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“If the purchaser owes the principal and interest, unless payment is accepted on other terms, any part payment of the debt will go to reduce the amount of the interest first”
Part 1 - How to calculate late payment interest
What rate of interest can be charged?At the start of a six-month period the official dealing rate of the Bank of England (the base rate) will be made a fixed "reference rate" for the subsequent six months. The table below shows how this works.
determine what interest rate you should use when calculating interest on a late payment, you need to add 8% to the "reference rate" that covers the six-month period in which your debt became late. How do I find the correct base rate to use?The correct interest rate to be used can be found by visiting www.payontime.co.uk
The Better Payment Practice Group will also issue a press release with the base rate to be used for the forthcoming 6-month period. The Bank of England base rate on the 30 June or 31 December can be found by looking in the financial pages of the national press of the appropriate date (libraries will be able to help) or by visiting the Bank of England website at www.bankofengland.co.uk. How do I calculate the interest charge?The interest owed on a late payment is simple, not compound, interest. It is calculated like this:
Debt x interest rate x the number of days late 365 Do I calculate inclusive or exclusive of VAT?You charge interest on the gross amount of the debt (including any element of VAT), but you do not pay VAT on the interest. ExampleIf the base rate is 4% for the six-month period when the debt became late, then the statutory interest rate is 12% (4% base rate plus 8%)
Debt is £851.06 plus £148.94 VAT = total £1,000
If this debt is 30 days late, then the interest owed is:
£1,000 x 12% = £120 (the annual rate) £120 ÷ 365 = 32.9p (the daily rate) 32.9 pence x 30 days = £9.86 (the interest owed to date) When does the interest stop running?Interest stops running on a debt once the principal has been paid i.e. once payment is received but not yet cleared if relevant. If the purchaser owes the principal and interest, unless payment is accepted on other terms, any part payment of the debt will go to reduce the amount of the interest first. Part 2 - Compensation arising from late paymentHow much compensation am I allowed?The table below shows how much compensation you are entitled to.
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