---
title: "How to add late payment fees to invoices in Xero in 2026"
description: "Xero has no built-in way to automatically add late payment fees or interest to invoices. This guide shows the two manual methods inside Xero, how much you can legally charge, and how to apply fees automatically with Paidnice the moment an invoice goes overdue."
url: https://www.paidnice.com/blog/add-late-payment-fees-xero
---

# How to add late payment fees to invoices in Xero in 2026

Written by

Denym Bird
Personally tested

Co-founder & CEO of Paidnice

Denym walked through both manual late fee routes for Xero invoices, covering why reminders add no charge and what Xero has said about its long-running request for late interest.

Reviewed by Ashley Schroder

Co-founder of Paidnice

Updated Nov 6, 2026 · 10 min

Listen to this article, read by Denym

Read by Denym Bird4 min

0:004:26

## Summary

Xero has no built-in way to add late payment fees to an invoice. You add the fee manually, either as a new line on the overdue invoice or as a separate invoice that references it, or you automate it with an app connected to your Xero organisation.

- **Manual route:** Raise a new invoice to the same Xero contact for the fee or interest, quoting the original invoice number, so the original sale record stays untouched.
- **UK statutory rate:** Business-to-business debts carry the Bank of England base rate plus 8% a year, 11.75% for invoices that fall overdue in 2026 (8% plus the 3.75% reference rate set on 31 December 2025 and 30 June 2026), plus a fixed sum of £40, £70 or £100 by debt size.
- **Automated route:** Paidnice raises the fee in Xero, as a new invoice or a line on the overdue invoice, on a policy you set once per customer group, with no manual step per invoice.

A customer's invoice has gone overdue in Xero, and the reminder you scheduled has already gone out. You open the invoice to add the late fee and find no setting for it. Here is how to add the fee manually, what you can charge, how VAT applies and how an app automates the fee.

## Does Xero charge late payment fees automatically?

**No, Xero has no native feature to calculate late payment interest or apply a late fee to an overdue invoice.**

The request has sat on the Xero Product Ideas board since 29 March 2012. The thread [Sales invoices: add interest to late invoices](https://productideas.xero.com/forums/967115-invoices-quotes/suggestions/44960305-sales-invoices-add-interest-to-late-invoices-in) holds more than 1,100 votes, and Xero's last response, on 7 July 2025, gave no committed plans to build the feature.

Until that changes, a Xero user has two routes. The first is manual: add the fee as a line on the overdue invoice, or raise the fee on its own invoice to that customer.

The second is a Xero App Store app connected to the Xero organisation, such as Paidnice, which calculates the fee and posts it to the ledger when the invoice goes overdue, or after the grace period you set.

The video below shows both routes: the manual invoice in Xero, then the automated policy.

Free: Late payment interest calculatorWork out the interest or fee on an overdue invoice.

## Does Xero automatically send overdue invoices?

**Xero can email automatic reminders about overdue invoices, but a Xero reminder never adds a late fee or interest to the amount owed.**

Under Sales, Invoices, Invoice Reminders you can schedule emails before or after the due date. A reminder carries no charge and does not touch the ledger. To turn a reminder into a fee on the invoice, you still need one of the two manual methods below, or an app that applies the fee when the invoice goes overdue.

## How do I add a late fee to an invoice in Xero?

**Add the late fee in Xero as a new line on the existing overdue invoice, or as a new invoice to that customer quoting the original invoice number. Xero does not calculate or apply either step for you.**

### Should a late fee go on a separate invoice or the existing invoice?

**Use a separate invoice for a late fee in most cases, because the original invoice stays the record of the sale and the fee gets its own tax rate.**

A separate invoice is the cleaner route for four reasons:

- **Sale record:** the original invoice stays the record of the sale.
- **Tax:** the fee gets its own line and tax rate, apart from any VAT on the sale.
- **Waiving:** you can void the fee invoice, if no payment sits against it, and the sale stays untouched.
- **Xero limits:** [Xero lets you change only some fields](https://central.xero.com/0/article/Edit-an-invoice) on a paid or part-paid invoice unless you remove the payment first, and a lock date stops changes to transactions in a locked period. A separate invoice avoids both.

Adding a line to the existing invoice is quicker for a small one-off charge on an invoice with no payment against it, but it changes the original sale record. To do it, open the invoice, choose Edit, add the fee line and update the invoice.

