Late Payment Interest Calculator
Introduction - Late Payment Interest
Late payment interest is a term used to describe the interest charged on unpaid invoices beyond their due date.
In the UK, late payment interest is regulated by law and is an important aspect of managing cash flow for businesses.
In this article, we will discuss what late payment interest is, how to calculate it, and how to apply it, with facts and legal points.
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What is Late Payment Interest in the UK?
Late payment interest is the interest charged on invoices that have not been paid within the agreed payment terms. The UK government introduced legislation in 1998 to protect businesses from late payments, known as the Late Payment of Commercial Debts (Interest) Act 1998. This act provides businesses with the right to charge interest on late payments.
The Late Payment of Commercial Debts (Interest) Act 1998 applies to commercial debts, which includes invoices for goods and services provided by one business to another. The act applies to all businesses, regardless of their size, and sets out a standardised approach to charging late payment interest.
How to Calculate Late Payment Interest in the UK
The calculation of late payment interest in the UK is based on the Bank of England's base rate plus 8%. The base rate is the interest rate set by the Bank of England, and it is currently at 4% (March 2023) Therefore, the current late payment interest rate in the UK is 12%. See this for reference
To calculate late payment interest, you need to know the amount of the invoice, the number of days it is overdue, and the current late payment interest rate. The following formula can be used to calculate late payment interest:
Late Payment Interest = (Invoice Amount x Late Payment Interest Rate x Number of Days Overdue) / 365
For example, if a business has an unpaid invoice of £10,000 that is 30 days overdue, the calculation of late payment interest would be as follows:
Late Payment Interest = (£10,000 x 8.1% x 30) / 365 = £67.12
Therefore, the late payment interest charged on the unpaid invoice would be £67.12.
How to Apply Late Payment Interest in the UK
To apply late payment interest in the UK, businesses need to include a clause in their terms and conditions that outlines their right to charge late payment interest. The clause should specify the late payment interest rate, the payment terms, and the consequences of non-payment.
Once an invoice becomes overdue, the business should send a reminder to the customer, notifying them of the overdue payment and the late payment interest that will be charged. If the payment is still not received after a reasonable period, the business can then apply late payment interest.
It is important to note that late payment interest cannot be charged if it is not included in the terms and conditions. Therefore, it is essential to ensure that the terms and conditions are clear and concise and that they are agreed upon by both parties.
Legal Points to Consider.
The Late Payment of Commercial Debts (Interest) Act 1998 provides businesses with a legal right to charge late payment interest on overdue invoices. However, there are several legal points to consider when applying late payment interest in the UK.
Firstly, businesses cannot charge late payment interest that exceeds the amount of the debt owed. Therefore, it is important to calculate late payment interest accurately and ensure that it does not exceed the debt owed.
Secondly, businesses cannot charge late payment interest if the payment terms have not been agreed upon. Therefore, it is important to ensure that the terms and conditions are agreed upon by both parties.
Lastly, businesses should ensure that they follow the correct procedure when applying late payment interest. This includes notifying the customer of the overdue payment and the late payment interest that will be charged.
Conclusion.
Late payment interest is an important aspect of managing cash. Use our free calculator below to help you calculate the late payment interest.
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UK Late Payment Calculator
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*This calculator and blog information in its entirety is only a guide to the amounts to approximately charge and should not be relied upon for an accurate calculation of any late payment interest in the UK. Always seek professional advice and do not rely on this blog or its content for advice whether actual or implied in any way.