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How Is Late Payment Interest Calculated?

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The problem of late payments is becoming one of the biggest problems that not just businesses confront, but even private employees as well as freelancers must face too.

Amongst the numerous negative consequences you face because of such a delay is burden of charging interest on late payments is perhaps the most relevant one.

In imposing a fixed amount of interest per day the client is over the deadline, you will be compensated in cash for delays you’ve faced from clients who haven’t kept their commitments.

However, before you can charge this interest, we recommend knowing the basics of the topic. This is the reason we set out to provide you with an in-depth overview of all aspects of late payment penalties so that you can implement the process to your advantage.

All transactions in business must follow certain rules. To ensure smooth and conflict-free business dealings, it is vital that payments are done within the agreed time limit.

The time period is defined in”due date” or “due date” of a contract. When this due date is over and your contract allowsit, you’re legally entitled to charge a late due payment fee, as well as late interest charges.

In addition, charging interest benefits you by allowing an additional payment of interest on the amount due but also helps clients pay on time. This is because if a client refuses to pay the late payment or defers payment after a particular time there could be severe legal consequences.

In the UK the United Kingdom, the application of this interest on late payments was introduced following the late payment of commercial Debts (Interest) Act 1998. This act also recognised reasonable costs. You will find out more about these later on.

When is it appropriate to charge interest on a delinquent payment?

The contract you negotiate with your client will clearly state the date by which you are free to start charging late interest on payments.

The typical time frame for receiving public sector payments is 30 days. However, for private sector payments it’s 60 days. This duration may be subject to change depending on the various contracts that are available to different customers.

Before you decide to charge interest on late payments, it is advised that it’s beneficial sending reminders your customer. This can be accomplished in three ways. You could begin by sending out a reminder two or three days after the due date is passed.

If the delay in payment is by more than 7 days, it may be a suitable moment to call. Formal letters or messages can be sent. If the payment has not been received, you can start charging interest on a regular basis.

You can find a late payment interest calculator over on this website…

How much late payment interest can you charge?

The interest on unpaid invoices you charge can depend on two factors. It could be governed by the law of your country, or the interest rate you decide to set within your agreement.

If there is a predetermined rate of interest that you mentioned in the signed contract, then you are required to abide by that. But, the period of 60 days legally mandated has to be observed.

In the absence of a mentioned interest rate in the formal contract, you’ll have to charge the rate of interest rate that is set by law for late payments.

HMRC regulates interest rates

The HMRC or HM Revenue and Customs is the body responsible for tax collection. The HMRC also passes laws setting the interest rates which can be charged for late payments.

The interest rate paid is 8% above the base interest rate set by the Bank of England. The interest rate set by the Bank of England has seen many recent reductions. This is because of the overall relaxation in the rates of interest by the COVID-19 pandemic.

Late charge assessment – the role of late charges

Analyzing the late payment interest and other aspects that are associated with the late payment are extremely crucial. If you don’t know the exact amount due or the interest you are required to charge to the customer, it could become problematic.

To avoid this, you must conduct an extensive assessment to fully understand the process in claiming claims of interest.

The first thing to look over the contract you signed with the client in question. By doing this, you’ll examine the terms that between you and the customer agreed to in relation to late payments as well as the late payment interest.

You are only able to apply the interest rate that is governed by UK law if your contract does not specify the interest rates of any other type you have agreed to.

Additionally, this evaluation will also be able to identify any time requirements which your contract stipulates. This will assist you in planning your strategy to charge interest on late payment accordingly.

As part of the assessment You will also compare any other details in the contract to the late payment rate you have calculated.

What are “reasonable costs”?

In accordance with UK law, there are three additional compensations you can claim based on the amount of the overdue payment. These are;

PS40 for debts less than PS1,000
PS70 for debts that fall between PS1,000 and PS10,000
PS100 for loans of more than PS10,000

However, sometimes, the process of chasing late payments can cost a lot of money. If you’re found to be in such a situation, you are able to declare the amount you spent as “reasonable costs”.

Thus, reasonable costs essentially assure that you’re not paying anything out of your pockets while trying to collect your missing payments from your client. Those individuals who hire the assistance of an firm for these payment requests are most likely to spend more on the process , which they can claim as “reasonable expenses”.

Lastly, these costs can be avoided when the rate of interest applied is the rate of the contract, and not the one specified in UK law.

What is the length of time this process can will take?

Claimant for tardy interest payment is a relatively simple process.

It doesn’t require you to be having to rush around to meet certain needs or gathering numerous documents. Neither do you have to submit complicated paperwork. However, it can indeed be time-consuming.

The total time that this process will take is contingent on the time it must acknowledge first and then process the late payment and interest due on late payments.

The time frame that the UK law allows the client is 30 days in the absence the agreed due date set in the contract. The duration starts on the moment the client gets an official invoice requesting payment. Interest can be charged from the day following the date of due.

In the UK, public sector clients have 30 days in which to pay the interest on late payment after the claim has been filed. For private sector clients, the deadline will be 60 calendar days.

If the deadlines you set are not met, you’ll need to wait until the next time frame that is stated on the Letter Before Action that you send. The length of time you have to wait for can be different depending on what Letter Before Action you draft. It is possible to wait up to a week or 60 days.

What happens if a client doesn’t pay the interest?

There is always the chance of not receiving late freelance payments regardless of numerous prompts and reminders. Some clients might not acknowledge the payment due or the fees and interest which you’ve charged.

In such circumstances, the only resort that is left is to seek legal options. This is possibly the most severe action that you could take, and should not be taken in the event of a need to.

Once legal proceedings begin and legal proceedings begin, there is a great chance that your relationship with the client you are dealing with is going to end. There are also important factors to be aware of prior to making legal actions against clients for pursuing late interest payments.

These include substantial legal fees as well as time that must be absorbed. In this situation the most effective course of procedure is to perform an analysis of the costs and benefits.

In an overview

We are aware of how smooth cash flow depends on the timely payment of business invoices. To ensure this smooth flow it is imperative to avoid late payments.

The interest charged for late payments aids in this cash flow. This interest acts as your compensation for not being paid timely.

To ensure that you have made the right payments and claims of interest for your customer it is crucial that you analyze all factors to it.

This includes how amount of interest calculated is determined, the time it takes to process the claims and what should be done when the client isn’t cooperating. Obtaining information regarding the late payment interest deductibility is essential when considering the interest that is charged.