### What are the steps for a separate late fee invoice?

A separate late fee invoice in Xero takes four steps:

1. Work out the charge: days overdue multiplied by the daily rate, plus any fixed sum your terms or the law allow.
2. Start a new sales invoice for that customer, dated today.
3. Add one line, "Late payment interest on invoice INV-1001", with the amount. On a UK invoice, set the interest line to Xero's No VAT rate. Put any fixed sum on its own line.
4. Approve it, send it, and include it on the customer's next statement.

## Is there VAT on late payment interest and fixed compensation?

**UK late payment interest carries no VAT: HMRC treats interest awarded or agreed because of late payment as outside the scope of VAT, as compensation for the delay.** The source is [HMRC's VAT manual, VATSC06810](https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc06810).

That page does not name the fixed sum of £40, £70 or £100, and we found no HMRC or gov.uk page that rules on it. Ask your accountant which tax rate to use on that line.

Ask about any flat admin fee in your own terms too. HMRC's [test for compensation](https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc05910) looks at what the payment is for, whatever you call it.

## How much should a late payment fee be?

**A late payment fee on a UK business-to-business invoice is set by statute: 8% a year over the Bank of England base rate, which is 11.75%, plus a fixed sum of £40, £70 or £100 per invoice.**

| Size of the debt | Fixed sum per invoice |
| --- | --- |
| Under £1,000 | £40 |
| £1,000 to £9,999.99 | £70 |
| £10,000 or more | £100 |

**Fixed fees get paid more often.** About 8 in 10 fixed late fees get paid. Only about 6 in 10 percentage-based fees do, and percentage fees are the ones waived most often.
Original dataSource: our analysis of invoice data from over 1,000 Paidnice customers. See our late fee data.

The rate comes from the [Late Payment of Commercial Debts (Rate of Interest) Order 2002](https://www.legislation.gov.uk/uksi/2002/1675/article/4): the [base rate](https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate) in force on 30 June or 31 December applies to interest that starts running in the following six months.

The fixed sums come from [section 5A of the 1998 Act](https://www.legislation.gov.uk/ukpga/1998/20/section/5A). You cannot claim more than base rate plus 8% as statutory interest.

Our guide to [statutory interest](https://www.paidnice.com/blog/late-payment-fees-uk) has the full calculation, and the [late payment interest calculator](https://www.paidnice.com/late-payment-interest-calculator) does the arithmetic for one or more invoices.

In the US there is no national rate. Each state sets its own limit, and most states set no cap on business invoices. A few states cap the interest rate. Our guide to [late fee laws by US state](https://www.paidnice.com/blog/late-fee-laws-by-all-us-states) lists the limits.

In both markets the fee belongs in your payment terms before the invoice goes out. Our [late fee policy wording examples](https://www.paidnice.com/blog/late-fee-policy-wording-examples) give the clause, and the [late fees](https://www.paidnice.com/late-fees) hub covers the rules market by market.

## Is charging late payment interest and fees legal in the UK?

**Yes, late payment interest and a fixed fee are legal on UK business-to-business invoices: the [Late Payment of Commercial Debts (Interest) Act 1998](https://www.legislation.gov.uk/ukpga/1998/20/section/1) implies statutory interest and a fixed sum of £40, £70 or £100 into every qualifying contract, with no clause needed.**

UK statutory interest runs at 11.75% a year on invoices that fall overdue in 2026, the Bank of England base rate plus 8%. A late fee of any other kind needs a clause in your terms, and a fee that works as a penalty can be unenforceable.

Before you set one up, see [what invoice data says about late fees](https://www.paidnice.com/blog/do-late-fees-work).

A contract term that tries to exclude statutory interest is [void](https://www.legislation.gov.uk/ukpga/1998/20/section/8) unless the contract gives the supplier a substantial remedy of its own. Invoices to consumers sit outside the Act, so a consumer late fee has to be a fair term in your contract.

Our page on UK [late payment law](https://www.paidnice.com/blog/commercial-payments-bill-uk-late-payment-law) covers the Act in full and the Commercial Payments Bill now in Parliament, which is not yet law.

In the US a late fee on a business invoice is legal when it is written into your contract or terms in advance and is reasonable. A few states also cap the interest rate.

