The Best Time to Charge a Late Payment Fee

A late payment fee is typically an additional charge that is added on top of an outstanding invoice. Once the due date of an invoice has passed and is still unpaid, a late payment fee will normally be applied. The late payment of commercial debts act was introduced by the government in 1988. These fees were introduced in order to help business owners resolve the issue of past due or delayed invoices. 

Late payment fee image

When to charge late payment fees?

In order to charge a late payment fee, the breakdown of the additional payment must be included in the initial contract. Late payment fees should only be added or introduced if you have exhausted all other options, which will normally include sending an email, making a call and maybe a formal letter through the post. However, there are other reasons businesses should consider when wanting to apply a late payment fee, as it may not be the best option at the time. These may include:

  • If the work fulfilled the estimate
  • If the client is not able to pay due to circumstances out of their control

What is a reasonable late payment fee?

The statutory interest in the UK is 8% plus the Bank of England base rate for business to business transactions. However, this may change from time to time. Although the statutory rate is 8%, most clients will not have to pay the full 8% depending on how the late payment fee has been calculated. 

How are late payment fees calculated?

Here’s a quick example for a business that is owed £2,000 with a Bank of England base rate of 0.75%

  1. Annual statutory interest for these figures would be £175 (2,000 x 0.0875 = 175)
  1. Divide £175 by 365 to find out the daily interest. In this case, it is 48p (175 / 365 = 0.48)
  1. Assuming payment is 30 days late, you would be owed a total of £14.40 (30 x 0.48 = 14.4)

Leave a Comment

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Scroll to Top