds interest automatically from the day after the due date.
Both rates are tied to the Bank of England base rate. Both are simple interest, worked out daily. That is roughly where the similarity ends. One is a right you have to choose to use. The other arrives whether you like it or not.
This guide covers both, starting with the one most small businesses underuse.
Why This Matters This Week
On 5 November 2026 the Bank of England raised base rate by 0.25 percentage points to 4%, the first increase since 2023. That changes the two rates in different ways.
- HMRC late payment interest follows base rate within a few weeks. HMRC sets it at base rate plus 4 percentage points, so it rises from 7.75% to 8%. HMRC usually applies a change about 13 working days after the Bank's decision, so expect it in the second half of November. Check the GOV.UK rates page for the exact date.
- Statutory interest on commercial debts does not move today. The Act fixes the reference rate twice a year, so invoices that fell overdue between 1 July and 31 December 2026 stay at 11.75% for as long as they remain unpaid. Invoices that fall overdue from 1 January 2027 will use the base rate in force on 31 December 2026. If the Bank holds at its 17 December meeting, that gives 12%.
The detail that most guides miss is that second point. The statutory rate is locked by the six month period in which the debt became late, not by today's base rate.
Statutory Interest: What You Can Charge
The 1998 Act applies to contracts between businesses for goods or services. It covers sole traders, partnerships and companies, and public sector bodies when they buy from you. It does not cover sales to consumers.
If your customer pays late, you can claim three things.
1. Interest at 8% Above Base Rate
The rate is 8 percentage points above the Bank of England base rate. It is simple interest, so there is no compounding, and it runs from the day after the payment was due until the day it is paid.
The base rate used is the reference rate:
| Debt became overdue between | Reference rate is base rate on | Base rate | Statutory rate |
|---|---|---|---|
| 1 January to 30 June 2026 | 31 December 2025 | 3.75% | 11.75% |
| 1 July to 31 December 2026 | 30 June 2026 | 3.75% | 11.75% |
| 1 January to 30 June 2027 | 31 December 2026 | 4% if unchanged on 17 December | 12% if unchanged |
2. Fixed Compensation
On top of interest, you can claim a fixed sum for the cost of recovering the debt. It depends on the size of the invoice:
| Debt | Fixed compensation |
|---|---|
| Up to £999.99 | £40 |
| £1,000 to £9,999.99 | £70 |
| £10,000 or more | £100 |
It is claimed per invoice paid late, not per customer, which is why it adds up quickly for businesses that send lots of small invoices.
3. Reasonable Recovery Costs
If your actual costs of recovering the debt are higher than the fixed sum, for example a collection agency or solicitor's letter, you can claim the reasonable difference. You need to show what you spent.
When Is a Payment "Late"?
This is where many claims go wrong. The interest starts the day after the payment was due, so you need to know the due date.
- You agreed terms. The due date is whatever your contract says. If you agreed 45 days, interest starts on day 46.
- No terms agreed. The default is 30 days after the later of the customer receiving the invoice or receiving the goods or services.
- Terms over 60 days. Business to business, terms longer than 60 days are allowed only if they are not grossly unfair to the supplier. Public bodies are limited to 30 days.
Your contract can also set its own late payment remedy instead of statutory interest, but only if it is a "substantial remedy". A clause offering 1% a year would almost certainly fail that test and statutory interest would apply instead. A clause offering 2% a month would probably pass.
How to Calculate It: A Worked Example
Fernhill Joinery Ltd fits out commercial kitchens. It invoiced a main contractor £18,600 including VAT on 1 August 2026 on 30 day terms. The invoice was due on 31 August 2026. The contractor paid on 14 November 2026.
Step 1: count the days late. From 1 September to 14 November inclusive is 30 + 31 + 14 = 75 days.
Step 2: find the rate. The debt became overdue in September 2026, so the reference rate is base rate on 30 June 2026, which was 3.75%. The statutory rate is 11.75%. Today's rise to 4% does not change it.
Step 3: daily interest. £18,600 × 11.75% ÷ 365 = £5.99 a day.
