Late Payment Penalties in the UK: A SaaS and Professional Services Guide

Understanding UK Late Payment Laws for Startups

For a SaaS or professional services startup, a late invoice from a key customer puts immediate pressure on runway. Chasing overdue payments often feels like a difficult choice between maintaining a good client relationship and protecting essential cash flow. Fortunately, UK late payment laws provide a clear, professional framework for startups to manage this. The system allows you to enforce your payment rights without resorting to aggressive tactics. This is not about punishing clients; it is about implementing a predictable process to ensure your financial stability. For complete workflows, see the invoicing and collections hub.

The Legal Foundations for Small Business Payment Rights UK

The core of your rights is found in a specific piece of legislation: The Late Payment of Commercial Debts (Interest) Act 1998. This framework applies specifically to business-to-business transactions in the UK. Its most important feature for a founder is that these rights are statutory, meaning they apply automatically. You are entitled to claim interest and compensation even if you never mentioned it in your original contract.

For SaaS companies, where predictable monthly or annual recurring revenue is vital, this legal backstop helps enforce payment discipline. For professional services firms, it ensures that milestone or project-completion invoices are treated with the urgency they require to manage project costs and payroll.

Understanding this shifts the dynamic from a difficult conversation to a standard business procedure. The law provides for two distinct components you can claim: statutory interest calculated daily and a one-time fixed sum compensation fee. This provides a legal basis for charging interest on overdue invoices, giving you a structured, non-emotional path to follow.

A Tiered Approach to Enforcing Your Rights

Fear that enforcing late-payment charges will harm client relationships is the most common reason founders hesitate. This is a valid concern, but it can be managed by reframing the process. Enforcing your rights should not be the first step, but the final one in a clear, professional collections process. The reality for most pre-seed startups is more pragmatic: consistent late payments from any client, no matter how important, pose a direct threat to your runway.

What founders find actually works is a tiered approach that escalates calmly and professionally. The goal is communication first and enforcement last. This method preserves goodwill with clients who have made a simple mistake while creating clear consequences for those who are habitually late. See our guide on collections process automation for automating reminders.

1. Polite Reminders: Use your accounting software like Xero to send automated, polite follow-ups. Most late payments are simple oversights that are resolved at this stage.
2. Formal Notice of Intent: If an invoice becomes significantly overdue (e.g., 15-30 days past the due date), send a clear, firm, and professional notice. This email states that the invoice is now overdue and that if it is not paid by a final specified date, you will be exercising your statutory rights to add interest and compensation fees.
3. Application of Charges: Only after the deadline in the formal notice passes do you apply the charges. You should issue a new, separate invoice for these fees to maintain clear records.

This system distinguishes between a valued client who made a mistake and a systemic late payer who impacts your business. The primary goal is always getting the original invoice paid. The potential application of fees is simply the most effective tool UK law provides to achieve that goal.

Calculating What You Are Owed: Statutory Interest and Compensation

When you do need to apply charges, UK late payment laws are very specific about what you can claim, which removes any guesswork. The rules apply consistently across England, Wales, Scotland, and Northern Ireland. There are two parts to every claim.

1. Statutory Interest

This is a daily interest charge on the gross amount of the overdue invoice, including VAT. The formula is fixed by law: 8% + the current Bank of England base rate. As of early 2024, the Bank of England base rate is 5.25%, making the total statutory interest rate UK businesses can charge 13.25% per year. You can find the current official rate on the Bank of England's website.

Let's use a recurring case study: A SaaS company is owed £5,000 for an annual licence. The invoice is now 35 days late.

• Step 1: Calculate annual interest.
  £5,000 x 13.25% = £662.50
• Step 2: Calculate daily interest.
  £662.50 / 365 days = £1.815 per day
• Step 3: Calculate total interest owed.
  £1.815 x 35 days = £63.53

2. Fixed Sum Compensation

In addition to the daily interest, you can claim a one-off compensation payment for each late invoice. The amount is set in legislation and depends on the value of the debt.

