Late Payment Interest Clause in UK Contracts: What It Means & Example Wording

When to Include a Late Payment Interest Clause

• In every commercial contract and freelancer agreement to deter late payment and compensate for the cost of delayed cash flow
• In supply agreements where the supplier is a small business that depends on timely payment to manage cash flow
• In any agreement where the payment terms are longer than 30 days, to provide additional incentive for timely payment

Example Wording

This example wording is illustrative only. Customise it to your specific circumstances and consider seeking legal advice.

Is a Late Payment Interest Clause Enforceable in the UK?

Late payment interest clauses are enforceable in the UK. However, under the Late Payment of Commercial Debts (Interest) Act 1998, any contractual interest provision must provide a 'substantial remedy' for late payment. If the contractual rate or remedy is not substantial, the debtor can challenge it and rely on the statutory rate (8% above base rate) instead. In consumer contracts, an excessive interest rate could be challenged as an unfair term under the Consumer Rights Act 2015.

Common Mistakes

• Setting an interest rate that is too low and inadvertently displacing the more generous statutory rate — if the contractual rate provides a less substantial remedy than the statute, the statutory rate prevails
• Failing to specify when interest starts to accrue — it should be clear that interest runs from the due date, not from the date a reminder is sent
• Not mentioning debt recovery costs — the Late Payment Act also entitles the creditor to a fixed sum (£40 for debts up to £999.99, £70 for debts up to £9,999.99, £100 for debts of £10,000 or more) plus reasonable recovery costs