TL;DR: Simple interest is calculated using the formula Interest = Principal x Rate x Time, where the rate is expressed as a decimal and the time is expressed in years. It is most often used for short-term consumer loans, payday loan illustrations, late-payment interest under the Late Payment of Commercial Debts (Interest) Act 1998, and HMRC interest on certain tax amounts. UK savings and most consumer loans use compound interest rather than simple interest, so it is important to check which formula applies before relying on a calculation. The Annual Equivalent Rate (AER) for savings is a compound figure; the Annual Percentage Rate (APR) for credit is also compound but constructed in a specific regulatory way that includes fees.
Last reviewed May 2026
"Simple interest" is one of the most common phrases in personal finance and one of the most often misapplied. In strict mathematical terms, simple interest is interest calculated only on the original principal, never on interest already accrued. In everyday UK usage, "simple interest" sometimes means the formula Interest = Principal x Rate x Time and sometimes just means "easy to calculate". This guide uses the precise meaning: interest that does not compound.
This guide shows the formula, walks through worked examples for typical UK uses (a short-term personal loan, a savings deposit, an HMRC interest charge, and a statutory late payment claim), and explains where simple interest applies versus where the compound formula or the APR/AER construction is what actually matters.
The simple interest formula
The formula is Interest = Principal x Rate x Time, where the rate is expressed as a decimal and the time is expressed in years. To convert a percentage to a decimal, divide by 100: 5 percent becomes 0.05, 12 percent becomes 0.12. To express partial years, use the fraction: six months is 0.5 years, three months is 0.25 years, 60 days at the standard 365-day convention is 60 divided by 365.
The total amount owed or held at the end of the period is the principal plus the interest, which can be written as Closing amount = Principal x (1 + Rate x Time). This is the version of the formula most calculators use because it returns the closing balance directly. A worked example: a 5,000 pound loan at 8 percent simple interest for two years produces interest of 5,000 x 0.08 x 2 = 800 pounds, for a total amount due of 5,800 pounds.
How simple interest differs from compound interest
Simple interest accrues only on the original principal. Compound interest accrues on the principal plus any interest already added. On a one-year horizon, the two are identical (no time for interest on interest to build). Over longer horizons, the divergence is significant. A 10,000 pound deposit at 5 percent simple interest for 10 years pays 5,000 pounds of interest (10,000 x 0.05 x 10). The same deposit at 5 percent compound interest paid annually grows to roughly 16,289 pounds, producing 6,289 pounds of interest, a 26 percent uplift over simple.
The compound formula is A = P x (1 + R/n)^(nt), where n is the number of compounding periods per year. Most UK savings accounts compound interest at the frequency stated in the terms (monthly, annually, or daily), and the headline rate is converted into the Annual Equivalent Rate (AER) so savers can compare different compounding patterns on a like-for-like basis.
Where simple interest is actually used in the UK
Several UK contexts apply pure simple interest rather than compound. The Late Payment of Commercial Debts (Interest) Act 1998 entitles a UK business creditor to interest on overdue commercial invoices at the Bank of England base rate plus 8 percent, calculated on a simple interest basis from the day after the agreed payment date. The calculation is mechanical and uses the standard Principal x Rate x Time formula with time measured in days divided by 365.
HMRC charges interest on late-paid tax and pays interest on overpaid tax. The headline rates are published by HMRC. The calculation method for HMRC interest is set out in the Finance Act 2009 and the corresponding regulations; for most personal taxes the calculation uses simple interest day-by-day at the prevailing rate. County Court Judgment debts attract statutory interest under the Judgments Act 1838 at 8 percent simple, calculated from the date of judgment.
Why most consumer credit is NOT simple interest
UK consumer credit (personal loans, credit cards, store cards, overdrafts) is generally not simple-interest. The Consumer Credit (EU Directive) Regulations 2010 and the Consumer Credit Act 1974 require regulated credit to be advertised with a representative Annual Percentage Rate (APR). The APR is a constructed figure that uses compound interest mathematics and includes most fees, so the cost over the life of the loan is comparable across products.
For a personal loan, the APR calculation converts the lender's actual interest rate (whether stated daily or monthly) and any compulsory fees into a single annualised figure. The APR is always equal to or higher than the lender's underlying interest rate because of the way fees are incorporated. APR is not the same as the lender's "monthly rate" or "daily rate"; it is a regulated calculation laid down in the rules.
Savings accounts and AER
UK savings accounts are advertised using the Annual Equivalent Rate (AER) under FCA rules. AER is the rate of interest that, applied annually, would produce the same return as the actual compounding pattern of the account. A savings account paying 5 percent gross monthly is advertised at an AER slightly higher than 5 percent because monthly compounding produces a slightly higher annual return than a single yearly payment.
For comparing savings accounts, AER is the figure to use. For working out the actual interest a specific deposit will earn in a year, the calculation depends on the deposit pattern (single deposit on day one, monthly contributions, mixture). Many bank and building society calculators offer an "interest calculator" that takes the inputs and returns the projected balance using the account's actual compounding rules.
