Record late-payment interest in Xero as Interest Income, not sales

In Xero, the usual way to charge interest is a sales invoice, and a sales invoice line defaults to the item’s or the contact’s sales account. A comment on the Xero idea “Add interest to late invoices” (17 October 2025) explains the problem: interest on overdue accounts “is not sales revenue” and “should ideally be classified as ‘Other Income’ or ‘Finance Income’”. The fix is to code each interest line to an income account kept for interest.

The manual way in Xero

1. Create the interest invoice for the customer.
2. On each line, set the account to your interest income account and choose the tax rate your accountant has agreed for these charges.
3. To do many at once, use Xero’s Import customer invoices: in the Sales menu select Invoices, click Import, and download the template file.

Points from Xero Central for that import file:

• Each row is one invoice line. Rows with the same InvoiceNumber make one invoice.
• Only ContactName and InvoiceNumber are required. AccountCode and TaxType must match your Xero organisation exactly, or the value isn’t imported.
• An invoice number that already exists in Xero isn’t imported.
• UnitAmount must be all tax-exclusive or all tax-inclusive in one file; you choose which when you import.
• Xero recommends no more than 500 items per file. Imported invoices are drafts that you approve.

What Lateby does

• Writes the interest invoices in the column layout of Xero’s invoice import template: one draft invoice per customer and currency, one line per late invoice, with the days and rate in the description.
• Fills the account code you set. It defaults to 270, which is “Interest Income” in Xero’s standard UK chart of accounts, and warns if you leave it empty. Check it against your own chart of accounts.
• Fills the tax rate name you type, exactly as it appears in Xero (for example No VAT). It is empty by default.
• Numbers the invoices from a first number you choose, such as INT-0001, and skips invoices already numbered with that prefix so interest is never charged on interest.
• Warns when the file has more than 500 lines (it doesn’t split the file).

When importing, choose tax exclusive amounts. Then check, approve and send the drafts from Xero.

What to check

• How interest and fixed sums are treated for VAT or other tax is a question for your accountant; Lateby only writes the tax rate name you give it.
• Xero’s import template header is best taken from your own organisation’s download; compare it if an import fails.

Lateby is a calculator, not legal advice. Charge interest only where your terms or the law allow it, and only to business customers: interest on consumer debts is regulated differently.

More guides

• Add interest to late invoices in Xero
• UK statutory late payment interest: 8% plus Bank Rate
• Late payment compensation: £40, £70 or £100 per invoice

Lateby is independent and not affiliated with or endorsed by Xero. Xero is a trademark of Xero Limited. This guide was checked against the linked sources on 27 October 2026; Xero changes its product, so check the current Xero Central article if a menu looks different.