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What the UK late payment reform means for small business owners

If you have ever spent time chasing an invoice that should have been paid weeks ago, you will know the particular frustration of it. The work is done, the invoice is sent, and then the waiting begins. And, of course, this is while you’re still paying your own bills, your staff, and your suppliers. For too long, this has been accepted as part of the reality of running a small business in the UK, but that may finally be about to change.

The government announced in March 2026 what it has described as the most significant overhaul of late payment law in over 25 years – measures it says will give the UK the strongest legal framework on late payments in the G7. Here’s what you need to know and what it could mean for your business in practice.

The scale of the problem

Late payments cost the UK economy an estimated £11 billion every year, and some 38 businesses close every. single. day. because they are not paid on time (GOV.UK). Small business owners, including tradespeople, freelancers, family firms and the self-employed, have to waste time and money chasing unpaid invoices when they could be growing their businesses. And in some cases, late payments have prevented more than two-fifths of SMEs from paying staff salaries on time in the last 12 months (Credit Connect).

What is changing about late payments?

The new legislation introduces several significant reforms.

  • A cap on payment terms

    Maximum payment terms will be limited to 60 days, falling to 45 days after five years. This matters because large companies have historically used long payment terms (sometimes 90 or 120 days) to manage their own cash flow at the expense of smaller suppliers, and that practice will no longer be legal.

  • Mandatory interest on late payments

    Mandatory interest on late payments will be introduced, requiring all commercial contracts to include statutory interest at 8% above the Bank of England base rate. Until now, businesses technically had the right to charge interest on overdue invoices under the 1998 Late Payment of Commercial Debts Act, but many were reluctant to exercise that right for fear of damaging their relationship with a client. Making it mandatory removes that awkwardness, and the interest is simply built in.

  • A deadline for disputing invoices

    A strict 30-day invoice verification deadline has been introduced, and businesses must confirm or dispute invoices within a month. This closes a common loophole in which larger companies can drag out the process by sitting on an invoice without formally acknowledging or challenging it.

  • A stronger Small Business Commissioner

    The Small Business Commissioner will be given sweeping new powers to investigate poor payment practices, adjudicate payment disputes, and fine the worst offenders, with fines potentially reaching tens of millions for firms that persistently pay late or fail to comply with the new laws.

    Previously, the Commissioner existed but had limits, and relatively few people had even heard of the Small Business Commissioner, let alone feared it. The new powers change that significantly, and crucially, if interest is unpaid, small businesses will be able to escalate to the Small Business Commissioner and resolve the matter through adjudication without having to go through the courts.

  • Board-level accountability

    Large businesses will soon be legally required to establish audit committees to monitor their payment practices and publish results in annual reports. The intention is to make senior leadership directly responsible for how their companies treat suppliers, rather than leaving poor payment practices buried in the accounts department.

  • Construction-specific changes

    The practice of deducting and withholding retention payments under the terms of a construction contract is also proposed to be banned, to prevent loss through insolvency, late and non-payment. If you work in the construction sector, this is particularly worth watching.

What does this mean for you day-to-day?

For most small business owners and freelancers, the most immediate practical effect should be greater predictability. If your clients are large companies, they will be operating under tighter legal constraints on when and how they pay you. That said, there are some things worth doing now to make sure you are in a position to benefit from the reforms.

Review your contracts and payment terms

If your current terms are looser than the new 60-day cap, this is a good time to tighten them. Many small businesses have been accepting longer terms out of habit or because they felt they had no choice. You now have the law more firmly on your side.

Make sure your invoicing is clear and timely

The new 30-day dispute deadline puts the onus on your clients to raise any issues with an invoice quickly. The clearer and more prompt your invoicing process, the harder it becomes for a client to claim there was a problem they did not spot until later.

Know your rights around interest

Statutory interest on late payments is becoming mandatory. You do not need to negotiate it into contracts or feel uncomfortable raising it because it will simply be part of the legal framework.

Document everything

If you need to escalate a dispute to the Small Business Commissioner, you will need a clear record of when invoices were issued, when payment was due, and what communication took place.
Review your contracts and payment terms

If your current terms are looser than the new 60-day cap, this is a good time to tighten them. Many small businesses have been accepting longer terms out of habit or because they felt they had no choice. You now have the law more firmly on your side.

Make sure your invoicing is clear and timely

The new 30-day dispute deadline puts the onus on your clients to raise any issues with an invoice quickly. The clearer and more prompt your invoicing process, the harder it becomes for a client to claim there was a problem they did not spot until later.

Know your rights around interest

Statutory interest on late payments is becoming mandatory. You do not need to negotiate it into contracts or feel uncomfortable raising it because it will simply be part of the legal framework.

Document everything

If you need to escalate a dispute to the Small Business Commissioner, you will need a clear record of when invoices were issued, when payment was due, and what communication took place.

A word of warning about enforcing reforms

Even if the reforms are implemented in full, most businesses will rely to some degree on other suppliers and subcontractors, who will face the same issues as their customers regarding payment terms and disputes. In other words, the legislation may help you get paid faster by your large clients, while also requiring you to pay your own suppliers within tighter timeframes, so that is worth factoring into your cash flow planning now.

There is also the question of enforcement, as previous attempts to improve payment culture in the UK have not always had the desired effect, largely because the rules lacked consequences. The more substantial fines and board-level accountability create genuine deterrents this time around, but how rigorously the new powers are exercised in practice remains to be seen.

Ambitious changes

Late payment is not just a cash flow issue – it affects how confident you feel about taking on new clients, investing in your business, hiring, and planning ahead. These reforms are intended to reduce the hours small business owners spend chasing debt, freeing them to focus on more productive growth. If they achieve even part of that goal, the effect on day-to-day life for freelancers and small business owners across the UK could be substantial.

The legislation is still moving through the system (expected to take effect in late 2026 or early 2027), and some details may yet change, but the direction of travel is clear, and the ambition behind it is bigger than anything we have seen in this area for a very long time.