UK late payment laws: are late fees legal in the UK?

What are the changes to UK payment laws?

In March 2026, the UK Government confirmed proposed amendments to the Late Payment of Commercial Debts (Interest) Act. These changes favour smaller businesses and their ability to get paid on time.

Current law already lets businesses charge late fees when an invoice is paid late. Payment terms between businesses should usually be no more than 60 days, but longer terms are allowed if they’re fair to both sides, so some businesses still insist on extended terms (e.g. 60+ days).

The proposed changes will remove that exception and create a hard 60-day limit on payment terms, mainly where larger businesses buy from smaller suppliers.

If no payment terms are agreed, payment is due 30 days after the invoice is received or the goods or services are delivered. Buyers can ask for longer terms, but under the proposals no longer than 60 days.

An invoice is late once the payment due date has passed, and from that point you can charge late fees.

How do I calculate late fees on an invoice?

The law sets the interest rate that applies to late invoices:

• 8% plus the Bank of England base rate. The base rate is 3.75% as of October 2026, so the interest rate is currently 11.75%.
• Interest is calculated daily, as simple interest.

Fixed compensation is also added, at the following rates:

So in the example above, the total late fee is £19.32 interest plus £70 compensation: £89.32.

How can I enforce late payment fees?

The good news is that you don’t need to add late fee clauses to a contract, or any other agreement with the buyer.

However, it’s not good commercial practice to spring late fees on buyers who weren’t expecting them.

To start with, we recommend telling buyers that late fees will now be applied. A standard email referencing the law, and explaining how late fees will be calculated, is enough.

Also, add late fee guidance to the terms section of your invoices. If it comes to enforcement, being able to show the guidance was on the invoice should help in any dispute.

Should I enforce late payment fees?

Whilst a buyer is legally required to pay late fees, in some circumstances charging them can damage the commercial relationship.

From a purely business perspective, charging late fees to a frequent buyer who always pays on time, except for this one occasion, might be too aggressive.

Use late fees to encourage buyers to pay on time, not as an extra source of revenue.

When it comes to actually applying fees, we recommend giving first-time late payers some leniency, provided they’re not too late.

I’ve decided to charge the late fee. How do I do this?

First, calculate the late fee. You can do this easily with the Orderlinks late payment interest calculator.

Provided you’ve told the buyer that late fees will apply, you’ll need to adjust the invoice manually in your accounting system. Xero doesn’t have a built-in way to automate this, so you’ll need to update it as the late fee grows.

Alternatively, solutions such as Orderlinks apply late fees to invoices automatically. When an invoice is late, the late fee is added and kept up to date. Automated messages explain the late fee to buyers, which encourages prompt payment.

If a late fee is applied via Orderlinks, you can still easily remove it from the invoice in Xero.

This article is general guidance, not legal advice. The proposed changes need new legislation and may change before they become law. Sources: GOV.UK guidance on late commercial payments, and the Government’s March 2026 response to its late payment consultation.