Author: Helen Whitehouse

Why your pension can no longer sit outside your estate plan.

 

Inheritance Tax, or IHT, is charged on the value of your estate above certain thresholds when you die, normally at 40%. Until now, most private pensions have sat outside that calculation altogether: money left unused in a defined contribution pension could generally pass to your chosen beneficiaries free of Inheritance Tax, however large the fund or your wider estate.

 

From 6 April 2027, that changes. Following confirmation at the Autumn Budget 2025, and legislation that has already received Royal Assent as the Finance Act 2026, most unused pension funds and lump sum death benefits will be added to the value of your estate for Inheritance Tax, and personal representatives, not pension providers, will be responsible for reporting and paying any tax due. The timing is important because Inheritance Tax thresholds are frozen for years to come, and because estate plans, pension nominations and wills built around the old rules may no longer achieve what you intended.

 

HMRC’s own analysis estimates that thousands of estates will pay Inheritance Tax for the first time as a direct result. Inheritance Tax receipts already reached a record £8.5 billion in the 2025/26 tax year, and this change is expected to push that figure higher still.

 

Key takeaways

• From 6 April 2027, most unused pension funds and lump sum death benefits will normally count towards your estate for Inheritance Tax.
• This is now law under the Finance Act 2026, not a proposal – only the April 2027 start date is still to come.
• Personal representatives, not pension providers, will be responsible for reporting and paying the tax.
• Death-in-service benefits, and anything left to a spouse, civil partner or charity, remain outside the charge.
• Nominations, wills, retirement income plans and life cover may all be worth reviewing before April 2027.

 

What’s changing from April 2027

From 6 April 2027, most unused pension funds and lump sum death benefits will count towards the value of your estate for Inheritance Tax. This ends a long-standing position under which pensions generally sat outside a person’s estate, regardless of how much was left unused at death.

 

The change was first announced at the Autumn Budget on 30 October 2024, refined through a technical consultation with the pensions industry, and confirmed in further detail at the Autumn Budget on 26 November 2025. It is no longer a proposal: the core legislation is now in force as the Finance Act 2026, which received Royal Assent on 18 March 2026. Only the effective date – deaths on or after 6 April 2027 – is still to come, which gives a limited but useful window to review your position.

 

Why pensions are being brought into the estate

The government’s stated aim is to stop pensions being used mainly as a way to pass on wealth, rather than to fund retirement. In its policy paper, HMRC pointed to pension freedoms introduced in 2015 and the later removal of the lifetime allowance, which together made it possible to build up a large pension fund, draw on other assets to live on, and pass the untouched pension to the next generation free of Inheritance Tax.

 

The government also wanted to remove an inconsistency: some pension schemes, including the NHS and judicial schemes, were already counted as part of an estate for Inheritance Tax, while most private and workplace schemes were not. Whatever your view of the reasoning, the practical point is the same: pensions are being pulled firmly into mainstream estate planning, alongside property, savings and investments.

 

Which pensions does this affect?

The new rules mainly affect defined contribution pensions – personal pensions, SIPPs and most workplace pensions – where money remains unused when you die. This can include:

• Uncrystallised funds: money you have not yet drawn on at all.
• Drawdown funds: money moved into drawdown but not yet withdrawn.
• Most lump sum death benefits: payable at the scheme’s discretion or otherwise.

 

Defined benefit, or final salary, pensions are generally less affected, since most do not have an unused fund in the same sense – dependants typically receive a fixed ongoing income rather than a pot that can be left to anyone. Annuities are treated differently depending on how they are set up: a joint-life annuity that simply continues to pay an income to your spouse or civil partner after your death is not affected by these changes, though other annuity structures may need checking individually.

 

What stays outside the new rules?

Some of the most significant pension benefits are specifically excluded from the charge. These include:

• Death-in-service lump sums: paid from a registered pension scheme when someone dies while still employed, whether the scheme is discretionary or not.
• Dependants’ scheme pensions: an ongoing income paid to a dependant under a defined benefit or collective money purchase arrangement.
• Transfers to a spouse or civil partner: the existing spouse and civil partner exemption applies in full to pension wealth, exactly as it does to other assets.
• Gifts to charity: pension death benefits left to a registered charity also remain exempt.