## How do I automate late fees in Xero?

**Late fees in Xero are automated with a connected app such as Paidnice: Paidnice connects to the Xero organisation, you set a late fee policy once, and the fee posts to Xero when an invoice goes overdue, or after your grace period.**

Paidnice charges every overdue Xero invoice on the same rules without opening each one:

- An invoice late fee on each overdue invoice, as a flat amount or a percentage, raised as a new invoice or added as a line on the overdue invoice, with a fixed-amount line for the UK £40, £70 or £100 compensation.
- Statement interest on the customer's whole overdue balance, with a Bank of England base rate toggle that either locks the rate for each six-month period, as the Order sets it, or follows the base rate as it changes.
- Compounding is on by default through the "Include previous interest charges" toggle. UK statutory interest is simple interest, so switch it off if you charge statutory interest only. Adjust for Credit works the charge out on the net balance when the customer holds a credit.
- The charge posted to Xero as Draft or Approved with its own tax rate, including "not applicable", so it sits in the customer's aged payables rather than only in an email.

The late fee policy screen in Paidnice holds these choices: (1) a new invoice or a new line on the overdue invoice, (2) Approved or Draft, (3) the fee type, with **Fixed** for a set sum such as the UK £40, and (4) the tax rate.

![The Paidnice late fee policy screen with four numbered fields: how to issue the fee, Approved or Draft, the Fixed fee type set to 40, and the tax rate](https://www.paidnice.com/images/blog/add-late-payment-fees-xero-policy.png)

Paidnice setup takes under 15 minutes: connect the Xero organisation, review the draft policies Paidnice prepares, and approve them. [Start free](https://www.paidnice.com/sign-up), no card needed.

A disputed invoice comes out of the policy with a reference filter while the policy stays on for every other customer. Paidnice customers report half as many late invoices in the first 30 days. The [add late fees to Xero invoices automatically](https://www.paidnice.com/xero/add-late-fees) page has the setup in full.

## What do late fees look like on three overdue invoices?

**On three overdue UK invoices, #1001 for £1,000, #1002 for £500 and #1003 for £750, the statutory fixed sums come to £150, and 30 days of statutory interest at 11.75% on the combined £2,250 comes to about £22.**

**As invoice late fees**, each invoice carries its own fixed sum: £70 on #1001, £40 on #1002 and £40 on #1003, which is £150 across the three, each raised against the invoice it belongs to.

![Xero invoices with late fees added: 70 pounds on INV-1001, 40 pounds on INV-1002 and INV-1003](https://www.paidnice.com/images/blog/add-late-payment-fees-xero-card.png)

**As statement interest**, the combined £2,250 at 11.75% a year accrues £0.72 a day (£2,250 × 11.75% ÷ 365). Over 30 days that is £21.73, raised as one monthly charge against the account rather than three. Paidnice recalculates the figure at the moment the statement is sent, so the number the customer opens is current that morning.

## What mistakes cost you money when you add late fees in Xero?

Three mistakes leave an overdue Xero invoice with no fee, or a fee that is too small.

- **Using the £40 fixed sum on every invoice.** The [fixed sum](https://www.legislation.gov.uk/ukpga/1998/20/section/5A) is £70 for a debt from £1,000 to £9,999.99 and £100 at £10,000 or more. On a £12,000 invoice, £40 is £60 short. *Fix: pick the sum by the size of each debt.*
- **Expecting a Xero reminder to add the fee.** A reminder is an email. It carries no charge and does not touch the ledger. On the three invoices above, the £150 of fixed sums is never charged unless you raise it.*Fix: raise the fee with one of the two methods above, or set a late fee policy in a connected app.*
- **Raising the interest once and never updating it.** The three invoices above accrue £0.72 a day (£2,250 × 11.75% ÷ 365), or £21.73 for every 30 days. A charge raised once misses £21.73 for each further 30 days the invoices stay unpaid.*Fix: raise a new charge each period, or use statement interest, which Paidnice recalculates when the statement is sent.*

## Frequently asked questions about late fees in Xero

Should I add the fee to the original invoice or raise a new one?

A separate Xero invoice is the cleaner way to charge a late fee, because the original sale record stays intact and the fee gets its own line and tax rate. Adding a line to the existing invoice is simpler for a small one-off fee, but on a part-paid invoice Xero makes you remove the payment before you change the amounts.

Does Paidnice work with Xero?

Yes. Paidnice connects to your Xero organisation and applies your late fee, interest and reminder rules automatically. It also works with QuickBooks Online. There is no migration: it sits on top of the accounting software you already use.

Is late payment interest subject to VAT in the UK?

