What the New UK Late-Payment Rules Mean for Small Businesses

On average, late payments cost the economy roughly £11 billion and affect approximately 1.5 million UK businesses annually. This can have a direct impact on the cash flow of small businesses and their ability to innovate and grow.

As well as the monetary cost to companies, it was shown that business owners waste 86 hours per year due to chasing invoices for late payments. This is the equivalent of 133 million staff hours across all UK businesses. The government has recognised this and has introduced new late-payment rules in their bid to tackle the issue.

The New UK Late-Payment Rules

In March 2026, the government announced its overhaul of the previous late payment law after 25 years. It will build on the existing late payment legislation, but measures are said to be the toughest in the G7. The hope is that this will boost our economy and help small business’ cashflow.

The changes will include:

New 60-Day Cap on Payment Terms

When paying smaller suppliers, there will be a new 60-day cap implemented for large firms. The maximum payment terms will be 60 days and reduce to 45 days after five years. Payment terms have historically been 90-120 days, with large companies using this longer timeframe as a way to manage their own cash flow.

Mandatory Interest on Late Payments

Legally, up until now, businesses were able to charge interest on overdue invoices under the 1998 Late Payment of Commercial Debt Act. However, implementing interest can be damaging to client relationships, so has often been avoided by small businesses. New rules will therefore bring mandatory interest on late payments, meaning all commercial contracts will include statutory interest set at 8% above the Bank of England base rate.

A Deadline for Disputing Invoices

Businesses will now have a strict 30-day invoice verification deadline in which they can confirm or dispute a deadline. This prevents larger businesses from waiting longer to pay to manage their own cash flow.

The Small Business Commissioner

The Small Business Commissioner will have more power to adjudicate payment disputes, look into poor payment practices and even fine businesses where necessary. For firms who consistently pay late or do not abide by the new laws, fines can be up to millions.

Board-Level Accountability

In time, audit committees will have to legally be established by bigger businesses. Their role will be to oversee payment practices and release annual reports. This puts ownership on senior leadership to ensure suppliers are treated fairly and poor payment practices go unnoticed.

Construction

For those in the construction sector, it has also been proposed to ban the practice of withholding or deducting retention payments under a construction contract. This is often done to prevent late and non-payment or insolvency.

What Does This Mean for Businesses Day-to-Day?

The immediate effect of these new rules will provide greater predictability for small businesses and freelancers. It should provide better peace of mind that clients who are larger companies will be held to stricter regulations with payments. However, there are some precautions you can take to ensure you get the most from the proposed reforms.

Review Current Payment Terms and Contracts

Historically, smaller businesses may have felt obliged to accept longer terms.

Now the law is in your favour, it’s important to ensure terms are tightened, if they’re looser than 60 days.

Invoicing

Ensure your invoicing is prompt and clear, especially now that there is a 30-day dispute deadline for clients who may want to raise any problems with an invoice sooner.

Rights Around Interest

Get familiar with your rights around interest now that statutory interest on late payments will be mandatory. This removes the awkwardness around negotiating it in contracts.

Documentation

It’s imperative you keep accurate, detailed records for invoicing, including when they were issued, when payments were due and any communication with the client. If this is raised as a dispute to the Small Business Commissioner, this will be needed.

What About Suppliers?

While this new legislation will help smaller businesses receive payments from larger companies faster, it also means their own suppliers will need to be paid in tighter timeframes.

These new rules are currently expected to take effect in late 2026 or early 2027, with some details still subject to change. For both small and large businesses, it’s important that these legislations are considered when looking at your overall policies and cash flow planning.