 

For many couples, the first death may therefore see little practical change, since pension wealth left to a surviving spouse or civil partner stays outside Inheritance Tax. The bigger impact tends to fall on the second death, or wherever a pension is left directly to children, grandchildren or other beneficiaries.

 

Personal representatives take on the reporting and paying

Responsibility for reporting and paying any Inheritance Tax due on pension wealth sits with personal representatives – the executors or administrators dealing with an estate – rather than with pension providers.

 

This is a genuine change of direction. The original 2024 proposal was for pension scheme administrators to handle this. Following industry consultation, the government confirmed in July 2025 that personal representatives would take on the role instead, folding pension wealth into the normal probate and Inheritance Tax reporting process. Pension beneficiaries are also jointly and severally liable for tax on the pension wealth they receive, so HMRC can, in principle, pursue them directly if it is not paid.

 

To help fund the bill, a personal representative who reasonably expects Inheritance Tax to be due can direct a pension scheme to withhold up to 50% of the taxable death benefits, for up to 15 months from the date of death, and pay that amount towards the tax before releasing the balance to beneficiaries. Once HMRC issues a clearance certificate, personal representatives are normally protected from further liability on any pension discovered later, provided they made reasonable efforts to find it. Given this expanded role, choosing your executors carefully, and giving them a full list of your pensions, matters more than it used to.

 

Frozen thresholds mean more estates are exposed

The pension change lands on top of Inheritance Tax thresholds that are already frozen for years to come, so its practical impact is larger than the headline rate suggests. The nil-rate band has stood at £325,000 since 2009, and the residence nil-rate band at £175,000, tapering away once an estate exceeds £2 million. Both were already frozen to April 2030, and the Autumn Budget 2025 extended that freeze by a further year, to April 2031, alongside the taper threshold.

 

Threshold	Amount	Frozen until
Nil-rate band	£325,000	5 April 2031
Residence nil-rate band	£175,000	5 April 2031
Residence nil-rate band taper	£2,000,000	5 April 2031

 

HMRC’s own analysis, published alongside the Autumn Budget 2025 and certified by the Office for Budget Responsibility, estimates that of around 213,000 estates expected to hold inheritable pension wealth in 2027/28, some 10,500 will have an Inheritance Tax bill for the first time, and a further 38,500 will pay more than they otherwise would, with the average bill rising by around £34,000 where pension assets are included (HMRC policy paper, “Inheritance Tax – unused pension funds and death benefits,” published 26 November 2025). The same measure is forecast to raise an additional £710 million in 2027/28, rising to £1,665 million a year by 2030/31.

 

A worked example: What a pension could cost your estate

Suppose your estate, including your home and savings, already uses up your available nil-rate and residence nil-rate bands. You also hold a SIPP worth £150,000 that remains unused when you die, left to your adult son.

 

Under the current rules, that £150,000 passes to him free of Inheritance Tax. From 6 April 2027, it is added to your estate instead. Taxed at 40%, that produces a bill of £60,000, leaving him with £90,000 rather than the full £150,000.

 

This example assumes the whole pension falls within the taxable part of your estate. If you have unused nil-rate band or residence nil-rate band available, part or all of the pension could still pass free of tax, so the impact depends heavily on the rest of your estate, not the pension in isolation.

 

Could your pension be taxed twice?

In some circumstances, yes – the same pension can attract both Inheritance Tax and income tax, though not necessarily on the same amount at the same time.

 

Whether income tax is due on withdrawal depends on your age at death, a rule that is not changing. If you die before 75, your beneficiary can normally draw the pension down free of income tax, provided funds are paid out within two years of the provider being notified. If you die at 75 or over, your beneficiary usually pays income tax on withdrawals at their own marginal rate, exactly as now. What changes from April 2027 is that Inheritance Tax may also be due first, on top.

 

Returning to the £150,000 example, suppose you die at 78. Inheritance Tax of £60,000 is due first, leaving £90,000. If your son is a higher-rate taxpayer and draws that £90,000 as income, he could pay a further £36,000 in income tax, leaving him with £54,000 – a combined tax charge of around 64% of the original fund. This compounding effect is one reason many advisers are revisiting whether pension wealth should be left untouched for as long as possible.

 

Do your nominations and will still make sense?

Not necessarily, so this is worth checking rather than assuming. Most defined contribution pensions rely on an expression of wish form: you tell the provider who you would like to benefit, and the scheme’s trustees usually, though are not legally bound to, follow it.