No. HMRC's manual says no tax is due on interest awarded or agreed because of late payment, which is [outside the scope of VAT](https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc06810) as compensation for the delay. It does not name the fixed compensation sum of £40, £70 or £100, so ask your accountant about that line. This is general guidance, not tax advice.

How do I charge a late fee in Xero when a direct debit fails?

Xero will not add one, so raise a separate late fee invoice that quotes the original invoice number, if your terms or the 1998 Act allow the charge. In Paidnice, a failed direct debit freezes the invoice, so no policy runs on it until you fix it. Correct the invoice quickly, or charge the fee manually.

## How do late fees close the payment gap in Xero?

A late fee closes the gap between invoice and payment by putting a cost on paying late: on a UK invoice, a fixed £40 to £100 plus 11.75% a year. Xero reminders charge nothing when an invoice stays unpaid.

[Try Paidnice free](https://www.paidnice.com/sign-up) and start applying late fees to your Xero invoices automatically, or [book a demo](https://www.paidnice.com/book-a-demo) and we'll set it up with you.

Read the transcript: How to Add & Automate Late Fees in Xero

Hi there. So while you can manually add late fees to your Xero invoices, if you want to automate that and to have it apply either every month at an interest rate, or whenever an invoice goes overdue a particular number of days, all automatically, then you are going to need a Xero app for that. So head on over to the Xero App Store and search for Paidnice. Now Paidnice is a Xero add-on that extends the capabilities of Xero so that you can run better AR, just like running automated late fees or interest. Now click get this app to install and to connect Paidnice to your Xero org.

Once you are inside, you will see all these settings, and so the first thing to to explain is how groups work. So when you set up a late fee, you want to apply these apply the late fee to a specific group of customers. There are many different ways to filter and to put people put different customers into from groups, and a group essentially will have any policy applied to it so long as they meet the criteria. Now we have two different types of late fees. We have invoice late fees, which charge late fees and interest on a per invoice basis. So let's say if we had two or three different invoices that were overdue: once we hit the criteria for that late fee, it will it will do two or three different late charges based on the number of invoices. But if you wanted to say group and charge and group late fees and interest together per contact on a recurring schedule, so say say let's say look at look at an interest rate, or just charge late fees on a monthly basis, sort of like an interest charge, then we can do it that way as well. I will start off with the first one and show you how that looks.

I have created a new group here just so I can separate them out and show you what they look like in each one. We have an invoice late charge here, and inside here is where you can set up all of the different policy configurations for the late charge. Now the first thing is you have to think about how you want it to be charged. Right so either you either put it on the existing invoice, or you have it issued as a brand new invoice. You can also choose what type it is going to be: so either a fixed fixed amount, so either say £10 or $20 or whichever, you might also want to do a percentage or a fixed percentage, so let's say 10% of just just of whatever the invoice total is. Then you can also do an an annualized interest rate, which is then calculated on a pro rata basis across every day.

Something important to do here is is to set the right chart of account for this to go into. So Xero does have a default that you can use there, but you are more than welcome to set up your own. Now this is an invoice charge, so it is going to happen for every one of those invoices that goes overdue. And so this is where we can set when it will happen: either on the due date if you want it to happen on the due date or you might say you want to give them a few days, so maybe let's go seven days, or let's just say for the scenario is 3 days. You can also set it to repeat, and then you can also edit other things like the description of the line item. You can also set up a notification that goes to the clients as well. Now we can also test this out before we even take it live and then see what it looks like. I have one earlier which I think was here, yeah. So this will apply so it's it's telling us the time in the future, right so it's telling us it's going it's going to it's going to apply this charge. So it is working just as we want it to be, so we will hit save, and we can even turn that on here. Now we have our late charge here, and we can see it is going to do it 3 days after the due date.

Now we are going to head on over to the actions tab here, and this is where we can see that the invoice the late fee is scheduled to run. So we can see this one here, it is ready to go in the future. Here, so it's all good to go so what I am actually going to do is forcefully action this now so that you can see what it looks like. You can also instead of like scheduling everything, you can also approve actions beforehand. You do this if they are in a draft mode here, so this little orange button: if that was on, there then the the the late fees would come up in this draft mode, and this is where you could essentially double check and approve beforehand.

