Freelancers and small business owners: Here’s how to calculate and charge mandatory 8% late payment interest (templates included)
Freelancers and small business owners can stop chasing unpaid invoices for free thanks to a major legal update that makes overdue fees automatic
Late invoices are a massive headache for freelancers and the solo self-employed. Chasing clients takes up precious time. It also hurts your weekly cash flow. Thankfully, the law is changing to protect you.
The UK government recently introduced a landmark law to Parliament. It is called the Commercial Payments Bill. Ministers describe it as the largest crackdown on late payments in over 25 years.
This legislation fixes a major problem. Previously, freelancers could charge late fees. However, many felt too awkward to bring it up. They feared damaging their client relationships.
The new bill changes everything. It creates a mandatory interest requirement for commercial contracts. Clients must pay interest on late invoices. This fee is now an automatic legal rule.
The rate is set at 8% above the Bank of England base rate. This makes the penalty a meaningful deterrent for slow payers.
How to calculate late interest on an invoice
Calculating the fee is simple. Let us look at a basic example. Imagine a client owes you £2,000. The payment is now 30 days overdue.
First, find the current base rate. Let us assume the base rate is 4.5%. You must add the mandatory 8% to this figure. Your total annual interest rate is 12.5%.
Now, calculate the yearly interest on your debt.
- Multiply £2,000 by 0.125. This equals £250 of interest per year.
- Next, divide £250 by 365 days. This gives you a daily interest rate of around 68p.
- Finally, multiply 68p by your 30 late days. Your client now owes an extra £20.40 in late payment interest.
Update your contract’s terms
You must prepare your business for this law. Check your standard freelance terms and conditions. Ensure your contracts mention the Commercial Payments Bill rules.
State clearly that all invoices have a 60-day maximum limit. This matches the new legal cap for large firms. Write down that statutory interest applies automatically after the due date.
Add this clear, simple clause to your standard terms and conditions or Statement of Work (SOW):
Late Payment Terms: Payment is due within 30 days of the invoice date. In line with the UK Commercial Payments Bill, late payments will automatically accrue statutory interest daily at a rate of 8% above the Bank of England base rate, calculated from the final due date until full payment is received.
Onboarding: How to approach the client about late fees
When you send over your contract or SOW, you do not need to be defensive or awkward about payment terms. Frame it as a standard, legal business practice.
What to say in your email or meeting:
I am looking forward to partnering with you on this project.
Attached is the Statement of Work for your review and signature. Please note that our payment terms are set strictly to 30 days, fully adhering to the standard compliance guidelines outlined in the UK Commercial Payments Bill.
Once the signed document is returned, we will officially schedule the kick-off date and begin development.
Automate your payment reminders
Do not chase these fees manually. Use smart accounting software or an email scheduled for a certain date to update your clients about invoice reminders. Add an automated line to your email templates.
For example, write a polite warning message. State that the invoice is overdue. Note that late payment interest is accumulating daily by law. This keeps your tone professional. It lets the system do the hard work for you.
Automated email templates
Gentle reminder (3 days before due date)
Subject: Upcoming Invoice Reminder: [Invoice Number] for [Project Name]
Hi [Client Name],
I hope your week is going well.
This is a quick, automated reminder that invoice [Invoice Number] for [Amount] is due in three days on [Due Date]. Please note again that our payment terms are set strictly to 30 days, fully adhering to the standard compliance guidelines outlined in the UK Commercial Payments Bill.
You can view the invoice and payment details attached to this email. Please let me know if you need anything else from my end to help process this on time.
Best regards, [Your Name]
Overdue notice (1 day after due date)
Subject: Overdue Invoice: [Invoice Number] for [Project Name]
Hi [Client Name],
Our records show that invoice [Invoice Number] was due yesterday, [Due Date], and remains unpaid.
Please note that under our contract terms and the UK Commercial Payments Bill, late payment interest is now accumulating daily on this balance at 8% above the Bank of England base rate.
To prevent further interest charges, please arrange for payment of [Amount] to be transferred today.
Thank you for your prompt attention to this matter.
Best regards, [Your Name]
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