 

Some families have deliberately left pensions to children or grandchildren rather than a spouse, precisely because it avoided Inheritance Tax. Under the new rules, that choice can produce a larger tax bill than expected, and shift more of the family’s overall tax burden onto the beneficiaries who receive the pension. Worth reviewing alongside your nominations:

• Your will: does it still reflect your intentions now that pension wealth may form part of your taxable estate?
• Life cover: would a policy written in trust help meet a future Inheritance Tax bill without forcing beneficiaries to sell other assets quickly?
• Your executors: do they know about every pension you hold, and are they equipped for a more demanding role?

 

Should you stop contributing to a pension?

Generally, no. The case for pension saving during your working life is largely unaffected by this change. Income tax relief on contributions, employer contributions and tax-free growth within the pension remain as they are, and the 2026/27 annual allowance stays at £60,000, tapering to a minimum of £10,000 for higher earners with income above certain thresholds.

 

The change from April 2027 affects what is left unused at death, not what you pay in or draw for your own retirement. The more useful question to work through now is less “should I keep contributing” and more “how much of this should I plan to spend during my lifetime.”

Rethinking the order you draw down retirement income

Many retirees have followed a “spend other assets first, preserve the pension” strategy, and that may be worth revisiting. Because pensions previously sat outside the estate, it often made sense to draw on ISAs, savings or investment income first, and leave pension funds untouched for as long as possible, both to keep growing tax-efficiently and to pass down free of Inheritance Tax.

 

From April 2027, that second advantage disappears for funds left unused at death. For some people, it may make more sense to draw more from a pension during retirement and preserve other assets for beneficiaries instead. There is no single right answer: the best order depends on your income needs, health, other assets and family circumstances. Decisions about how and when to draw your pension count as regulated financial advice, so these are best worked through with your financial adviser alongside a review of the tax position with us.

 

Gifting and other planning options remain available

The normal Inheritance Tax gifting rules have not changed, and can still reduce your family’s overall exposure. The annual £3,000 gift exemption, small gift allowance, wedding gifts and gifts made out of normal income all remain available, as does the seven-year rule for larger gifts, with taper relief if you die between three and seven years after making one.

 

From 6 April 2026, the £2.5 million allowance for the 100% rate of agricultural and business property relief also became transferable between spouses and civil partners, following further changes confirmed after the Autumn Budget 2025 – worth checking if your estate includes business or farming assets. Bringing pension wealth into the estate makes an overall gifting and estate-planning strategy more useful, not less, though gifting directly from an unused pension is not usually straightforward, since funds generally need to be drawn down, and any income tax paid, before they can be gifted onward.

A different position for Scotland, Wales and Northern Ireland

Inheritance Tax, including this pension change, applies in the same way across the whole of the UK. Unlike income tax, Inheritance Tax is not devolved, so the nil-rate band, residence nil-rate band and the new pension rules work identically whether you live in England, Scotland, Wales or Northern Ireland.

 

Where the position can differ is on the income tax side of the double taxation point discussed above. Scottish taxpayers pay income tax on non-savings income under separate Scottish rates and bands, including a top rate of 48%, compared with the 45% additional rate elsewhere in the UK. This means the income tax due on a pension drawdown by a Scottish-resident beneficiary can differ from the rest of the UK, even though the Inheritance Tax treatment is the same.

 

Closing comment

From 6 April 2027, most unused pension funds and death benefits will, for the first time, generally form part of your estate for Inheritance Tax – a change that is now settled law rather than a proposal. Frozen thresholds mean more families than ever are likely to be affected, and the interaction with income tax means some pension wealth could face a combined tax charge from two directions.

 

The main risk is inaction. Nominations, wills and retirement plans built around the old rules may no longer achieve what you intended, and personal representatives now carry more responsibility for getting the reporting right.

 

If you hold a defined contribution pension and have not reviewed your estate plan since these changes were confirmed, contact us before April 2027 so we can check how the new rules affect you and your family.

A practical guide for sole traders and landlords approaching £30,000 in income.

 

Making Tax Digital for Income Tax is a legal requirement to keep digital business records and send HMRC a short online update every three months, rather than relying on one Self Assessment return a year. It has applied since 6 April 2026 to sole traders and landlords with qualifying income over £50,000, and from 6 April 2027 it extends to anyone with combined self-employment and property income over £30,000.