Now we have our late charge here. So let's have a look here, so we've got it, we've got it been triggered. Here is the original invoice, is here which was this this one from the demo company, and then let's look at our penalty invoice. So here it is. We have our 10% late charge on there. It has automatically generated it for us and it's created it inside of Xero, and and we can also set it to also send them as well. Nice. Now we can also if we wanted to waive the charge, we can just come in here, and then we can just go click on this, and we can just remove the late fee there. And so now that that late charge has been completely avoided. Yep, that's gone. Fantastic. So the other thing that we want to do is set up an interest charge over the month. So so this is where we do the statement interest charge here. So this one is a little bit bit bigger than the other one, but you have the same thing here. So what this how this works is it will generate a a brand new charge, a single invoice, so it will not just do it across multiple invoices. It will just do it on so let's say three different invoices: it will just generate one late charge. And it does that you cannot add it to existing invoices. This one can only be done as a brand new charge. Now you can see two different types, either interest per annum here or the the percentage. I would like to say you the same 10% that we did.

Now, if you are in the UK, we also dynamically pull the Bank of England base rate. So if you wanted to use those rules here, which we will in this scenario, we are going to put in our interest account as well, and because it is the Bank of England base rate, we are going to do the 8% there, which is the the legislated amount. We are also going to look at how that is going to be applied. So you can apply this either on a monthly or a weekly basis, and we can do it on you know the first of the month, second of the month, however you so desire.

There is a variety of other settings as well. So you can also calculate interest from different dates, say the due date or or the the issue date. You can also set a minimum or maximum debt age, or maximum so let's say you know you want the debt to be at least a few days old before charging it. You can also do the notification, as I mentioned, and there are other things as well about adjusting for credit and and other things. This is really these These are really important, especially if you have payments that are made against invoices, so you can still charge interest against what is owing.

We have got that set up. Now I am going to show you how it works for the approval. So we've got the we've got it we've already started to see it it's coming through here in our draft actions, and you can see here we have a few different ones coming up. We have City Limousines here, which actually owes us a little bit of money. So we just just going to show you how that looks so we've got City Limousines they've got four different invoices there. us, right, so we've got we've got one that is 78, 48 and 43 days. We have quite a lot there already, so we're going to we're going to we're going to see what that looks like. So yeah and if we had the other late charge set up, it would do three different charges or four different charges for them. So here we have this one, here and we're just going to this is where you can approve these actions. We can come through here and we can be like yep, let's approve those, and now those have moved over to scheduled. Right so this is just because we have them in this draft mode where you can kind of see what is going on. But if you were to use if you were just to have it on green mode, then that would automatically be scheduled to to go out on the the 1st of March, which is the end of this month. So let's see here. We have this one here, and again we are going to force this to happen now because we do not want to wait. Wait wait so we can action this now, and now this is what will essentially happen when the scheduled date comes up that you want this to happen for but again if you want to just manually do these charges and do them en masse, like now, then this is how you do it. So you can see here we are jumping over to the complete tab here and it is complete. We have this one here, and we can see it has generated our statement interest. And so let's have a look. So we've got this we've got this one here so this is again this has been created by Paidnice inside of Xero for you, and you can see here we had three different charges, because we had three different invoices that were overdue for City Limousines and you can see what it's done is created one single statement or sorry one one single invoice with three different line items, one for every single one of those charges. It has worked out the Bank of England base rate plus the 8%, and it has also calculated a prorated amount across each of those different periods. That is how it is done.

So that's how it's done it there so that's how late fees work with Paidnice. There is obviously a little bit more in terms of how you can set it up for yourself, in terms of different different ways to apply them to different customer groups and all that sort of stuff, and I can be more than happy to help show you how that works. But if you would like to find out more and get started for free, visit paidnice.com. Thanks.

## Paidnice features in this article

- [**Late fees and interest** Adds late fees and interest to overdue invoices when you turn them on.](https://www.paidnice.com/late-fees)

## About the editorial team

Written by Denym Bird Co-founder & CEO of Paidnice

Denym started Paidnice in 2022 after customers paying late left his own business short on payroll. He has led it to $1 billion collected on time across more than 1 million invoices, and writes about credit control, late fees and getting paid on Xero and QuickBooks.

Reviewed by Ashley Schroder Co-founder of Paidnice

Ashley is a co-founder and lead developer of Paidnice and has built accounting software for more than 10 years. He builds the ledger connections that put reminders, late fees and payments into Xero, QuickBooks and ERPs such as NetSuite and Business Central. Before Paidnice he co-founded A2X, ecommerce accounting software for Xero and QuickBooks.

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