• For debts up to £999.99, the fee is £40.
• For debts from £1,000 to £9,999.99, the fee is £70.
• For debts over £10,000, the fee is £100.

In our example, the £5,000 invoice falls into the second tier, so you can add a £70 compensation fee.

The total amount you are now legally owed is £5,000 (original invoice) + £63.53 (interest) + £70 (compensation) = £5,133.53.

How to Implement Your Debt Recovery Process

Knowing your rights is one thing; implementing them professionally is another. The key is to build this process into your standard operations to avoid ad-hoc, emotional chasing. This is a critical part of the debt recovery process UK startups should formalise early.

1. Update Your Invoice Terms

While your rights are statutory, explicitly stating them on your invoices sets clear, professional expectations from the start. Add a simple clause to your invoice template in your accounting software.

Example Wording:
Payment terms are 30 days from the invoice date. We reserve the right to claim statutory interest and compensation for late payment under The Late Payment of Commercial Debts (Interest) Act 1998.

2. Create a Formal Notice Template

This is the crucial communication before applying fees. It should be polite, factual, and unambiguous. A scenario we repeatedly see is that a clear, formal notice is often all that is needed to secure payment.

Example Email Template:

Subject: Final Notice Regarding Overdue Invoice [Invoice Number]

Dear [Client Contact Name],

I am writing to you regarding invoice [Invoice Number] for the amount of [£ Amount], which was due for payment on [Due Date].

Our records show that this invoice is now [Number] days overdue. A copy is attached for your reference.

If the full amount is not paid within the next 7 business days (by [Final Date]), we will exercise our statutory right to add late payment interest and a fixed sum compensation fee as allowed under The Late Payment of Commercial Debts (Interest) Act 1998.

We want to resolve this amicably. Please let us know if there is an issue we are unaware of.

Regards,

[Your Name]

3. Issue a Separate Invoice for Charges

If the final deadline passes, issue a new invoice just for the calculated interest and fixed compensation fee. Do not add it to the original overdue invoice. In your accounting system like Xero, create a new item and clearly reference the original invoice number in the line description, for example, "Late payment charges relating to invoice [Invoice Number]". This keeps your primary revenue reporting clean and makes reconciliation easier.

Protecting Your Cash Flow: Key Takeaways

Cash-flow strain from late-paying customers is a serious risk, but UK law provides a powerful and professional toolkit to manage it. The goal is not to collect penalties, but to ensure you are paid on time for the work you have delivered or the service you provide. Having a formal policy transforms a stressful situation into a manageable business process.

Your first step should be to update your invoice templates to include your payment terms and a reference to the Act. Next, create an email template for your formal notice. By systemising your approach, from gentle reminder to formal notice to the final application of charges, you protect your cash flow, assert your rights, and maintain professionalism in your client relationships. You can find more resources at the Invoicing and Collections Process hub.

Frequently Asked Questions

Q: Can I claim late payment interest if it was not in my original contract?
A: Yes. The right to claim statutory interest and compensation under The Late Payment of Commercial Debts (Interest) Act 1998 is statutory. This means it applies automatically to all B2B transactions in the UK, even if your terms and conditions or contract do not mention it.

Q: What is the current statutory interest rate in the UK for late payments?
A: The statutory interest rate is the Bank of England's base rate plus 8%. As the base rate can change, you should always verify the current rate on the Bank of England's website. For example, if the base rate is 5.25%, the statutory interest rate you can charge is 13.25% per annum.

Q: Will charging late fees damage my relationship with an important client?
A: This is a common fear, but it can be managed with a professional process. The key is to use penalties as a last resort in a tiered collections system that starts with polite reminders. A formal notice before applying charges gives a good client every chance to pay, preserving the relationship.

Q: Should I add the late payment fees to the original invoice?
A: No, it is best practice to issue a separate, new invoice for the statutory interest and compensation fees. This keeps your accounting records clean, especially in systems like Xero. Clearly reference the original overdue invoice number on the new invoice for the late payment charges.