---
title: "Compound or simple interest on overdue invoices"
description: "UK statutory interest is simple and does not compound. Charging interest on interest is a contractual choice. What it adds, what your terms need to say."
url: https://www.paidnice.com/blog/compound-interest-on-overdue-invoices
---

# Compound or simple interest on overdue invoices

Written by

Denym Bird
Expert verified

Co-founder & CEO of Paidnice

Denym clarified that UK statutory interest is simple interest, covering what monthly compounding would add on 10,000 pounds at 12 percent and what your terms must say to charge it.

Reviewed by Ashley Schroder

Co-founder of Paidnice

Updated Nov 6, 2026 · 8 min

## Summary

UK statutory interest on overdue invoices is simple interest, not compound: the Late Payment of Commercial Debts (Interest) Act 1998 charges 8% above the Bank of England base rate on the original debt only. Compounding is available only where your own contract terms say so in writing before the invoice is raised.

- **The size of it:** On £10,000 at 12% a year, compounding monthly adds £68.25 over twelve months compared with simple interest, a 5.7% difference.
- **Where it lives:** UK and EU statutory rights are simple by default; everywhere else the right is contractual, so compounding is available on the same footing as any other rate.
- **How Paidnice sets it:** The 'Include previous interest charges' toggle controls it on a fee policy, and it is on by default, so choosing simple interest is the deliberate act.

## What is compound interest on overdue invoices (and what is it not)?

**Compound interest on overdue invoices is interest charged on the unpaid balance plus any interest already added, so each period's charge is larger than the last.** See the [definition of compound interest](https://www.paidnice.com/dictionary/compound-interest).

- **Simple interest is not compound interest.** Simple interest is charged on the original debt only. UK statutory interest under the [Late Payment of Commercial Debts (Interest) Act 1998](https://www.legislation.gov.uk/ukpga/1998/20/contents) is simple: 8% above the Bank of England base rate.
- **Fixed compensation is not interest.** UK debts also carry £40, £70 or £100 per invoice, set by the size of the debt. It is a fixed sum and does not grow with time.

The choice changes the amount owed. On £10,000 at an example rate of 12% a year over twelve months, simple interest is £1,200.00 and monthly compounding is £1,268.25, which is £68.25 more.

Without a compounding clause you fall back to the simple statutory rate, and a new clause is hard to apply to invoices raised before it took effect.

## Statutory interest is simple interest

The [Late Payment of Commercial Debts (Interest) Act 1998](https://www.legislation.gov.uk/ukpga/1998/20/contents) gives simple interest at 8% above the Bank of England base rate, calculated on the debt itself.

For debts overdue in the second half of 2026 the statutory rate is **11.75% a year**: the 3.75% base rate in force on 30 June 2026 plus 8%. Check the base rate at the [Bank of England](https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate) before quoting a figure for a different period.

The statutory rate is fixed in six-month blocks rather than moving with the base rate. A debt that turns late in the first half of the year takes the rate set the previous 31 December. One that turns late in the second half takes the rate set that 30 June. The full rules for a goods supplier, including the £40, £70 and £100 fixed sums per invoice and the position in the US, Australia and New Zealand, are in [charging interest on overdue invoices](https://www.paidnice.com/blog/charging-interest-on-overdue-invoices). Our [UK late payment fees guide](https://www.paidnice.com/blog/late-payment-fees-uk) sets out the mechanics, and the same rate has to appear on the customer's statement, which is covered in [late payment interest on customer statements](https://www.paidnice.com/blog/late-payment-interest-on-statements).

## Compounding is a contractual choice

You are not obliged to take the statutory rate. Write your own into the contract and it displaces the Act, so long as it qualifies as a **substantial contractual remedy** for late payment. That is where compounding lives.

Compounding is open to you when your terms say interest runs on the outstanding balance **with earlier interest rolled in**. If they are silent, you cannot, because you fall back to the statutory position and the statutory position is simple.

