Late Payment Interest Explained

When a commercial customer pays an invoice late, the money you are owed has been working for them instead of for you. Late payment interest is the law's way of correcting that: a charge that compensates a supplier for the time its cash sat in someone else's account. In much of the world this is not a favor you have to negotiate. It is a statutory right that applies the moment an invoice goes overdue.

The catch is that the rules differ sharply by country. The United Kingdom hands suppliers a clear formula and a fixed fee on top. The European Union sets a floor that each member state then implements in its own law. The United States has no general federal rate at all and leaves it to the contract. Knowing which regime governs your invoice is the difference between charging the right amount and charging a number a client can wave away.

This guide explains how the main statutory rates are built, why they are pinned to a central-bank base rate, and how to turn the rule into an actual figure for the invoice in front of you. It is the companion explainer to the Late Payment Interest Calculator, which applies these rules so you do not have to compute them by hand.

The UK: base rate plus 8 percent, plus a fixed fee

The United Kingdom has one of the clearest statutory regimes. Under the Late Payment of Commercial Debts (Interest) Act 1998, a business supplying another business can charge interest at the Bank of England base rate plus 8 percent per year on any overdue commercial invoice. If the base rate is 4.75 percent, the statutory rate is 12.75 percent.

Two details matter in practice. First, the rate is fixed for a six-month reference period: invoices that fall overdue in the first half of the year use the base rate in force on 31 December, and those in the second half use the rate from 30 June, so the figure does not move every time the Monetary Policy Committee meets. Second, on top of interest you can add a fixed compensation sum per invoice to cover the cost of chasing: 40 pounds for debts below 1,000 pounds, 70 pounds for debts up to 10,000 pounds, and 100 pounds for anything larger. That fixed fee is often the part clients forget exists.

The EU: 8 points over the ECB rate, implemented nationally

The European Union approaches the same problem through the Late Payment Directive (2011/7/EU). It sets a minimum statutory rate for business-to-business transactions of the European Central Bank main refinancing rate plus at least 8 percentage points, and it gives creditors a right to a fixed recovery amount of at least 40 euros per invoice.

The word "directive" is the key to how this plays out. A directive is not directly the law in any country; each member state must transpose it into national legislation, and they vary in the details above the floor. Germany adds 9 percentage points over its base rate for B2B debts under the Civil Code. France sets a higher penalty and a mandatory fixed fee. Spain implements the directive through Ley 3/2004. So an invoice billed from Munich, Milan, or Madrid all trace back to the same EU floor but reach a slightly different final rate. When you charge EU late interest, you apply your own country's transposed rule, not the directive in the abstract.

The US: no federal rate, so the contract rules

The United States is the major outlier. There is no general federal statute setting a B2B late-payment interest rate. The Prompt Payment Act and the procurement regulation FAR 32.905 require federal agencies to pay their own contractors on time and to pay interest when they do not, but that protection stops at the government's own invoices. It does not reach private commercial debts at all.

For an ordinary business-to-business invoice in the US, your right to interest comes from your contract. If you stated a late-payment rate, that rate governs, subject to state usury caps. If you said nothing, you fall back on your state's prejudgment interest statute, which a court applies if the dispute reaches one; these run from roughly 6 to 18 percent annually depending on the state. The lesson is simple and practical: in the US, the late-fee clause you write into the contract is doing all the work, so write one. Our guide on how to write payment terms on an invoice covers the wording.

Other markets: India, the Philippines, and beyond

Outside the UK, EU, and US, the picture is a patchwork worth knowing if you invoice internationally. India protects small suppliers strongly: under the MSMED Act 2006, payments owed to a registered micro or small enterprise carry statutory interest at three times the RBI bank rate, compounded monthly, which produces an effective rate near 19 percent. The Philippines sets a legal interest rate of 6 percent per year for monetary obligations when the contract is silent, fixed by Bangko Sentral ng Pilipinas in BSP Circular 799. Singapore has no statutory commercial rate but its courts award prejudgment interest at a default rate. The common thread is that "the rate" depends entirely on where the obligation sits.

