Late payments cost the UK economy £11 billion every year and force 38 businesses to close every single day. If you run a small business, you already know the problem — you deliver the work, send the invoice, and then wait. And wait. For many UK small businesses, that waiting period has been the difference between growth and insolvency.

The government has decided enough is enough. In what it describes as the toughest crackdown on late payments in a generation, new legislation is being introduced that will cap payment terms, give the Small Business Commissioner real enforcement power, and impose mandatory interest charges on large companies that pay late. These are not suggestions or voluntary codes. They are laws with fines attached.

This article explains what is changing, when it takes effect, how it affects your business, and what you should do right now to prepare.

Why the Government Is Acting Now

Late payments have been a known problem for decades, but the scale has reached a point where the government can no longer treat it as a private matter between businesses. Nearly two-thirds of UK SME invoices were paid late in 2025. Forty-two percent of small businesses reported they could not pay their own staff on time because their clients had not paid them. The ripple effect is enormous — suppliers cannot pay their suppliers, employees miss wages, and viable businesses collapse not because they lack customers but because they lack cash.

The previous approach relied largely on voluntary commitments. The Prompt Payment Code, introduced in 2008, asked large companies to pledge that they would pay suppliers within reasonable terms. But it had no teeth. Companies could sign the code and still pay at 90 or 120 days with no real consequences. That system has now been replaced, and the replacement comes with enforcement mechanisms that did not exist before.

UK 2026 late payment rules dashboard with overdue alerts

The Fair Payment Code

In January 2025, the government replaced the Prompt Payment Code with the new Fair Payment Code, managed by the Office of the Small Business Commissioner. This is not simply a rebrand. The structure, requirements, and accountability have all changed.

How it works

The Fair Payment Code operates a tiered awards system based on actual payment performance:

Gold — Awarded to businesses that pay the vast majority of invoices well within terms and demonstrate consistently strong payment practices
Silver — Awarded to businesses that meet the core payment standards and show steady improvement
Bronze — The entry level, recognising businesses that have committed to the code and are working toward compliance

Previous Prompt Payment Code signatories are not automatically transferred. Businesses must apply separately to the new Fair Payment Code. This means any company that previously displayed the old code's badge now has nothing unless they actively re-register under the new system.

The key change for SMEs

Under the old code, signatories were expected to pay 95% of invoices within 60 days, with 30 days encouraged as best practice. Under the Fair Payment Code, 30-day payment to SMEs is mandatory for signatories, while the 60-day limit remains as the maximum for larger suppliers. This is a meaningful shift — 30 days is no longer a target. It is the standard.

The New Legislation

The Fair Payment Code is voluntary. What makes 2026 different is the legislation being introduced alongside it. The government announced in July 2025 that it would introduce new laws creating the toughest late payment regime in the G7. Here is what the legislation includes.

Maximum payment terms

Large companies will face mandatory maximum payment terms. The initial cap will be set at 60 days, reducing to 45 days. This means that a large company cannot contractually impose 90-day or 120-day payment terms on a small supplier. If the contract says 90 days, it will not be enforceable beyond the legal maximum.

This is a fundamental change. Until now, payment terms have been a matter of contract negotiation, and small businesses have had very little bargaining power. A small supplier told "our terms are 90 days, take it or leave it" by a large buyer had no legal recourse. Under the new rules, that conversation changes completely.

Stronger Small Business Commissioner

The Small Business Commissioner is being given significantly expanded powers. Under the new legislation, the Commissioner will be able to:

Carry out spot checks on large companies to assess their payment practices
Levy fines worth potentially millions of pounds against the biggest firms that persistently pay suppliers late
Enforce a 30-day invoice verification period to speed up dispute resolution — meaning a company cannot delay payment indefinitely by claiming an invoice is "under review"

The fines are designed to be proportionate but punitive. Reports indicate that fines would be set at double the amount the company owes in late-payment interest. For a large company with millions of pounds in overdue supplier invoices, that creates a serious financial incentive to pay on time.

Audit committee scrutiny

Audit committees at large companies will be legally required to scrutinise payment practices at board level. This means late payment to suppliers will no longer be buried in accounts payable — it becomes a governance issue that directors are personally accountable for reviewing.

Mandatory interest charges

The legislation will also introduce mandatory interest charges for late payment. Currently, the right to charge statutory interest exists under the Late Payment of Commercial Debts (Interest) Act 1998, but many small businesses either do not know about it or choose not to enforce it for fear of damaging client relationships. The new rules aim to make interest charges automatic rather than optional.

Your Existing Rights Under the Late Payment Act

Even before the new legislation takes full effect, you already have significant legal rights if another business pays you late. Many small business owners do not realise how much they can claim.

Statutory interest

You can charge statutory interest on any late commercial payment. The rate is 8% plus the Bank of England base rate. For the first half of 2026, the Bank of England reference rate is 3.75%, which means the statutory interest rate is currently 11.75% per year on the overdue amount.

