Should Late Payment Interest Be Simple or Compound on Invoices?

Q: How much difference does compounding make on an overdue invoice?

Small at first. On a $5,000 invoice at 1.5% per month, simple interest over 6 months is $450 while monthly compounding gives $467.22, a $17.19 difference. Over 12 months the gap grows to about $78.

Q: Should I charge interest on the original invoice amount or the remaining balance?

Charge on the remaining unpaid balance. If a client partially paid, interest should accrue only on what is still outstanding, not the original invoice total.

Guides · Updated October 2026

My answer to should late payment interest be simple or compound on invoices is the same one I would give if you asked me over coffee: simple. Not because compound is evil. Because simple interest is easier to calculate, easier to explain to the client who owes you, and easier to defend when someone questions the number. Compound interest buys you a little more money and a lot more argument.

How much does compounding actually earn you

Run both against a $5,000 invoice at 1.5% per month, six months late. This is the rate most freelancers use, so the example is not hypothetical:

Simple: $5,000 × 1.5% × 6	$450.00
Compound: $5,000 × (1.015⁶ − 1)	$467.22
Extra earned by compounding	$17.19

$17.19. That is the entire upside of compound interest on a six-month delinquency at the standard rate. Stretch it to 12 months and simple gives you $900, compound gives $978.08, a $78 difference. Notice what is happening: on the timelines most invoices actually live in, the two methods barely differ. Compound only pulls away on severely delinquent accounts, which is exactly where the client relationship is already dead and the invoice is heading to collections anyway.

The legal side: what your terms actually allow

The law does not pick a side for you; your contract does. Two facts worth knowing:

UK statutory interest is simple. The law grants 8% over the Bank of England base rate, calculated per day on a 365-day year, explicitly not compound. A contract can set its own remedy instead, but it has to be a "substantial remedy" to replace the statutory rate.
In the US, your contract must say so. If your agreement just says "1.5% per month on overdue balances," a court will read that as simple interest on the outstanding principal. Compounding needs an explicit clause, and state caps can limit the total regardless of what your invoice says.

The federal government is the one big exception: under the Prompt Payment Act, federal agencies owe monthly compounding interest on late payments. If your client is a federal agency, the invoice gets compound interest by statute, and the Treasury even publishes a compounding calculator for it. Your own invoices do not get this treatment unless you write it in.

The line item test. Whatever you choose, put the interest on the invoice as its own line item: the overdue amount, the rate, the number of days, and the method. Simple interest survives this test every time because the client can check your math with a phone calculator. Compound interest invites a phone call that starts "can you explain this number." The call costs more than the $17.19.

When compound makes sense

There is a case for it. On accounts over 90 days past due, the difference between simple and compound stops being trivial, and compounding functions as an escalating incentive when the simple-interest invoice has clearly stopped motivating anyone. If your contracts explicitly allow compounding and your clients are commercial accounts that understand what they signed, use it. Just know you are choosing it for the deterrent effect, not the yield, because on most timelines the yield is pocket change.

And charge on the remaining balance, not the original invoice. If the client paid $2,000 of the $5,000, interest accrues on $3,000. Charging on the original total is the fastest way to turn a late payer into a former client.

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Frequently asked questions

Should late payment interest be simple or compound?

Use simple interest. It is easier to calculate, easier to explain, and easier to defend. Compound interest needs an explicit contract clause and earns very little extra on the timelines most invoices live in.

How much difference does compounding make on an overdue invoice?

On a $5,000 invoice at 1.5% per month: $17.19 more over 6 months ($450 simple vs $467.22 compound), and about $78 more over 12 months. The gap only becomes meaningful on severely delinquent accounts.

Is compound late payment interest legal?

It depends on your contract and jurisdiction. UK statutory interest is explicitly simple. In the US, compounding needs an explicit clause and may be limited by state law. Never compound by default.

Does the US government compound late payment interest?

Yes. Under the Prompt Payment Act, federal agencies owe monthly compounding interest on late payments. Your own invoices do not get this treatment unless your contract provides it.

Should I charge interest on the original invoice amount or the remaining balance?

The remaining balance. If a client partially paid, accrue interest only on what is still outstanding, not the original invoice total.

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