Worked examples for everyday UK situations
Example one: a 2,000 pound personal loan from a friend agreed at 5 percent simple interest for one year. Interest = 2,000 x 0.05 x 1 = 100 pounds. Total due at the end of the year = 2,100 pounds.
Example two: a commercial invoice for 8,500 pounds overdue by 90 days, with statutory simple interest under the Late Payment of Commercial Debts (Interest) Act 1998. Assume Bank of England base rate is 5 percent for the period (this should be checked against current data); the statutory rate is base rate plus 8 percent = 13 percent. Interest = 8,500 x 0.13 x (90/365) = approximately 272 pounds.
Example three: HMRC late payment interest on a 1,200 pound self-assessment balance paid 60 days late at an HMRC interest rate of (for illustration) 7 percent. Interest = 1,200 x 0.07 x (60/365) = approximately 13.81 pounds. The actual HMRC rate at the time of late payment should be checked on GOV.UK; the rate changes when the Bank of England base rate changes.
Common simple interest mistakes to avoid
The most common mistake is applying simple interest to a long-term calculation where compound is the right formula. A 30-year retirement projection using simple interest will significantly underestimate the eventual balance compared to actual compounded growth in a savings or investment account.
The second mistake is mixing percentage and decimal forms. Using the rate as a percentage (5 instead of 0.05) in the Principal x Rate x Time formula produces an answer 100 times too large. The third is using months when the formula expects years (time should be in years, so a 6-month period is 0.5 years, not 6). The fourth is forgetting to include compounding when one side of a comparison uses simple interest and the other uses AER; the figures are not directly comparable.
Online simple interest calculators
Free simple interest calculators are widely available online; MoneyHelper offers free savings and loan calculators that handle both simple and compound calculations and clearly label which is being used. The Bank of England publishes inflation calculators that show the effect of historic inflation rates on real purchasing power, which is a separate but related calculation.
For statutory late payment claims, the Department for Business and Trade and the Federation of Small Businesses publish guidance and template calculators. For HMRC late payment interest, GOV.UK provides the published interest rate history and a worked example of the calculation. For Court Judgments, the Ministry of Justice's guidance on enforcement of judgments includes the Judgments Act 1838 simple interest position.
How we verified this
The formulas and constructions described here are drawn from standard mathematical definitions, the Consumer Credit (EU Directive) Regulations 2010 (APR construction), FCA Handbook rules on AER for savings (BCOBS), the Late Payment of Commercial Debts (Interest) Act 1998 (statutory simple interest for B2B debts), the Judgments Act 1838 (statutory simple interest on court judgments), and HMRC's published interest rate schedules under Finance Act 2009. No statutory interest rate or formula has been invented; example calculations are illustrative and use rates that should be checked against the current published rate before relying on them.
Disclaimer: This article is general information about simple interest calculations in a UK context. It is not financial, tax or legal advice. Statutory interest rates change with the Bank of England base rate and with HMRC announcements; current rates should be checked on the relevant primary source before relying on a specific figure. For legal claims relying on interest calculations, professional advice is often warranted.
Frequently asked questions
What is the simple interest formula?
The formula is Interest = Principal x Rate x Time, where the rate is expressed as a decimal and the time is expressed in years. The closing balance is Principal x (1 + Rate x Time). The rate must be in decimal form (5 percent is 0.05), and the time must be in years (six months is 0.5).
What is the difference between simple interest and compound interest?
Simple interest accrues only on the original principal. Compound interest accrues on the principal plus any interest already added. Over short periods the two are similar; over longer periods, compound returns are materially higher because interest earns interest. UK savings accounts and most consumer credit use compound interest; statutory late payment interest and court judgment interest use simple interest.
Is the APR on a loan calculated using simple interest?
No. The Annual Percentage Rate is a regulated compound figure that includes most fees and charges associated with a credit agreement. APR is calculated using a formula set out in the Consumer Credit (EU Directive) Regulations 2010. It is always equal to or higher than the underlying interest rate because the compounding and fee inclusion both push the figure up.
Does HMRC charge simple or compound interest on late tax?
HMRC charges late payment interest on a simple-interest basis under the Finance Act 2009 regime for most personal taxes. The interest rate is reviewed and published by HMRC; it tracks Bank of England base rate plus a margin. Interest is calculated day-by-day on the unpaid balance using Principal x Rate x (days divided by 365).
What is the statutory simple interest rate for late commercial payments in the UK?
Under the Late Payment of Commercial Debts (Interest) Act 1998, a UK business creditor is entitled to interest on an overdue commercial invoice at Bank of England base rate plus 8 percent, calculated on a simple-interest basis from the day after the agreed payment date. Compensation amounts (40 to 100 pounds depending on debt size) are also payable. The right applies between businesses, not to consumer debts.