Step 4: total interest. £5.99 × 75 days, or more precisely £18,600 × 11.75% × 75 ÷ 365 = £449.08.
Step 5: add compensation. The invoice is over £10,000, so the fixed sum is £100.
| Amount | |
|---|---|
| Statutory interest (75 days at 11.75%) | £449.08 |
| Fixed compensation | £100.00 |
| Total claim | £549.08 |
Two points worth noting. First, interest runs on the full invoice including VAT, because that is the debt. Second, if Fernhill had sent eight separate invoices of £2,325 for the same work, the fixed compensation would be £70 each, or £560, more than the interest itself. How you invoice changes what you can recover.
To put £449.08 in context, the contractor effectively borrowed £18,600 from a joinery firm for 75 days. At 11.75% that is more expensive than most business overdrafts. That is the point of the Act. It is meant to make a supplier's balance sheet the most expensive source of credit, not the cheapest.
Should You Actually Claim It?
Few small businesses do. The usual reason is fear of losing the customer, and that fear is reasonable. Our view, after years of watching how clients get paid, is more nuanced than "always claim" or "never claim".
Always state it. Put a line on your terms and on every invoice: "We reserve the right to charge interest and compensation under the Late Payment of Commercial Debts (Interest) Act 1998." It costs nothing. Large customers run payment queues, and accounts payable teams tend to pay the suppliers who look organised first.
Claim it when the relationship has already changed. If a customer is 60 days late, has stopped answering, or you have decided not to work with them again, there is no relationship left to protect. Add the claim to your final statement of account and your letter before action.
Use it as a bargaining chip. A calculated claim of £549 that you offer to waive if the invoice is paid within seven days often works better than another polite reminder. It shows you know your rights without forcing a fight.
Do not claim it on disputed invoices. If the customer has a genuine complaint about the work, sort that out first. Interest on a disputed sum only hardens positions.
Be careful with large customers you depend on. If one customer is 40% of your turnover, the conversation is commercial, not legal. Talk to them about terms before you invoice for interest.
How to Record It in Your Books
This is the part most guides skip, and it affects your accounts and your tax.
When to recognise it. Only book late payment interest as income when you have claimed it and it is likely to be paid, or when it is actually received. Under FRS 102 interest income is recognised when the inflow is probable and can be measured reliably. Adding a claim to your trade receivables that you fully expect to waive overstates your current assets and your profit.
Where to post it. Use a separate nominal code such as "Late payment interest received" under other income, not sales. If it goes into sales it inflates turnover, distorts your gross margin and pushes up your debtor days calculation.
VAT. Do not add VAT to statutory interest or the fixed compensation. They are compensation for late payment, not payment for a supply, so they are outside the scope of VAT. Raise them on a separate invoice or debit note, not as a line on a VAT invoice for the original work.
Tax. Interest and compensation received are taxable. For a sole trader or partnership they form part of business profits. For a limited company, interest received is taxed under the loan relationship rules and counts towards corporation tax profits like any other interest.
If the customer never pays. If you have claimed interest but the underlying invoice goes bad, write off the interest along with the debt. Our guide to bad debts covers how write offs and VAT bad debt relief work.
HMRC Late Payment Interest: What You Pay
Now the other direction. HMRC charges late payment interest on unpaid income tax, corporation tax, VAT, PAYE, National Insurance and capital gains tax. It runs from the day after the due date until payment, whatever the reason for the delay.
The rate has been base rate plus 4 percentage points since 6 April 2025. Before that it was base rate plus 2.5%. The government raised the margin to encourage people to pay on time.
| From | HMRC late payment rate | HMRC repayment rate |
|---|---|---|
| 6 April 2025 | 8.50% | 3.50% |
| 28 May 2025 | 8.25% | 3.25% |
| 27 August 2025 | 8.00% | 3.00% |
| 9 January 2026 | 7.75% | 2.75% |
| Late November 2026 (expected) | 8.00% | 3.00% |
Repayment interest is what HMRC pays you when you overpay. It is base rate minus 1%, with a floor of 0.5%. The gap between the two rates is now five percentage points, which is a strong reason not to treat HMRC as a source of credit.
