UK Late Payment of Commercial Debts (Interest) Act 1998: Does the Interest Rate Change When the Bank of England Base Rate Changes?

The Question

The Late Payment of Commercial Debts (Interest) Act 1998 allows businesses to charge statutory interest at 8% above the Bank of England base rate on overdue commercial debts. The base rate changes regularly. The question—surprisingly unsettled in the case law—is whether the statutory interest rate on an existing debt changes with the base rate, or whether the rate is fixed at the date the debt became due.

The short answer: The issue is debated, and your calculator should handle both interpretations.

The Statutory Mechanism

The Act uses a "reference rate" system. The BoE base rate as of 31 December becomes the reference rate for 1 January to 30 June; the rate as of 30 June becomes the reference rate for 1 July to 31 December. You add 8 percentage points to that reference rate to get the statutory interest rate for the period.

At present (January 2026), the BoE base rate is 3.75%, so the statutory rate is 11.75%. Six months ago, the base rate was 5.25%, and the statutory rate was 13.25%. For a debt that has been outstanding since early 2023—when the base rate was 3.50% and the statutory rate 11.50%—the reference rate has fluctuated by nearly 2 percentage points.

The Debate: Fixed or Fluctuating?

The Fluctuating-Rate Argument

Most practitioner guidance and official resources state that you apply the rate "in effect during each period the debt was outstanding," which implies that the interest rate on an existing debt changes with each BoE reference rate change.

Evidence for the fluctuating interpretation:

The Small Business Commissioner's statutory interest calculator applies semi-annual rate changes to outstanding debts.
Government guidance on the Late Payment Act describes the six-month reference periods in a way suggesting periodic adjustment.
The Act's language—referring to "the rate applicable" to a debt—has been read to mean the rate in effect at each six-month interval during which the debt remains outstanding, not the rate at the point the debt fell due.

The Fixed-Rate Counter-Argument

A counter-argument exists (albeit less commonly articulated): that the right to statutory interest and its rate crystallises when the debt becomes due, and subsequent BoE base rate changes do not affect it. Under this reading, the "reference rate" is the rate applicable at the time the payment obligation arose, not a rate that moves over time. This interpretation would treat statutory interest like a fixed-rate judgment: you calculate what the rate was when the debt fell due, and apply that fixed rate for the entire outstanding period.

The Legal Status

We have not located a definitive appellate decision or statutory guidance definitively resolving this. The vast majority of online calculators and law firm templates assume a fluctuating rate. But if you are litigating a substantial debt and the debtor's solicitor argues for a fixed rate crystallised at the debt due date, you should be prepared to justify your approach.

The lack of settled caselaw on this specific point is notable. Most practitioners default to fluctuating rates because it seems to align with the statutory language and government guidance. But until there is a clear Court of Appeal or Supreme Court decision, both interpretations have some legitimacy.

Practical Implications

On a £100,000 debt from January 2023 to January 2026:

If you apply a fixed rate of 11.50% (the rate in effect in early 2023), you get approximately £34,500 in interest over three years.
If you apply fluctuating rates (11.50% for the first six months, then adjusting semi-annually through 13.25% at the peak and down to 11.75% now), you get approximately £35,000–£36,000, depending on exact timing.

The difference on this example is modest. But on a £2 million debt over five years, during which the base rate moved from 0.10% (2021) to 5.25% (2024) and back down, the gap between fixed and fluctuating can be tens of thousands of pounds.

What the Calculator Does

Rather than prescribe a single interpretation, the calculator is designed to handle both approaches:

Fluctuating-rate mode: Applies each six-month reference rate change to the outstanding debt, recalculating interest for each period. This is the default and aligns with most practitioner guidance.
Fixed-rate mode: Applies the rate in effect at the date the debt became due for the entire outstanding period, treating it like a judgment with a fixed rate.

You choose which interpretation fits your facts and your position in the dispute.

Guidance for Users

If you're a creditor claiming interest:

Default to the fluctuating interpretation, because it aligns with government guidance, the Small Business Commissioner's calculator, and most practitioner commentary. In your particulars of claim or settlement correspondence, make it clear you are applying semi-annual rate changes and cite the BoE historical base rate table.

If you're a debtor defending a claim:

If the creditor has claimed interest using a fluctuating rate and you believe a fixed rate applies (crystallised at the debt due date), challenge it. The caselaw is not settled, and a court might agree that the rate should have been fixed.

In either case:

Show your working. Specify which interpretation you're using and why. Courts and opposing parties will scrutinise this, especially in high-value matters. Transparency about your methodology—and your awareness of the debate—goes a long way.

For Commercial Practitioners

The Late Payment Act is meant to be simple and accessible. This wrinkle—while not addressed in major caselaw—is anything but simple. Until there is definitive guidance, we recommend:

Default to the fluctuating-rate interpretation in most cases (it's the safer, more widely accepted approach).
Be explicit about your assumption when drafting correspondence or pleadings.
If challenged, be ready to explain and justify your choice, and consider whether the fixed-rate alternative might be more defensible on the specific facts.

The calculator lets you do both. Use that flexibility wisely.

Calculate Late Payment Interest

Use our calculator with UK Late Payment Act rates pre-selected. Supports both fixed and fluctuating rate interpretations.

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