Xero will not calculate or raise a late payment fee for you. The accepted method is to create a separate invoice for the interest and the fixed compensation you are owed, using a no-VAT line, and reference the original invoice on it. This guide walks through the steps, the tax treatment most people get wrong, what to do if the fee is questioned, and how to stop doing it by hand.
The short answer
Raise the late fee as a separate sales invoice in Xero, not as an edit to the original. Add one line for the statutory interest and one for the fixed compensation sum, set both to a no-VAT tax rate, reference the original invoice number, and send. The amounts come from the Late Payment of Commercial Debts (Interest) Act 1998: 8% plus the Bank of England base rate, plus £40, £70 or £100 depending on the size of the debt.
Why Xero has no late-fee feature
Xero is brilliant at raising and sending invoices and recording payment, but it has never added a way to calculate or charge late fees, a gap on its product wishlist since 2014. So the work falls to you: decide what you are owed, raise it, and chase it. The method below is the clean way to do that without creating a VAT headache or muddling your original invoice.
Work out what you are owed
Statutory interest on a worked example. A fixed sum of £40 to £100 is added on top. The rate moves with the base rate.
Under the Late Payment of Commercial Debts (Interest) Act 1998, a UK business can charge another business statutory interest of 8% a year plus the Bank of England base rate on an overdue invoice, from the first day it is late. On top of that sits a fixed compensation sum: £40 for debts up to £999.99, £70 from £1,000 to £9,999.99, and £100 at £10,000 and above.
The fiddly part is the interest. Because the base rate is reset several times a year, a long-overdue invoice can span more than one rate, and the correct charge is prorated across each period. Work it out on the day you raise the fee, using the base rate that applied while the debt was overdue.
Raise the fee invoice in Xero, step by step
Adding a late fee in Xero is a manual sales invoice. There is no built-in late-fee feature.
Create the fee as a new invoice
In Xero, go to Business, then Invoices, then New Invoice, addressed to the same customer as the original.
Add a line for the interest
Describe it clearly, for example interest on overdue invoice INV-1042, and enter the interest amount you calculated.
Add a line for the fixed compensation
A second line for the £40, £70 or £100 fixed sum that matches the size of the debt.
Set both lines to a no-VAT rate
Statutory interest and compensation sit outside the scope of VAT, so choose a no-VAT tax rate and post them to a suitable account, such as other income, rather than your normal sales account.
Reference the original and send
Put the original invoice number in the description so the customer can see exactly what the charge relates to, then approve and send.
Get the VAT treatment right
This is the step people miss. Statutory interest and late-payment compensation are not a supply of goods or services, so they are outside the scope of VAT. Do not add VAT to either line. Using a no-VAT tax rate keeps the charge correct and keeps these amounts out of your VAT return, where they do not belong. If in doubt, confirm the account and tax-rate mapping with your accountant before you make it a habit.
Separate invoice or an extra line
Always raise the fee as its own invoice rather than adding a line to the original. Three reasons. The original invoice is a fixed record of the goods or services you supplied, and editing it after the fact muddies your books. A separate invoice keeps the VAT treatment clean, because the original almost certainly carried VAT and the fee does not. And it gives you flexibility: you can issue the fee, then waive it with a credit note if the customer pays promptly, without ever touching the original.
If the customer disputes the fee
Disputes are usually about surprise, not the law. Point the customer to the original payment terms and to the statutory right itself, which applies to business-to-business invoices whether or not it was written into the contract. If you would rather keep the relationship warm, the practical move is to confirm the fee is valid, then offer to waive it as a goodwill gesture if the original invoice is paid within a few days. If you do waive it, raise a credit note against the fee invoice so your records stay clean.
How to stop doing it by hand
Doing it by hand
- Remember the rate every time it changes
- Work out days and interest per invoice
- Raise and chase a second invoice
- Easy to skip when you are busy
Letting a tool do it
- Indexes to the live base rate plus 8%
- Calculates the interest for you
- Raises the fee invoice automatically
- Applies it every time, consistently
Why most businesses never claim what they are owed when they do it by hand.
Doing this once or twice a year is fine. Doing it every week is where it falls apart, because the interest maths changes with the base rate and nobody remembers to redo it. Accounts receivable tools that connect to Xero can apply the fee for you. Paidnice, for example, raises the late-fee invoice automatically and keeps the interest pinned to the Bank of England base rate plus 8%, recalculating as the rate moves, with an audit trail behind each charge. It holds a 5-star average on the Xero App Store.
For a full comparison of the tools that can do this, see our guide to credit control software for Xero.
Frequently asked questions
Can Xero add late payment fees automatically?
No. Xero has no built-in feature to calculate or raise late fees or statutory interest. You either create a separate fee invoice by hand, or connect a tool that does it for you, such as Paidnice, which applies the fee and keeps the interest rate current automatically.
Do I charge VAT on a late payment fee?
No. Statutory interest and the fixed compensation sum are outside the scope of VAT, so the fee invoice should use a no-VAT tax rate and stay out of your VAT return.
How much late payment interest can I charge in the UK?
Statutory interest is 8% a year plus the Bank of England base rate on overdue B2B invoices, plus a fixed sum of £40, £70 or £100 depending on the debt size. Because the base rate moves, the correct figure depends on when the invoice was overdue. See GOV.UK for the official guidance.
Should I add the fee to the original invoice instead?
No. Raise it as a separate invoice. Editing the original after it has been issued muddies your records and the VAT treatment, and a separate fee invoice lets you waive it cleanly with a credit note if the customer pays promptly.
Is it worth charging late fees at all?
If you invoice other businesses and late payment is costing you, yes. The fee is money you are legally owed, and applying it consistently does more to change a slow payer's behaviour than another reminder. The point is consistency: a fee that always lands works; one that occasionally appears does not.
The bottom line
Xero leaves late fees to you, but the method is simple once you know it: a separate invoice, a no-VAT line for the interest and one for the fixed sum, the original invoice referenced, and the base rate checked on the day. Do it consistently and it changes behaviour. Do it often, and it is worth letting a connected tool apply it for you.
Sources and further reading
- GOV.UK: charging interest on commercial debt
- GOV.UK: late commercial payments overview
- Xero App Store: late fee and AR apps
Confirm tax-rate and account mapping with your accountant. Figures are accurate as of June 2026 and the base rate changes over time. This guide is published by Accounting.Events, powered by Paidnice.
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