Ensure customers pay you on time

When to charge interest on late payments

Guide

You have a statutory right to claim interest on late payments, as well as a contractual right to claim interest if you have specified this in your terms and conditions.

Should I charge interest on a late payment?

You can charge interest on all late payments. However, even if you indicate in your terms and conditions that you will charge interest on all late payments, it is up to you whether you actually do so or not.

You should address each debt on a case-by-case basis and:

  • consider the relationship with the customer
  • get the opinion of customer-facing staff
  • assess your credit management system

What rate of interest should I use?

Rates for calculating interest are called reference rates and are fixed for six-month periods. The Bank of England base rate on 31 December is used as the reference rate for debts becoming overdue between 1 January and 30 June of the following year. The rate in force on 30 June is used from 1 July to 31 December.

You can calculate the interest payable on overdue bills by taking the relevant reference rate and adding 8 per cent.

Alternatively, you can set a contractual rate that may be higher or lower than the statutory rate. If you set a contractual rate, the statutory rate no longer applies.

Interest should be charged on the outstanding gross amount inclusive of VAT. No VAT is chargeable on the interest itself.

Charging interest

If you don't already charge interest, you may need to:

  • adapt your credit management and billing systems
  • amend invoices and terms and conditions so that they state you reserve the right to charge interest
  • notify customers of your plans and check that they understand the new terms and conditions
  • contact habitual late payers to discuss how they'll be affected

Make sure invoices include an agreed payment date so customers know when interest will start being charged - let customers know if interest starts to accumulate. 

Before charging interest, you could issue a letter stating that the payment is late and if it is not paid within, say, seven days, interest will be charged.