Summary

  • A late payment fee is calculated based on two things. Statutory interest, charged daily on the overdue amount, plus a one-off fixed compensation fee.
  • The right to charge late fees is automatic on B2B invoices. It comes from the Late Payment of Commercial Debts (Interest) Act 1998 and applies whether or not late fees are in your contract. It doesn’t apply to consumers.
  • Statutory interest is 8% above the Bank of England base rate, charged as simple interest on the outstanding amount and accruing daily.
  • Compensation is £40, £70 or £100, depending on whether the invoice is under £1,000, under £10,000, or £10,000 and above.
  • Xero has no automatic late payment fee feature. You have to manually calculate the late fee amount and raise a new invoice.
  • Calculate late fees for free with Treasure. Trove’s free plan Treasure allows you to calculate late payment fees and raise late fee invoices in Xero for free.

How to calculate a late payment fee in the UK

How to calculate

Late payment fee = statutory interest + a fixed compensation fee

Statutory interest is a daily charge on the overdue amount.
Compensation fee is a one-off fixed sum to cover the cost of chasing the debt.

You are entitled to both as soon as a business invoice becomes overdue. Use Trove’s free calculator to calculate your late fees easily. Jump to Trove’s free plan ↓

When you can charge a late payment fee in the UK

The right comes from the Late Payment of Commercial Debts (Interest) Act 1998, and it applies to business-to-business invoices (and to public sector customers).

It does not apply when your customer is a private individual buying as a consumer. We cover that in our guide to whether late payment charges are legal in the UK.

You can charge interest from the agreed due date. If you never agreed a payment date, the invoice is treated as late 30 days after the customer received it or you delivered the goods or service, whichever is later. The right applies whether or not late fees are written into your contract, though having a clause helps if a customer pushes back.

How much you can charge

Statutory interest is set at 8% above the Bank of England base rate. It’s simple interest, charged on the outstanding amount, and it accrues daily, so the longer an invoice sits unpaid the more it grows.

The compensation fee is fixed and depends on the invoice amount:

Invoice amountCompensation fee
Up to £999.99£40
£1,000 to £9,999.99£70
£10,000 or more£100

On day one, even a large invoice won’t have built up much interest, but you can charge the compensation fee immediately, which makes it a useful prompt to pay. To work out the exact figure for a specific invoice, use our late payment fee calculator.

Adding the late fee to a Xero invoice

Xero has no built-in feature for late payment fees. The only action is to upvote this product thread suggesting they add this functionality:

Upvote Product Thread

Add late fee interest to overdue invoices

To add a late fee manually, it’s best to raise the fee as a separate invoice rather than editing the original (overdue) one. That keeps the original invoice clean and it matters for VAT. Statutory interest and the compensation fee sit outside the scope of VAT, so they shouldn’t be mixed in with VATable lines.

We walk through the method in how to add late payment fees to invoices in Xero.

Calculate late payment fees for free with Treasure (Trove’s free plan)

If you’d rather not do the arithmetic, Treasure by Trove is a free late payment fee calculator that connects to Xero. You upload an invoice or type in the details, it works out the statutory interest and the compensation fee and (if you connect your Xero account) it raises the late fee invoice for you.

It’s free with no limit on how many fees you calculate. What it won’t do is send anything to your customer or apply fees automatically as invoices go overdue.

Should you actually charge late payment fees?

Most businesses never get round to applying a late fee and they don’t always need to. Often, telling a customer that statutory charges are about to start is enough to get the invoice paid, or at least get a reply. In these cases, the fee acts as a useful nudge.

We cover how to handle that conversation in what to do after you calculate a late payment fee.

Applying late payment fees with Trove

Trove runs a free 30-day trial or you can book a demo to see fees applied, chased and waived automatically.