How to Handle Late Payment Contractually
Handle late payment by sending a payment reminder, then a formal demand citing your contractual and statutory rights to interest and compensation, escalating to a letter before action if payment is not received, and ultimately filing a county court claim if necessary.
Last updated: February 2025
Step-by-Step Guide
Send a polite payment reminder
Contact the debtor as soon as the invoice is overdue, referencing the invoice number, amount, and original due date.
- •Often late payment is due to administrative delays, and a reminder resolves it.
Issue a formal demand
If the reminder is ignored, send a formal demand letter citing the contractual payment terms and your right to statutory interest under the Late Payment of Commercial Debts Act 1998.
- •State the interest and compensation amounts you are claiming.
Calculate statutory interest and compensation
Interest accrues at 8% above the Bank of England base rate from the day after the due date. Fixed compensation is £40 (debts up to £999.99), £70 (£1,000 to £9,999.99), or £100 (£10,000 plus).
- •Include the interest calculation in your demand letter.
Escalate to a letter before action or court claim
If payment is still not received, send a letter before action giving 14-30 days to pay. If ignored, file a county court claim through Money Claims Online.
- •The threat of court action often prompts payment.
Legal Requirements
The Late Payment of Commercial Debts (Interest) Act 1998 gives businesses the statutory right to claim interest at 8% above the Bank of England base rate on late B2B payments. Fixed compensation of £40-£100 is also claimable. The Act applies automatically to B2B transactions unless the contract provides a substantial remedy that is not unfair to the supplier.
Common Mistakes
Template / Example
When to Get a Solicitor
If the debt is disputed, if the debtor has become insolvent, or if the amount is significant and you are considering court action.
FAQ
Can I charge interest on late payments even if it is not in the contract?
Yes. The Late Payment of Commercial Debts Act 1998 gives you a statutory right to charge interest on late B2B payments regardless of whether your contract mentions it.
What is the current statutory interest rate for late payments?
The rate is 8% above the Bank of England base rate. So if the base rate is 5%, the statutory interest rate for late payments is 13% per annum. The rate changes when the Bank of England base rate changes.
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