What the UK's new late payment law means for small businesses in 2025
Thirty-eight UK businesses close every single day because of late payments. That figure — published by the Office of the Small Business Commissioner in 2025 — is not a warning about poor trading conditions or difficult economic times. It is a direct consequence of a culture in which late payment has become, for too many businesses, a routine practice.
That culture is now changing. The UK government has introduced its most significant overhaul of late payment law in a generation, and for small and medium-sized businesses, the reforms represent a meaningful shift in power. If your business issues invoices to other businesses, this legislation matters to you — whether your customers are paying late now, or you want to ensure they do not in future.
Why UK late payment law needed to change
The existing framework for late payment was established by the Late Payment of Commercial Debts (Interest) Act 1998, subsequently extended to cover all business-to-business transactions in 2002 and updated again in 2013. The legislation gave suppliers the legal right to charge statutory interest — currently calculated at eight per cent above the Bank of England base rate — on overdue invoices, along with fixed compensation charges ranging from £40 to £100 depending on the value of the debt.
In principle, this was a reasonable protection. In practice, it was rarely used. Smaller suppliers, anxious about damaging important customer relationships, found it difficult to invoke legislation against the very businesses they depended upon. The result, as research by Coface published in 2025 confirmed, was that approximately 90 per cent of UK businesses were experiencing late payments — a rate substantially higher than comparable economies in Europe.
The problem was not just inconvenience. Research by Goldman Sachs found that 41 per cent of UK small businesses reported that late payments had directly affected their ability to grow. The government estimated the cumulative cost to the UK economy at £11 billion every year.
What the new late payment legislation introduces
The 2025 reforms are designed to create a fairer, more predictable payment environment — with clear rules and real consequences for persistent non-compliance. The key changes are as follows.
A 60-day cap on payment terms. For the first time, the law will effectively limit business-to-business payment terms to a maximum of 60 days. This is intended to prevent large organisations from imposing extended terms on smaller suppliers who have little ability to negotiate.
A 30-day invoice dispute deadline. Businesses that wish to raise a dispute against an invoice will be required to do so within 30 days of receiving it. Customers who fail to dispute within this window must pay the invoice in full, and will be liable for statutory interest if payment is then late.
A strengthened Small Business Commissioner. The Commissioner now has the power to investigate poor payment practices, require information from businesses, make binding decisions, and issue financial penalties against persistent late payers.
Supplier obligations for public sector contracts. From October 2025, suppliers bidding for public sector contracts valued above £5 million are expected to demonstrate that they pay their own suppliers within 45 days on average.
What this means in practice for SMEs
For small and medium-sized businesses, these changes offer genuine grounds for cautious optimism — but they are not, by themselves, a solution to the immediate problem of overdue invoices.
The legislation will take time to come into full force, and enforcement will be gradual. The cultural shift it is intended to produce — one in which prompt payment is the norm, not the exception — will not happen overnight. Businesses continue to face the practical reality of invoices unpaid at 30, 60, or 90 days, and the pressure on cash flow that follows.
The reforms are also most effective when businesses already have a structured, proactive credit control process in place. Legislation provides the framework; consistent follow-up provides the result.
How to put yourself in the strongest position
The most practical response to the new legislative environment is to ensure your credit control process is as consistent, professional, and proactive as possible — before an invoice becomes overdue, not after. This means:
Sending invoices promptly upon completion of work, with clear payment terms stated.
Following up courteously at agreed intervals, rather than waiting until payment is significantly late.
Keeping accurate records of all communications, so that if a dispute does arise, you are in the strongest possible position.
Having a clear escalation process for accounts that remain unpaid beyond agreed terms.
Many small businesses find that the part of this process which is most difficult to sustain — the consistent, professional follow-up with customers — is precisely the part that makes the greatest difference to how quickly invoices are paid.
In summary
The UK's new late payment law represents a genuine step forward for small business. The 60-day payment cap, the 30-day dispute window, and the empowered Small Business Commissioner together create a more equitable environment for suppliers — and send a clear signal that late payment culture will face increasing scrutiny and consequence.
The legislation does not remove the need for good credit control practice. It reinforces it. Businesses that already have structured processes in place will be best placed to benefit from these reforms. Those still managing invoices informally risk continuing to absorb the cost of late payments while the legal environment around them changes.
Get in Contact
If late payments are already affecting your cash flow, or if you would like to put a more reliable invoice management process in place ahead of the new legislation, that credit control would be delighted to help, please get in contact to find out more about professional outsourced credit control.