A Quick Comparison
Fernhill also paid its £21,000 corporation tax bill 75 days late, because cash was tied up in that contractor's invoice. At 7.75%, HMRC charges £21,000 × 7.75% × 75 ÷ 365 = £334.42.
So Fernhill could claim £549.08 from the customer whose late payment caused the problem, while owing HMRC £334.42. Claiming the statutory interest would more than cover the cost. This is a real pattern we see. Late payment flows down the supply chain, and the business in the middle pays twice unless it passes the cost back.
Can You Deduct HMRC Interest?
- Individuals and sole traders: No. Interest on late income tax, Class 4 National Insurance or capital gains tax is not deductible.
- Limited companies: Interest on late corporation tax is generally deductible as a non-trading loan relationship debit. Penalties are never deductible, for anyone.
If you know a payment will be late, set up a Time to Pay arrangement with HMRC before the due date. Interest still runs, but it usually stops penalties being added on top. For self assessment, our guide to payments on account explains how the January and July deadlines create interest traps for the newly self-employed.
What Is Changing: The Commercial Payments Bill
The government has been working on late payment reform since 2025. The Commercial Payments Bill was going through the House of Lords in autumn 2026. Nothing in it is law yet, and most measures will need regulations to set a start date. The main proposals are:
- A 60 day cap on payment terms when large businesses pay smaller suppliers, with the "not grossly unfair" exception removed. The government has said this will not start before 2027.
- Mandatory statutory interest. Businesses would no longer be able to contract out of statutory interest by agreeing a lower remedy.
- Stronger powers for the Small Business Commissioner, including investigating poor payers, adjudicating disputes and fining persistent late payers.
- A ban on cash retentions in construction, with timing still to be consulted on.
Large companies already have to report their payment practices every six months, and you can look up how quickly any of them pay on the Check payment practices service before agreeing terms. We think that is the most underused tool in UK credit control. If a prospective customer pays half its suppliers late, you know before you sign.
Common Mistakes
- Using today's base rate. The rate is fixed by the six month period in which the debt became late. A September 2026 invoice stays at 11.75% after today's rise.
- Counting from the invoice date. Interest runs from the day after the due date, not the invoice date.
- Adding VAT. Statutory interest and compensation are outside the scope of VAT.
- Posting it to sales. It is other income. Keep it out of turnover.
- Claiming one fixed sum per customer. It is per invoice paid late.
- Booking claims you will waive. Recognise the income when it is agreed or received, not when you first threaten it.
- Charging consumers. The Act covers business customers only. Interest on consumer debts needs a clear contract term.
How IAK Can Help
We work with small businesses, construction companies and limited companies across North London and Hertfordshire. Late payment is the single most common cash flow problem our clients bring to us, and it is usually fixable with better terms, a consistent chasing routine and the occasional well-timed interest claim.
Our bookkeeping team keeps your sales ledger clean so you know exactly what is overdue, using an aged debtors report you can trust. Our management reporting service adds debtor days and a rolling cash flow forecast, so a late customer shows up as a cash gap weeks before it becomes an HMRC interest bill. Our tax planning team can help you avoid HMRC interest altogether by planning for corporation tax and self assessment payments in advance. If you are owed money and not sure what to do next, get in touch.
Sources
- Late Payment of Commercial Debts (Interest) Act 1998, legislation.gov.uk, the statute that creates statutory interest, the reference rate and the substantial remedy test.
- Late commercial payments: charging interest and debt recovery, GOV.UK, for the 8% plus base rate interest, fixed compensation amounts and how to claim.
- Interest rates and Bank Rate, Bank of England, for the 5 November 2026 decision to raise Bank Rate to 4%.
- Rates and allowances: HMRC interest rates for late and early payments, GOV.UK, for HMRC late payment and repayment interest rates and their history.
- Office of the Small Business Commissioner, for the late payment reform package, the Commercial Payments Bill and the statutory interest calculator.
- FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, Financial Reporting Council, for when interest income should be recognised.