HMRC payment arrangement interest change
HMRC have changed the way that forward interest is calculated on payment arrangements made as part of a contract settlement. The changes should be beneficial for taxpayers, including those with loan charge issues.
When a taxpayer agrees a contract settlement and requests to pay by instalments, HMRC adds ‘forward interest’ to compensate for what the taxpayer owes being paid over time, rather than immediately.
Until very recently, this was calculated on the total unpaid balance, including accrued late payment interest and penalties, and included a 1% uplift on the standard late payment interest rate (which at the time of writing is 7.75%).
From 8 May 2026, this has changed. HMRC have shared the following update with us:
We are changing the way that forward interest is calculated on contract settlements paid by instalments, in order to bring them closer in line with Time to Pay agreements.
For instalment arrangements agreed on or after Friday 8 May 2026, irrespective of which tax years are involved, the additional consideration added will be reduced from 1% to £1.
We are also removing the element of compounding that previously occurred where forward interest was charged on accrued statutory interest.
Both of these changes will reduce the amount of forward interest that the customer has to pay.
These changes will not affect arrangements agreed before Friday 8 May 2026.
HMRC have updated their technical manual to reflect the changes.
These changes should be beneficial for taxpayers who need to settle disputes with HMRC after this date, including those with loan charge issues.
