Late Payment Legislation: Your Rights

Late payments are one of the most persistent and damaging problems facing sole traders and freelancers in the UK. According to the Federation of Small Businesses (FSB), poor payment practices cost small firms billions each year, and around 50,000 businesses close annually as a direct result of cash flow problems caused by late payments. If you've ever stared at an overdue invoice wondering how you'll cover next month's bills, you're not alone — and you have more legal rights than you might realise.

This guide explains the legislation that protects you, how to use it, and practical strategies for getting paid on time.

The Late Payment of Commercial Debts (Interest) Act 1998

The cornerstone of late payment legislation in England, Wales, and Scotland is the Late Payment of Commercial Debts (Interest) Act 1998 (as amended). This Act gives you a statutory right to charge interest and claim compensation on late commercial debts — and you don't need to have included this in your contract for it to apply.

When Does It Apply?

The Act applies to business-to-business (B2B) transactions. If you're a sole trader providing goods or services to another business (including limited companies, partnerships, and public sector bodies), you're covered. It does not apply to consumer transactions — i.e., when your client is an individual acting in a personal capacity.

Your Right to Charge Interest

Under the Act, you can charge interest on late payments at a rate of 8% above the Bank of England base rate. As of early 2026, with the base rate at 4.5%, that means you can charge 12.5% per annum on the outstanding amount. Interest starts accruing from the day after the agreed payment date, or if no date was agreed, 30 days after the invoice date or delivery of goods/services (whichever is later).

For example, if you sent an invoice for £2,000 with 30-day payment terms, and the client hasn't paid after 60 days (meaning 30 days late), the interest calculation would be:

£2,000 × 12.5% ÷ 365 × 30 = £20.55

It's not a fortune on a single invoice, but over multiple invoices and longer delays, it adds up. More importantly, the mere existence of this right — and letting clients know you'll exercise it — can be a powerful motivator.

Compensation for Recovery Costs

On top of interest, you're entitled to a fixed sum as compensation for the cost of recovering the debt:

• £40 for debts up to £999.99
• £70 for debts between £1,000 and £9,999.99
• £100 for debts of £10,000 or more

If your actual recovery costs exceed these amounts (for example, if you've had to instruct a solicitor), you can claim reasonable additional costs on top of the fixed sum.

Can Your Client Contract Out of These Rights?

A client cannot use contract terms to remove your right to interest and compensation entirely. The Act protects against this: any contract term that purports to exclude or restrict the statutory right to interest is void if it doesn't provide a "substantial contractual remedy" for late payment. In practice, this means a client's standard terms that say "no interest on late payments" are unenforceable.

However, a contract can substitute a different interest rate if it's a genuine, reasonable alternative. If a client's terms offer interest at, say, 2% above base rate, a court might consider that sufficient — but a term offering 0% would almost certainly be struck down.

Payment Terms: What the Law Says

If you haven't agreed specific payment terms with your client, the default position under the Act is 30 days from the later of either the date of the invoice or the date the goods/services were delivered. For public sector bodies, the default is also 30 days, and they cannot extend this.

For private sector contracts, you can agree longer terms — up to 60 days is common, and anything beyond that must be justifiable and not grossly unfair. Terms of 90 or 120 days, which some larger companies try to impose, may be challengeable as grossly unfair under the Act.

The key takeaway: always agree payment terms in writing before starting work. Include them in your contract, quote, or proposal, and restate them on your invoices. Common options are 14 days, 30 days, or payment on completion. The shorter, the better for your cash flow.

For a detailed guide on what your contracts should include, read our post on business contracts for freelancers.

How to Exercise Your Rights in Practice

Knowing your rights is one thing. Using them effectively is another. Here's a practical approach:

Step 1: Get Your Invoicing Right

Late payment problems often start with poor invoicing. Make sure every invoice includes:

• Your name and contact details
• The client's name and address
• A unique invoice number
• The date of issue
• A clear description of the goods or services
• The amount due (including VAT if applicable)
• Your payment terms
• Your bank details for payment
• A statement of your right to charge interest on late payments

That last point is important. Including a sentence like "We reserve the right to charge interest on late payments at 8% above the Bank of England base rate, plus compensation, under the Late Payment of Commercial Debts (Interest) Act 1998" puts clients on notice. It's perfectly legal and many sole traders find it encourages prompter payment.

