Pay Up or Pay the Price: Late Payment Reform Ahead – What Businesses Need to Know

April 10, 2026

Pay up or face dire consequences may soon become the reality for businesses that pay their suppliers late. The government has announced plans to tackle late payment in the UK, an issue that has long affected small businesses and their owners. Following a public consultation held last year, the government confirmed that action will be taken to address the damage caused by late payment practices.

Late payment is estimated to cost the UK economy around £11 billion every year and is believed to contribute to the closure of around 38 businesses each day (Department for Trade and Business). For many small businesses, late payments have a serious impact on cash flow. This often makes it difficult to pay employees on time, meet running costs such as rent and suppliers, or invest in new equipment and services that would allow the business to grow.

In response, the government plans to introduce new legislation to tackle late payments, subject to available parliamentary time. While the legislation has not yet come into force, the government has set out its intentions clearly. The aim is to create stronger rules and real consequences for businesses that consistently pay late.

Proposed changes to UK late payment laws

The key proposals are set out below:

  1. 60 days maximum payment term. One major proposal is the introduction of a maximum payment term of 60 days, with only limited exceptions. This is aimed at ensuring that small businesses are paid within a reasonable and predictable time. Alongside this, there would be strict deadlines for raising invoice disputes. If a dispute is not raised within the set time, the customer would be required to pay the supplier, including compensation and interest.
  2. 8% late payment interest. The government also intends to make late payment interest mandatory rather than optional. The proposed rate is 8% above the Bank of England base rate. At present, businesses can agree lower interest rates in their contracts, which often weakens protection for smaller suppliers. A fixed statutory rate would act as a stronger deterrent against late payment.
  3. Ban on retention. Specific attention has also been given to the construction industry, which has faced serious cash flow problems and a high number of insolvencies in the recent year, with 3,912 insolvencies in the 12 months to January 2026, accounting for 17% of total company failures (The Insolvency Service). The government is considering banning the practice of withholding and deduction retention payments, which allow money to be withheld under construction contracts. While retention is often used as a form of security, it has contributed to cash flow issues across the sector. If this change goes ahead, alternative ways to manage performance risk may need to be explored.
  4. Strengthening the role of the Small Business Commissioner. The commissioner’s powers are expected to be expanded to allow investigations into businesses suspected of poor payment practices or inaccurate reporting of payment performance. The commissioner will also be able to adjudicate payment disputes and issue fines. These fines could be significant, especially for large businesses that repeatedly fail to pay suppliers on time or do not comply with late payment laws.
  5. Transparency around payment practices. The government also plans to increase transparency around payment practices. This may include wider monitoring and audits of how businesses pay their suppliers. Large companies that persistently pay late could be required to publish comments explaining their payment performance and outline what steps they are taking to improve it. Board members or audit committees may also be more directly involved in addressing these issues.
When and where will the new late payment laws apply?

These measures are intended to work together as a strong legal and commercial framework to discourage late payment. However, the full impact will only become clear once the legislation is introduced and enforced.

The proposals are intended to apply across the UK, with the government working alongside Scotland, Wales and Northern Ireland to ensure consistency. At this stage, the announcement reflects the government’s intentions rather than settled law, and further details are expected.

What business should do now

In the meantime, businesses would be wise to review their payment practices. Ensuring fair and timely payment policies now will help avoid disruption later and reduce the risk of penalties once the new rules are in force. Developing good payment procedures early will make compliance easier when the legislation is introduced and support healthier relationships with suppliers.

If you would like to discuss these changes further or need help reviewing your terms and conditions or payment policies to avoid late payments, please contact us to speak to a member of our commercial team.

Cesare McArdle
Partner, Commercial & Construction
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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