Late Payment Interest: Simple vs Compound, Grace Periods, and Flat Fees
Late payment interest comes in two shapes. Simple interest charges the same amount every day against the original balance. Compound interest adds each day's charge to the balance so tomorrow's interest is calculated on a slightly larger number. Over the timescales freelancers deal with — thirty to ninety days — the difference is small, usually under a percent of the total, but it matters that you can say which one your contract specifies.
Last updated 2026-09-17.
Simple vs compound interest
SSimple Interest
Principal × Daily Rate × Days
Same charge every day, against the original balance. Easier to explain, easier to defend, and what most statutory schemes use.
CCompound Interest
Principal × ((1 + Daily Rate)^Days − 1)
Each day accrues on the balance including prior interest. Only defensible if your signed contract says so explicitly.
Worked example: GBP 5,000 invoice, 45 days late
| Principal outstanding | 5,000.00 |
|---|---|
| Rate basis | 12% per year |
| Daily rate (12% / 365) | 0.032877% |
| Days overdue / grace period | 45 / 7 |
| Billable days | 38 |
| Simple interest | 62.47 |
| Compound interest | 62.85 |
| Flat administrative fee | 25.00 |
| Total payable (simple) | 5,087.47 |
Takeaway: Over 38 days, compounding adds 38p. Over a full year the same 12% rate compounds to 12.75%, so the choice between simple and compound only becomes material on debts that run for many months.
Rate bases: annual, monthly, daily
Rates are quoted in three different ways and mixing them up is where the real errors live:
| Basis | Example | Daily rate calculation |
|---|---|---|
| Annual (APR) | 12% per year | 12% / 365 = 0.032877%/day |
| Monthly | 1.5% per month | 1.5% / 30 = 0.05%/day |
| Daily | 0.05% per day | Used as entered |
Some commercial contracts use a 360-day year (banker's year), which makes the daily rate marginally higher. The Late Fee Estimator uses 365 days.
Grace periods
A grace period is the number of days after the due date during which no interest accrues. Worth writing into a contract because it removes the argument about postal and bank delays.
The estimator subtracts the grace period from the days overdue before charging anything. A 7-day grace on a 45-day delay bills 38 days.
Flat administrative fees
A fixed charge (e.g., GBP 40, EUR 40, USD 50) added once, on top of interest, to cover the cost of chasing. Several jurisdictions provide for exactly this:
- UK (Late Payment of Commercial Debts Act): GBP 40 (debt < GBP 1,000), GBP 70 (GBP 1,000–GBP 10,000), GBP 100 (> GBP 10,000)
- EU Directive 2011/7: Minimum EUR 40 recovery costs
- US: Varies by state; often 1–1.5%/month + collection costs
Many contracts use both: a fixed administrative charge plus daily interest — exactly what the estimator models.
Statutory rates (indicative — check locally)
| Jurisdiction | Statutory rate | Fixed compensation |
|---|---|---|
| UK (commercial debts) | 8% above Bank of England base rate | GBP 40–GBP 100 by debt size |
| EU (B2B) | 8% above ECB reference rate | Min EUR 40 recovery costs |
| US (varies by state) | Typically 1–1.5%/month | Collection costs; usury caps apply |
| Australia | RBA cash rate + margin (varies) | Reasonable recovery costs |
Escalation ladder that works
Interest is leverage, not income. A workable escalation:
- 1Day 1 (after due date): Polite reminder. “Hi [Name], invoice INV-2026-0042 was due yesterday. Please let me know if there's an issue.”
- 7Day 7: Statement of account. List invoice, due date, amount, and accruing daily interest.
- 14Day 14: Formal notice. Quote the contract clause, the accruing daily amount, and the total now due. “As of today, GBP 62.47 interest has accrued. Total due: GBP 5,087.47.”
- 30Day 30: Pause further work. “Per our agreement, work is paused on accounts overdue > 30 days. Will resume on receipt of payment.”
Most invoices settle at the point the client sees a number that grows every day.
What to put in your contract
"Late payment: If payment is not received by the due date, the Client shall pay interest at [X]% per year (simple interest, 365-day year) on the outstanding balance from the due date until paid in full, after a grace period of [7] days. A fixed administrative fee of [GBP 40/EUR 40/USD 50] shall also be payable on any overdue invoice."
Is late payment interest taxable?
Interest is normally taxable income to you. In most VAT/GST systems, interest charged for late payment is outside the scope of the tax because it is compensation rather than consideration for a supply — but confirm the treatment locally before adding it to a tax-bearing line on the invoice.
Projection: what the penalty becomes if they keep waiting
The Late Fee Estimator shows a projection table for 7, 14, 30, 60, and 90 days. Use it to show the client exactly how the debt grows:
| Days | Simple | Compound |
|---|---|---|
| 7 | 9.73 | 9.73 |
| 14 | 19.45 | 19.46 |
| 30 | 41.67 | 41.73 |
| 60 | 83.33 | 83.65 |
| 90 | 125.00 | 126.04 |
Based on GBP 5,000 at 12% APR, 7-day grace. The divergence accelerates after ~60 days.
Related guides
- Payment Terms That Get You Paid Faster
- Following Up on Unpaid Invoices: Escalation Ladder
- Freelance Contract Essentials: What to Include Before You Start
Try the estimator
Open the Late Payment Fee Estimator. Enter the outstanding amount, rate, days overdue, grace period, and flat fee — it shows simple and compound interest side by side, plus a projection table and copy-ready text for your reminder email.
This estimator is arithmetic, not legal advice. Enforceable rates, statutory compensation, and usury caps vary by country and state. A clause valid in one place may be unenforceable in another. Take advice before pursuing a debt.