The clause has to exist first

A compounding clause cannot be applied retrospectively to invoices raised under terms that did not include it. If you are adding one now, it applies to work invoiced from the date the new terms take effect. Wording is in our [late fee policy wording examples](https://www.paidnice.com/blog/late-fee-policy-wording-examples), and the broader clause set is in [payment terms and conditions templates](https://www.paidnice.com/blog/payment-terms-and-conditions-templates).

## What compounding actually adds

On £10,000 at an example rate of 12% a year over twelve months, simple interest produces £1,200.00 and monthly compounding produces £1,268.25, a difference of £68.25 or 5.7% more interest.

Run your own numbers below. The basis selector changes how the interest is built, and the comparison line underneath shows all three at once.

What an overdue invoice is costing you

Market

Interest basis

Overdue amount
Days overdue

Interest rate (% per year)
Fixed or admin fee

#### Total now owed on the charge

£1,200.00
£1,200.00 interest, no fixed fee

#### What the delay costs them per day

£3.29
Accruing today, at the basis selected

Simple£1,200.00Compounded monthly£1,268.25Compounded annually£1,200.00

Set your own rate. Any rate you charge has to be in your payment terms before the invoice is raised.

Written out, so you can check the numbers.

An invoice of **£10,000**, **365 days overdue**, at **12% a year**.

- **Simple interest: £1,200.00.** Twelve per cent of the original debt, once.
- **Compounded monthly: £1,268.25.** Each month's interest joins the balance and earns interest itself.
- **Compounded annually: £1,200.00.** Over exactly one year there has been no second period yet, so it matches simple interest.

**Monthly compounding adds £68.25 over a full year, which is 5.7% more interest.** That is the size of it. Compounding is not the difference between collecting and not collecting, and anyone selling it as a step change in recovery is overstating it.

Where it does matter is at the daily level, which is the number your customer feels. At simple interest the debt costs them £3.29 a day. Compounded monthly, by the end of the first year, it costs £3.69 a day and keeps climbing.

## Is compound interest legal on invoices?

Compound interest on an invoice is legal when your contract terms say so. UK and EU statutory rights on their own give you simple interest only, and outside those two blocks the right to charge, and to compound, is contractual everywhere.

Two tests apply once you rely on your own clause. In the UK the clause has to be a substantial contractual remedy for late payment, or the Act's simple interest applies instead. In every contractual market, including the UK once you set your own rate, the charge must be proportionate to your legitimate interest in being paid on time, or a court can strike it down as a penalty. Compounding raises the effective annual rate, so a 2% monthly clause compounds to 26.8% a year rather than 24%, and that is the figure a court or a state usury cap measures.

## What your market allows

In the UK and the EU the right to charge is statutory and automatic, and the statutory basis is simple. Almost everywhere else the right is contractual from the start, which means compounding is available to you on exactly the same footing as any other rate: whatever your terms say, tested under contract law if it is disputed.

| Market | Basis | Can you compound? |
| --- | --- | --- |
| **UK** | Statutory. Base rate plus 8%, fixed in six-month blocks, plus £40, £70 or £100 per invoice | Only under your own terms, as a substantial contractual remedy |
| **EU** | Statutory under [Directive 2011/7/EU](https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32011L0007). ECB reference rate plus at least 8 points, plus €40 minimum | Only under your own terms |
| **US** | State by state, usury caps apply | Contractual, but usury caps bite on the effective rate, and compounding raises it |
| **Australia** | Contractual. No statutory B2B rate | Yes, if in your terms and proportionate |
| **New Zealand** | Contractual. Contract and Commercial Law Act 2017 | Yes, if in your terms |
| **Canada** | Contractual, federal and provincial variation | Yes, but state the annual equivalent rate, not just a monthly percentage |
| **South Africa** | Prescribed Rate of Interest Act as a statutory fallback | Contractual, subject to National Credit Act caps |
| **Singapore** | Common law, still applying the older genuine pre-estimate test | Yes, if it remains a genuine pre-estimate of loss rather than a penalty |

The penalty rule

The penalty rule applies wherever you rely on your own contract rather than a statutory right, and that includes the UK the moment you set your own rate instead of taking the statutory one. A charge that is out of all proportion to your legitimate interest in being paid on time can be struck down. Compounding raises the effective annual rate, so it moves you closer to that line. In the United States it can also push the effective rate through a state usury cap even when the stated rate looks compliant. Our [guide to late fee laws by US state](https://www.paidnice.com/blog/late-fee-laws-by-all-us-states) has the caps.