Fintech illustration of UK late payment compliance dashboard for businesses

Statutory compensation

On top of the interest, you can claim a fixed statutory compensation amount for each overdue invoice:

Debt Amount	Compensation You Can Claim
Under £1,000	£40
£1,000 – £9,999	£70
£10,000 and above	£100

These rights apply automatically under existing law. You do not need to include them in your contract terms — though doing so makes enforcement easier and signals to clients that you take payment seriously.

When a payment becomes legally late

If you have agreed a payment date, the payment is late the day after that date passes. If you have not agreed a specific date, the law says the payment is late 30 days after either the customer receives the invoice or you deliver the goods or provide the service, whichever is later. For public authorities, the default is also 30 days. For business-to-business transactions, you can agree terms up to 60 days, but anything longer must be fair to both parties.

How This Affects Your Business

The impact depends on which side of the payment relationship you sit on.

If you are a small business waiting to get paid

These changes are overwhelmingly positive. Maximum payment terms mean your largest clients cannot impose unreasonable waiting periods. A stronger Small Business Commissioner means there is a real enforcement body you can complain to. Mandatory interest charges mean late payment has a direct financial cost to the payer, not just an inconvenience for you.

But the rules only help you if you know about them and use them. Statutory interest is already available and most small businesses have never charged it. The Fair Payment Code only benefits you if you check whether your clients are signatories. The new legislation only protects you if your invoicing, record-keeping, and tracking are strong enough to prove when an invoice was sent, when it was due, and when it was actually paid.

If you also pay suppliers

The rules apply to you too. If you routinely pay your own suppliers late, the same statutory interest and compensation rights apply against your business. As the legislation tightens, it is worth reviewing your own payment practices to make sure you are not exposed. The simplest approach is to pay within the agreed terms every time and flag any invoice disputes immediately rather than letting them delay the entire payment.

What You Should Do Right Now

The legislation is coming, but you do not need to wait for it to take effect before improving your position. Several practical steps can be taken immediately.

Review your payment terms

Check what terms you currently set on your invoices. If they say "payment within 30 days" then you are already aligned with the direction of the new rules. If they are vague or do not specify a date, tighten them. Clear, explicit payment terms on every invoice are the foundation of getting paid on time.

Add late payment clauses to your contracts

Include a clause that references your right to charge statutory interest and compensation on late payments. You may never need to enforce it, but its presence on the invoice and in the contract signals that you are aware of your rights and prepared to use them.

Track your invoices properly

You cannot chase what you cannot see. Many small businesses lose track of which invoices are overdue because they rely on memory, spreadsheets, or inbox searches. A proper ageing report — showing which invoices are current, which are 30 days overdue, 60 days overdue, and beyond — gives you immediate visibility into your cash position and tells you exactly who owes what.

This is where accounting software makes a real difference. Platforms like Sage Accounting track every invoice from the moment it is issued, show you real-time ageing reports, send automatic payment reminders before and after the due date, and flag overdue invoices so nothing slips through the cracks. The ability to see your entire receivables position in one dashboard — rather than piecing it together manually — is the difference between chasing late payments reactively and managing cash flow proactively.

Automate your reminders

The most effective way to reduce late payments is to remind clients before the invoice is overdue, not after. A polite automated reminder three days before the due date, followed by a firmer reminder the day after, and a final notice at 14 days overdue, creates a consistent chasing process without requiring you to manually write emails every week. This is exactly the kind of workflow that modern accounting software handles automatically.

Check the Fair Payment Code

If your largest clients are signatories to the new Fair Payment Code, they have publicly committed to paying SMEs within 30 days. If they are not paying you within that window, you have grounds to raise the issue formally through the Small Business Commissioner. Knowing whether your clients are signed up gives you leverage you may not have realised you had.

The Bigger Picture

These reforms are part of a broader government plan to support small businesses. Alongside the late payment legislation, the government has announced a £4 billion wave of financial support including £1 billion in Start-Up Loans and a £3 billion boost to the British Business Bank to help lenders offer more small business loans. The message is clear: the government wants small businesses to survive and grow, and late payments are one of the biggest barriers being removed.

For small business owners, the practical takeaway is straightforward. The rules are changing in your favour. But the rules only work if your invoicing is clean, your tracking is reliable, and your records are strong enough to prove what is owed and when. Get those foundations right — ideally through software that handles the tracking, reminders, and reporting for you — and you will be in a much stronger position to benefit from the protections being put in place.

Late payments have been tolerated for too long. That era is ending. Make sure your business is ready.

This article is for informational purposes only and does not constitute legal or financial advice. The legislation described is based on government announcements as of March 2026 and may be subject to change as it passes through Parliament. For guidance specific to your circumstances, consult a qualified legal or financial adviser.