July 18, 2022

How Much Can I Charge For Late Fees In The United Kingdom?

Denym Bird
CEO of Paidnice

Small-to-medium enterprises are crucial to the UK economy and, despite the challenges of the last few years, are generally performing well.

The UK is currently home to around 5.94 million SMEs, representing 99.3% of all businesses and employing three-fifths of the nation’s workers.

But worryingly, a culture of late payment is increasingly pushing UK SMEs towards insolvency.

Reports show that at any given time, the average UK business is chasing five unpaid invoices of around £8,500 each.

If your organisation is beginning to see late payments as an unavoidable part of doing business, this article will show you how to turn the tables back in your favour.   

Please note that the information found in this blog serves to inform but does not constitute legal advice. For information specific to your industry, we recommend contacting a legal professional.

Is it legal to charge late fees in the UK?

Yes, businesses in the UK are entitled to charge both fixed penalty fees and interest on overdue invoices at a rate of 8% plus the Bank of England base rate.

While there isn’t any government guidance around the amount that can be charged for a fixed fee, the onus is on you to ensure it is “reasonable”. We’ll discuss what is considered reasonable later in this article. 

It’s important to note that although it’s legal to charge late fees on overdue invoices in the UK, it can only be enforced if certain criteria are met.

Important: Your clients are only obligated to pay the applicable late fee if they’ve agreed to your payment terms in advance.

To ensure your invoices are paid promptly and that any fees are upheld, it’s crucial to follow the best practices and legal requirements for charging late fees. 

What is the best practice for charging late fees?

In the UK, the main best practices to follow surrounding the charge of late fees on overdue invoices are: contract terms, grace period and when to waive charges. 

Make sure your client has agreed to your contract terms

Before you begin charging late fees on overdue invoices, your fees must be listed in payment terms, and the terms agreed to by your client.

This is standard practice when onboarding a new client, but can be slightly more difficult when introducing new payment terms to existing clients.

You can find examples of policy wording for both eventualities in our article, with examples you can use today.

Include a fair grace period

When charging late fees on overdue invoices in the UK, it’s considered best practice to reach out to your client first.

While this may not be a task anyone enjoys doing, it’s a goodwill gesture that will help to strengthen your business relationship. It’s also often all that’s needed to speed up payment - which is, after all, the end goal. 

For regular late payers, a fixed penalty late fee can be charged the day after the payment was due. If charging interest on overdue invoices, the guidelines suggest giving clients a grace period of 30 days after the due date before applying late fees.

Waive the first one if they ask

After quietly biting your tongue about late payments and then switching to a late fee model, you’ll likely field a few calls from late-paying clients who are upset at being charged.

At this point, it’s best practice to offer to waive the fee if the balance is settled promptly. Now that your client is aware you charge fees, your invoices are likely to move up a few places on their “to do” list.  

How much can I charge in the UK?

We’ve discussed the best practices for late fees in the United Kingdom, but let’s look at the specifics in more detail. How much can you charge? How do you work out the interest? What level of fee is considered “reasonable” in the UK?

Tip: We’ll begin by stating clearly that late fees should be an added motivator to pay a balance on time, not a secondary stream of revenue for your business.

With this in mind, you should settle on a fee amount that deters late payments without being exploitative. Based on what other businesses in the UK are charging, you may want to follow these guidelines:

Charge fixed fees on low invoice balances

For overdue invoices with a balance lower than £500, it’s generally not worthwhile charging interest. Instead, opt for a fixed fee penalty of approximately £10-30 per invoice. 

Charge interest on high invoice balances

If you are invoicing for larger amounts of £500+, interest-based late fees are the best choice for encouraging prompt payment. Interest can be charged at a rate of 8% + the Bank of England base rate. This is the annual interest rate, so it will need to be further broken down to a monthly level before applying. 

There are complicated formulas and late fee calculators to help you work out daily interest rates based on an invoice balance, but it’s a rather manual process. In fact, the added effort of charging late payment fees is why so many SMEs don’t bother. That’s where we come in.  

How can I set up and automate late fees?

Adding late fees is one of the most impactful ways to encourage clients to pay on time, but traditionally it created a lot of unwanted admin. With accounts receivable staff already overworked, many UK SMEs don’t have the resources to add fees to their invoicing procedures. 

Xero, one of the UK’s most popular accounting systems, notably has no facility for adding late fees other than manually adding a charge to each invoice. As users of Xero, we set out to find a solution. Enter Paidnice.  

Paidnice is an app that works seamlessly with Xero, allowing you to automate your late payment system. Users can customise fixed and interest-based late fees and apply them to clusters of clients, based on their needs. The results speak for themselves - businesses using Paidnice get paid 40% faster than other Xero users. Here’s how it works:

How to setup and implement your late fees

Step 1. Work out the type of late fee you'll charge

Decide whether you’ll charge a fixed or interest-based late fee and at what rate you will set it at.

Step 2. Setup your late fee policy

Next, create a late payment policy and send it to your customers for them to agree to. For help with writing your policy, see our examples.

Step 3. Get started!

Then, implement your late fee policy by manually implementing your fee on overdue invoices each time they go overdue.

Optional: Automate your late fees with Paidnice!

Paidnice is a Xero app that will automatically detect when your invoices go overdue, and issue your customers a penalty, either a late fee or an interest charge, and either add this to your existing invoice as a line item, or issue a new invoice as a penalty.

Want to see Paidnice in action? Watch our tutorial video and learn more about getting started with Paidnice today. 

Please note that the information found in this blog serves to inform but does not constitute legal advice. For information specific to your industry, we recommend contacting a legal professional.

Denym Bird
CEO of Paidnice
Denym is a software entrepreneur and writes about accounts receivables management for small business.