Step 2: Chase Promptly

Don't wait weeks after a payment is overdue to follow up. Send a polite reminder the day after the due date. If there's no response within a week, follow up again — this time by phone as well as email. Keep a record of all communications.

Many sole traders feel uncomfortable chasing payments, but it's a normal and necessary part of business. You've delivered your work; you're entitled to be paid for it.

Step 3: Send a Formal Letter Before Action

If informal chasing hasn't worked after 14-21 days past the due date, send a formal "letter before action" (also called a letter of claim). This should:

• State the amount owed, including the original invoice amount, accrued interest, and the fixed compensation sum
• Reference the Late Payment of Commercial Debts (Interest) Act 1998
• Give a deadline of 14 days to pay
• State that you will commence legal proceedings if payment is not received

This letter often prompts payment because it signals you're serious. You can find templates for these letters online, and the GOV.UK guidance on making a court claim for money provides useful context.

Step 4: Use the Small Claims Court

If the letter before action doesn't work, you can issue a claim through the County Court (via Money Claims Online for claims up to £100,000). For debts under £10,000, the case will usually be allocated to the small claims track, where costs are low and you don't typically need a solicitor.

The court fee depends on the amount claimed — for example, a claim of £1,000-£1,500 attracts a fee of £80 (as of 2026). If you win, the court fee is added to the amount the defendant must pay.

Many debtors pay up as soon as they receive the court papers, without the case ever reaching a hearing. The key is to be prepared to follow through — don't issue a claim unless you're willing to see it to conclusion.

The Prompt Payment Code

The Prompt Payment Code is a voluntary code that businesses can sign up to, committing to pay suppliers within agreed terms, aim to pay within 30 days, and not alter payment terms without prior notice. Thousands of businesses, including many large companies and public sector bodies, are signatories.

If a client is a signatory and consistently pays you late, you can report them to the Small Business Commissioner, who can investigate and name non-compliant businesses. While the Code doesn't have the force of law, being removed from it can be reputationally damaging, especially for larger firms.

Protecting Yourself Proactively

Prevention is always better than cure. Here are strategies to minimise late payment risk:

Request Deposits or Stage Payments

For larger projects, ask for a deposit upfront (typically 25-50%) and structure the remainder as stage payments tied to milestones. This reduces your exposure and ensures the client has financial skin in the game from the start.

Credit Check New Clients

Before taking on a significant piece of work for a new client, check their creditworthiness. Companies House provides free access to basic financial information about limited companies, and credit reference agencies offer affordable reports for small businesses.

Use Clear Contracts

A well-drafted contract is your best protection. It should specify payment terms, what happens if payment is late (interest, suspension of work), and your right to pursue debt recovery. Read more about this in our guide to business contracts for freelancers.

Automate Your Invoicing

Late payments are sometimes caused by late invoicing. If you're sending invoices weeks after completing work, you're already behind. Use accounting software to automate invoice creation and send them immediately upon completion. You can explore how Accounted helps with this on our features page.

Offer Multiple Payment Methods

Make it as easy as possible for clients to pay you. Offer bank transfer, card payment, and direct debit options. The fewer barriers to payment, the faster you'll receive it.

Late Payments and Your Mental Health

The financial stress of chasing unpaid invoices takes a real toll. Research consistently shows that late payments are a leading cause of stress and anxiety among self-employed people. If you're struggling with the emotional weight of cash flow problems, you're not alone, and there are resources to help.

Understanding your legal rights — and being willing to use them — can itself be empowering. You're not begging for money; you're exercising a legal entitlement. Framing it this way can help shift the dynamic.

For guidance on managing your finances and staying on top of your obligations as a sole trader, our complete guide to self-employment covers the essentials.

Key Takeaways

Late payment legislation gives you powerful tools to protect your business:

• You can charge interest at 8% above the Bank of England base rate on late B2B payments
• You're entitled to fixed compensation of £40-£100 per invoice
• These rights cannot be contracted out of unless replaced by a substantial alternative
• Default payment terms are 30 days if nothing else is agreed
• The Small Claims Court is an accessible, affordable route for recovering debts
• Prevention through good invoicing, clear contracts, and credit checks is the best strategy

Don't let late-paying clients undermine your business. Know your rights, exercise them confidently, and put systems in place to minimise the problem from the outset. If you're ready to streamline your invoicing and stay on top of payments, sign up for Accounted and let us help you get paid on time.