## Should you compound

Compounding earns more and is harder to explain. Simple interest plus a fixed fee reconciles to an obvious calculation and waives cleanly. Neither is wrong. Inheriting the setting without noticing is.

**Compounding earns more and is harder to explain.** A customer who queries an invoice for £1,268.25 when they can calculate 12% of £10,000 themselves will ask why the figure is higher, and you will spend the call on arithmetic rather than on when they are going to pay.

**Simple interest plus a fixed fee is easier to justify and [easier to waive cleanly](https://www.paidnice.com/blog/waiving-late-payment-fees).** The number reconciles to an obvious calculation, and the fixed fee is what makes a small invoice worth following up at all. Whichever you pick, it has to match what your [payment terms on the invoice](https://www.paidnice.com/blog/examples-of-payment-terms-on-invoices) actually say.

Neither is wrong. What is wrong is inheriting the setting without noticing, then discovering it during a difficult conversation. Look at the setting, decide, and write the decision into your terms.

> Compounding is a pricing decision dressed up as a technical setting. Treat it like a pricing decision: pick it on purpose, put it in the terms, and be ready to explain it.

## How Paidnice does this, and how simple it is

In [Paidnice](https://www.paidnice.com/late-fees) the basis is a setting on the fee policy rather than something you calculate per invoice.

![A Paidnice statement interest policy at 1.5 percent a month on balances over 30 days overdue, with the charge type, minimum overdue age and the compounding toggle numbered](https://www.paidnice.com/images/blog/late-fee-policy-wording-examples-interest.png)

- **One toggle controls it.** "Include previous interest charges" decides whether each period's interest is calculated on the balance including interest already charged. **It is on by default**, so switching to simple interest is the deliberate act.
- **Set the rate the way your market works.** Turn on the Bank of England base rate and Paidnice applies base plus your percent, either locked for each six-month period as the Late Payment Order sets it, or following the base rate as it changes. You choose which per policy. Outside the UK, set your own annual rate, or a flat percentage of the balance.
- **Add a fixed charge alongside it** for UK compensation of £40, £70 or £100, or for a contractual administration fee, with its own description and income account, which matters for [how to account for late fees](https://www.paidnice.com/blog/how-to-account-for-late-fees).
- **Every charge is a real invoice** in Xero or QuickBooks, so the compounding is visible in your ledger rather than living inside a spreadsheet nobody else can check.

Setting it up is one policy on one customer group, and the basis is one dropdown on the same screen as the rate.

Related

For multiple invoices and several calculation methods, use the [advanced late payment interest calculator](https://www.paidnice.com/late-payment-interest-calculator). For the current UK statutory figure, use the [UK statutory interest calculator](https://www.paidnice.com/uk/statutory-interest-calculator).

## Common questions

**Can you charge interest on unpaid interest?** Only if your terms of business say so. UK statutory interest is simple, so relying on the Act alone gives you interest on the debt and nothing further.

**Does UK statutory interest compound?** No. The Late Payment of Commercial Debts (Interest) Act 1998 provides simple interest at 8% above the Bank of England base rate, calculated on the overdue amount.

**How much does compounding actually add?** On £10,000 at 12% a year, compounding monthly adds £68.25 over twelve months compared with simple interest. The gap widens the longer the debt runs.

**Is monthly or annual compounding better?** Monthly produces more, and is the norm where compounding is used at all, because most businesses raise interest charges monthly anyway. Annual compounding does nothing at all in the first year.

**What wording do I need?** Terms that state interest runs on the outstanding balance with any earlier interest rolled in, at a stated annual rate, from the due date until the debt is cleared. Have a solicitor adapt it for your jurisdiction.

## 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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