Why the rate is pinned to a base rate

Almost every statutory regime expresses its rate as a central-bank reference rate plus a fixed margin, rather than as a flat number. There is a reason. A flat statutory rate set in law would drift away from economic reality as interest rates rose and fell; a 10 percent statutory rate written in a low-rate decade becomes punitive when base rates climb, and toothless when they fall. Pinning the penalty to the Bank of England base rate or the ECB refinancing rate keeps the compensation proportionate to the actual cost of money. The fixed margin, the 8 or 9 points, represents the additional penalty for paying late, over and above the pure time-value of the cash.

This is also why you cannot quote a single number for "the UK late payment rate" without saying when. The margin is fixed in law, but the base rate underneath it moves, so the headline rate changes whenever the central bank acts. Any figure you put on a demand should reference the base rate in force for the relevant period.

Turning the rule into a number

The arithmetic, once you have the rate, is straightforward. Interest equals the principal multiplied by the annual rate, multiplied by the number of overdue days divided by 365. A 5,000 invoice that is 30 days overdue at a 12.75 percent statutory rate accrues 5,000 x 0.1275 x 30 / 365, which is about 52, before you add any fixed compensation fee.

Doing that by hand is fine for one invoice. It gets error-prone fast across multiple invoices, multiple jurisdictions, and a base rate that resets twice a year, and a wrong figure on a demand letter undermines your credibility at exactly the wrong moment. The Late Payment Interest Calculator applies the correct statutory rule for the UK, the EU, India, and other jurisdictions, adds the fixed recovery fee where one applies, and returns the figure ready to quote. Once you have the number, the guides on how to follow up on an unpaid invoice and what to do when a client won't pay cover how to put it to work.

FAQ

What is statutory late payment interest?

It is interest a creditor can charge on an overdue commercial debt because the law allows it, even when the contract says nothing about late payment. Many countries set a statutory rate so suppliers are not left uncompensated when a buyer pays late. The UK, the EU member states, and India all have a statutory commercial rate; the US and several others rely on the contract or a court's prejudgment rate instead.

How much interest can I charge on a late UK invoice?

Under the Late Payment of Commercial Debts (Interest) Act 1998, the statutory rate is the Bank of England base rate plus 8 percent per year. You can also add a fixed compensation fee per invoice: 40 pounds for debts under 1,000 pounds, 70 pounds up to 10,000 pounds, and 100 pounds above that. The rate is fixed for a six-month reference period based on the base rate in force at the time.

How does the EU late payment rate work?

The EU Late Payment Directive 2011/7/EU sets the statutory rate at the European Central Bank main refinancing rate plus at least 8 percentage points for B2B transactions. Each member state transposes the directive into national law, so the exact figure and any fixed recovery fee depend on the country: Germany adds 9 points under the Civil Code, Spain applies the directive through Ley 3/2004, and France sets a higher floor.

Is there a federal late payment interest rate in the United States?

No. There is no general federal statutory rate for business-to-business late payments. The Prompt Payment Act and FAR 32.905 govern only payments by federal agencies to their contractors. For private B2B debts, you charge the rate stated in your contract, and if the contract is silent, most states allow prejudgment interest of roughly 6 to 18 percent under their own statutes.

Can I charge interest if my contract doesn't mention it?

In countries with a statutory rate, usually yes: the UK, EU member states, and India grant interest by law even when the contract is silent. In countries without one, such as the US, you generally need a contractual rate, though a court may still award prejudgment interest. The safest practice everywhere is to state a late-payment rate on the contract and invoice so your right to charge it is never in doubt.

How do I calculate the exact interest owed?

Interest is the principal multiplied by the annual rate, multiplied by the number of overdue days divided by 365. So a 2,000 invoice at 12 percent that is 40 days late owes about 26. Rather than do this by hand for each jurisdiction's rate and any fixed fee, the Late Payment Interest Calculator applies the correct statutory rule for the UK, EU, India, and others and returns the figure to put on your demand.

Late payment interest is not a penalty you invent to punish a slow client. It is a calibrated, statutory compensation for the time your money spent somewhere other than your account, and in most of the world it applies whether or not you remembered to mention it. Know the regime that governs your invoice, charge the right figure, and the interest becomes both fair compensation and a quiet incentive for the next client to pay on time.