Penalty fee

Penalty fee is a charge you add when a customer breaks agreed terms, for example pays late, cancels at short notice, or damages hired goods. In the UK this should not be a punishment: the amount needs to be reasonable and linked to your likely loss, admin time, or interest for late payment.

With business customers, you can rely on statutory late‑payment interest and a fixed charge, or set fair contractual terms. With consumers, fees must be fair and transparent, and you should only charge what is proportionate to the breach; clarify this in your terms and on invoices.

What to set in your terms:

• The exact trigger for the fee (e.g. payment after the due date or short‑notice cancellation).
• How the fee is calculated (fixed amount, percentage interest, or a reasonable estimate of loss).
• When it is applied (per invoice, per booking, or per incident) and any caps.
• Whether VAT applies to the charge, as treatment can depend on the nature of the fee.
• How you communicate the fee and any grace or dispute process.