New payment laws: What they mean for your contracts

It's not news that late payments remain a significant challenge for UK SMEs. They stifle growth, create cash flow problems, and in the worst cases, can lead to business failure. The UK government estimates that late payments cost the economy £11 billion annually, with 38 UK businesses closing every day due to this issue.

However, a significant legislative change is on the horizon. The Commercial Payments Bill, introduced to Parliament in May 2026, aims to be the most impactful legislation tackling late payments in over 25 years. This bill directly addresses the problems many businesses face daily, seeking to improve payment practices and ensure a healthier flow of cash through supply chains.

The government’s approach to payment terms

The consultation last year, running from 31 July 2025 to 23 October 2025, gathered broad feedback from 867 stakeholders across various sectors. The outcome, published on 24 March 2026, details a firm approach to improving payment practices. A key measure is the imposition of maximum payment terms.

Maximum payment terms of 60 days

The new bill is set to impose a maximum payment term of 60 days for business-to-business transactions. This means that, with strictly limited exemptions, you will not be able to agree to payment terms longer than two months with your suppliers or customers. This is a fundamental shift for many businesses that currently operate with 90-day or even 120-day terms.

For SME owners, this change is significant. It aims to reduce the time spent waiting for funds, which should directly improve your working capital. While there will be a lead-in and transition period, businesses should start reviewing their current contracts and standard payment terms now to ensure they are ready for compliance.

Interest on late payments and fixed sums for disputes

The new legislation strengthens the tools available to businesses when payments are delayed. This provides clearer pathways for recompense and aims to deter late payment practices from the outset.

Mandating interest at 8% above base rate

Under the new bill, suppliers will have a mandated right to charge interest on late payments at 8% above the Bank of England base rate. This is a powerful incentive for purchasers to pay on time. It is a clear message that delaying payments will come with a tangible financial cost, not just a strained business relationship.

This measure aligns with the existing Late Payment of Commercial Debts (Interest) Act, but the new bill solidifies and mandates this right across the board. For your business, this means clearer grounds for charging interest and greater leverage in payment discussions.

Fixed sums for dispute delays

Another innovative measure is giving suppliers the right to a fixed sum where a purchaser raises a dispute late or without sufficient information. Too often, payment disputes are strategically raised close to or after the due date, using vague terms to delay payment further. This new provision aims to stop that practice.

If a dispute is not raised promptly and with adequate detail, the supplier can claim a fixed sum. This provides a clear path for recovery even when buyers attempt to use disputes as a tactic. It encourages prompt and transparent communication, which benefits all parties.

Enhanced powers for the Small Business Commissioner (SBC)

The effectiveness of any new legislation depends on its enforcement. The Commercial Payments Bill significantly boosts the powers of the Small Business Commissioner, transforming its role from primarily advisory to one with real teeth.

Investigating and enforcing good practice

The SBC will gain the power to investigate larger businesses suspected of persistently engaging in poor payment practices. This includes the ability to make recommendations and take enforcement action, potentially imposing financial penalties, where breaches of payment legislation are found. This new capability means large companies can no longer ignore their payment responsibilities without consequence.

For SMEs, this means a more robust ally in the fight against late payments. If you are consistently facing delays from a larger client, the SBC will have the power to intervene effectively.

Adjudication and enforcement of reporting requirements

The SBC will also be able to adjudicate contractual payment disputes between small and larger businesses outside of the court process, even making binding interim decisions. This offers a quicker, less costly alternative to traditional litigation, making justice more accessible for SMEs.

Furthermore, the SBC will enforce statutory reporting requirements for large businesses regarding their payment practices. The bill introduces additional requirements, including reporting the amount of interest paid and owed. Boards or audit committees of persistently late-paying large companies will also need to publish commentary explaining their poor performance and outlining corrective actions.

Preparing for the new payment landscape

The Commercial Payments Bill is expected to bring fundamental changes to the UK’s payment landscape. While it was introduced to Parliament in May 2026, there will be an appropriate lead-in and transition time before the powers come into force. This means businesses have a window to prepare.

Review your current contracts, especially those with longer payment terms than 60 days. Update your invoicing procedures and terms and conditions to reflect the new mandated interest rates. Understand your rights regarding dispute resolution and how to engage with the Small Business Commissioner if needed.

These measures are not retrospective, meaning existing contracts will be judged by the rules in place at the time they were made. However, new contracts and amendments will fall under the new regime. Proactive preparation will ensure your business not only complies but thrives in this new, fairer payment environment.