How does HMRC’s forward interest change benefit contractors?

In a hardly announced but welcome move, HMRC cut the cost of instalment settlements on May 8th 2026, with some positive financial implications for contractors.

Wait; what? HMRC just made forward interest more affordable?

In this article, exclusively for ContractorUK, I will outline how HMRC’s new approach to forward interest on instalment settlements could reduce costs for some taxpayers — including contractors with loan charge-related issues, writes Meredith McCammond, technical tax officer at LITRG.

What is forward interest?

If a taxpayer agrees to a contract settlement with HMRC and asks to pay by instalments, HMRC adds ‘forward interest’ to reflect the fact that the liability is being paid over time.

This forward interest sits on top of any statutory late-payment interest that may already have built up on the underlying tax liabilities.

How is HMRC forward interest calculated?

Until May 8th 2026, HMRC generally calculated forward interest by taking the standard interest rate at the time of settlement, adding 1%, and applying that figure to the full balance — including tax, penalties and accrued late-payment interest — for half of the payment period.

This ‘half-period’ method is designed to roughly reflect interest on a reducing balance over time. The standard late-payment interest rate is currently 7.75% from 9 January 2026, although it can rise or fall.

What’s the change to HMRC forward interest?

HMRC has confirmed rather than announced, in an update to its Enquiry Manual (ESM6250), that both the basis and the rate used to calculate forward interest are changed on May 8th with immediate effect. The two-fold change is:

1. Forward interest will now only be calculated on tax and some penalties – not on the accrued late-payment interest. So no interest on interest.
2. The 1% uplift will not be added. Instead, HMRC will apply a token additional charge of £1.

Is there an HMRC forward interest change example?

These changes only apply to contract settlements agreed on or after 8 May 2026. And helpfully, HMRC used EM6250 to offer an example of its new model for charging forward interest.

Why will contractors cheer HMRC’s forward interest update?

For contractors, the forward interest change could materially reduce the cost of paying a settlement by instalments — especially in long-running cases where historic interest has built up.

Removing the accrued interest from the forward interest calculation should stop the compounding effect.

What about loan charge contractors’ historical interest?

For individuals settling with HMRC under the new loan charge settlement terms, historical interest may no longer be in play.

In addition, the removal of the 1% uplift — a change that we at LITRG called for in its submission to the Ray McCann Loan Charge review — should still deliver a meaningful saving.

It is also worth remembering that, under the new loan charge settlement terms, HMRC has agreed to five-year, no-questions-asked payment arrangements.

Longer arrangements may still be available, depending on individual circumstances.

What about contractors outside the new loan charge settlement opportunity?

We understand that contractors outside the scope of the new loan charge settlement terms, but still dealing with disguised remuneration disputes, should also be able to access instalment arrangements under HMRC’s general contract settlement principles.

Importantly, this forward interest update is not just a loan charge or disguised remuneration issue. The change could also help contractors involved in long-running enquiries or disputes in other areas of tax.

So it’s a boon for loan charge contractors, potentially reflecting HMRC’s desire to make the McCann-inspired settlement opportunity a success. But it’s also a potential boon for other contractors.

For contractors, here’s an example of the new HMRC forward interest

As an example, let’s imagine contractor Jill, who needs to settle a disguised remuneration issue for 2008/09.

Jill’s tax and penalties come to £26,000, with a further £12,000 in interest. She settles on May 30th 2026, but needs 10 years to clear the balance.

On the figures provided in the table above, the new forward interest calculation cuts Jill’s monthly instalments by roughly £54 per month over 10 years — a saving of around £6,500 overall.

What if contractors (like Jill) clear the balance early?

Let’s suppose that, after five years, Jill’s circumstances improve and she can repay the remaining balance in full.

In line with HMRC’s example of reduction in addition for time granted when instalment offer settled early, (which we understand is soon to be expanded to allow for the fact that from May 8th 2026 not all of the liability is interest-bearing), the forward interest would then be recalculated. The effect is that Jill pays only for the period during which the instalment arrangement actually ran, rather than for the original 10-year term.

How much can early loan charge settlement reduce a contractor’s bill by?

On that basis, the revised total payable would be £45,557.25.

Compared with the original amount of £48,076, early settlement would reduce the bill by £2,518.75.

Forward interest change: final takeaways for contractors

• Any contractor considering an instalment arrangement with HMRC should understand how forward interest could affect the total amount they end up paying.
• For instalment arrangements agreed on or after Friday May 8th 2026, irrespective of which tax years are involved, the way HMRC calculates forward interest has changed, which should reduce the amount of forward interest that a taxpayer has to pay.
• Even after these welcome changes for loan charge contractors, forward interest charges may still be significant-to-swingeing, because they remain tied to HMRC’s relatively high late-payment interest rate.
• Where possible, payment arrangements should be based on the shortest realistic repayment period.
• The changes by HMRC to forward interest are positive, but for taxpayers outside the new loan charge settlement terms, accrued historic interest may still be substantial. HMRC’s ability to reduce statutory interest is limited. Requests for review are considered through established internal processes, including HMRC’s specialist Interest Review Unit.
• Because penalties may still form part of the forward interest calculation base, taxpayers should make sure any penalty appeals — for example, on the grounds of ‘reasonable excuse’ — are resolved before final settlement figures are agreed.

So, it’s all change for HMRC forward interest…

The 1% surcharge was not statutory, so there was always scope for HMRC to waive it. The fact that HMRC has now done so — and gone further by removing the compounding effect of historic interest — is a positive development for contractors with loan charge issues and may remove another barrier to settlement.

It is important to note, however, that the changes to forward interest apply only to instalment arrangements agreed on or after Friday 8 May 2026, albeit applying regardless of the tax years involved.