Automatic interest means the software adds 8% above the Bank of England base rate plus a fixed compensation sum to every invoice that passes its due date unpaid: no spreadsheet, no mental arithmetic, no awkward recalculation when the customer pays on day 47. Here is what the law allows, what the automation does, and how to switch it on without souring customer relationships.
- Business-to-business debts: 8% above base rate plus £40, £70 or £100 compensation.
- Interest runs from the day after the due date, automatically by law.
- You must state the terms on the invoice for the customer to see them coming.
- The fixed sums do not apply to consumer (domestic) customers.
- Apply interest selectively at first. The reminder is often enough.
What the law already gives you
Under the Late Payment of Commercial Debts (Interest) Act 1998, a business customer who pays late owes:
| Debt size | Fixed compensation | Interest |
|---|---|---|
| Under £1,000 | £40 | 8% above Bank of England base rate |
| £1,000 to £9,999.99 | £70 | 8% above base rate |
| £10,000 or more | £100 | 8% above base rate |
Interest accrues per day from the day after the due date until payment clears, and you can also recover reasonable costs of recovering the debt. This applies to business-to-business debts and to most public-sector customers; it does not apply to consumer debts. A homeowner is chased under your contract terms instead. The full formula and a worked example are in the late payment interest guide.
What the automation actually does
Switching on automatic interest changes three things about every overdue invoice:
- The clock is watched for you. The system knows each invoice’s due date from your payment terms, so “day after due date” is tracked without a diary entry.
- The interest is computed, not estimated. Days late × daily rate on the outstanding balance, plus the fixed compensation for the debt band: calculated on the day you ask, or when the reminder fires.
- The number appears where you chase. Reminders and statements can show the running interest total, so the customer sees the debt growing: see the reminder wording and the customer statement.
The point is not aggression: it is accuracy. Traders who chase by feel under-claim systematically: they round down, they forget compensation, they stop counting after three weeks.
Setting it up
- Put payment terms on every invoice, a stated due date is what the interest runs from. Terms and wording if you need the copy.
- Turn on the interest rule so overdue invoices accrue 8% over base plus the fixed sums from the day after due.
- Mention it on the invoice. A line under the payment terms, “Late payments may attract statutory interest and compensation under the Late Payment of Commercial Debts (Interest) Act 1998”, means nobody can claim it was a surprise.
- Pair it with reminders so the customer is chased before the amount becomes significant.
- When payment arrives, reconcile first, apply the payment to the invoice before any interest is added, and waive or adjust where the relationship warrants.
When to actually charge it
The legal right exists from day one; the commercial decision is yours:
- First offence, good customer: the reminder usually collects. Charging £40 compensation to a client worth £10,000 a year is a choice, not an obligation.
- Repeat late payer: charge it, invoice it as a separate line or credit note against the account, and let the record speak.
- Main contractors and companies: charge it: late payment is budgeted behaviour at that level, and the statutory right is precisely for this case.
- Domestic customers: the fixed compensation does not apply; chase under your contract terms instead.
A sensible default: reminders escalate, interest is added from day 14 on business debts, and it is waived once per customer per year as a goodwill gesture. Never twice.
FAQ
Can I automatically add interest to overdue invoices?
Yes, invoicing software can calculate and display statutory interest (8% above the Bank of England base rate) plus the fixed compensation sums on overdue business invoices from the day after the due date. You still choose when to actually charge it.
How much interest can I charge on a late UK invoice?
For business-to-business debts, 8% above the Bank of England base rate plus £40, £70 or £100 fixed compensation depending on the debt size: under £1,000, £1,000–£9,999.99, and £10,000+ respectively. The sums come from the Late Payment of Commercial Debts (Interest) Act 1998.
Does automatic interest apply to homeowners?
The fixed compensation sums in the late payment legislation apply to business debts, not consumer ones. You can still charge interest on a domestic customer if your contract allows it, but the statutory scheme’s fixed sums do not.
Do I have to warn customers before charging interest?
The statutory right applies regardless, but stating it on your invoices (and chasing before charging) avoids disputes. A line citing the Late Payment of Commercial Debts (Interest) Act 1998 under your payment terms is enough.
What if the customer pays part of the invoice?
Payments are applied against the invoice, and interest continues on the outstanding balance. Interest stops accruing on the day payment clears for the amount received.
Can I waive the interest for a good customer?
Yes, the statutory right is yours to use or waive. Many traders apply it by default on repeat late payers and waive it once as a goodwill gesture for otherwise reliable customers.
One last thing
Automatic interest does its real work before a penny is charged: an invoice that visibly accrues interest on every reminder gets paid faster than one that doesn’t. Set the rule, say so on the invoice, and use it as leverage you only occasionally have to pull.