 

For those newly affected, the change is less about the tax owed and more about how records are kept. Four quarterly updates are followed by a year-end final declaration – similar in substance to the annual tax return many people are used to, but sent through compatible software rather than HMRC’s own online service. A shoebox of receipts sorted once a year is no longer enough.

 

More than 436,000 sole traders and landlords successfully sent their first Making Tax Digital for Income Tax quarterly update, and over 570,000 had signed up to the service, HMRC confirmed as at 12 August 2026. The next wave is expected to be considerably larger.

 

If your combined income from self-employment and property sits between £30,000 and £50,000, your 2025/26 tax return is the one HMRC will use to decide whether you join from 6 April 2027, so the time to prepare is now rather than next spring.

 

Key takeaways

• Threshold: Combined self-employment and property income over £30,000 – on a gross basis, before any expenses are deducted – means joining Making Tax Digital for Income Tax from 6 April 2027, based on your 2025/26 tax return.
• Reporting: Four quarterly updates plus a final declaration submitted through compatible software.
• Joint property: Only your own share of jointly owned rental income counts towards your qualifying income, not the total.
• Penalties: Unlike the first intake in 2026, there is no penalty-free grace year for quarterly updates in 2027 – points-based fines can apply from day one.
• Scope: Partnerships and limited companies are not yet included, and qualifying income of £20,000 or less remains automatically exempt.

 

What is Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax is HMRC’s system for reporting self-employment and property income digitally throughout the year, alongside your annual final declaration. It does not create a new tax – Income Tax, Class 4 National Insurance and the underlying rules for calculating profit all stay the same. What changes is the reporting process.

 

Anyone within scope must keep digital records of self-employment and property income and expenses, send HMRC a quarterly update every three months, and submit a year-end final declaration by 31 January, through compatible software rather than HMRC’s own online service. You cannot submit your final declaration for the year until all four quarterly updates have been sent.

 

The rules apply in the same way across England, Scotland, Wales and Northern Ireland. Scottish taxpayers pay Income Tax at different rates and bands, but that affects how much tax is due, not whether the rules apply.

 

The three thresholds, and when they come into effect

Making Tax Digital for Income Tax is being introduced in three stages, based on qualifying income – broadly, gross self-employment and property income before expenses – declared on a specific year’s tax return.

 

Qualifying income over	Tax year	Mandatory from
£50,000	2024/25	6 April 2026
£30,000	2025/26	6 April 2027
£20,000	2026/27	6 April 2028

 

HMRC reviews the relevant Self Assessment return each year and writes to anyone who has crossed a threshold, confirming they need to join from the following April. That letter is a courtesy rather than a condition – responsibility for checking your own position sits with you even if none arrives.

 

For the £30,000 threshold, your 2025/26 tax return, due by 31 January 2027, is the one that counts. Because that return covers income already earned, some people only discover they are affected weeks before the new rules start – working out your likely position now gives you far more useful notice.

 

What counts as qualifying income?

Qualifying income is your total turnover from self-employment and property, added together, before any expenses are deducted. It is based on the tax return you submit for the relevant year, not on profit.

 

Suppose you earn £22,000 from self-employment as a personal trainer and receive £9,500 in gross rent from a buy-to-let flat you own outright. Your combined qualifying income is £31,500, just over the £30,000 threshold, so you would need to start using Making Tax Digital for Income Tax from 6 April 2027, based on income declared on your 2025/26 tax return.

 

Some income is excluded from the calculation altogether. Employment income taxed under PAYE, dividends, State Pension and private pensions, and your share of profit from a partnership as an individual partner, do not count towards qualifying income, even though they still need to be reported on your tax return.

 

If you are a UK resident, foreign property income counts a

UK inflation rose to 3.1% in the year to August, up from 2.9% in July, driven largely by rising petrol, diesel and airfare costs, according to the Office for National Statistics (ONS).

 

Petrol prices reached their highest level in almost four years, with the average cost per litre climbing 9.1p to 161.3p between July and August – the highest level recorded since November 2022. Diesel prices also rose sharply, and overall motor fuel costs increased by 23% compared with the same month last year.

 

The rise follows continued disruption to global oil supplies linked to conflict in the Middle East. Oil prices climbed above $91 a barrel, compared with around $73 before hostilities began, and have since surpassed $100 a barrel.

 

Food and drink price inflation remained steady at 1.3%, suggesting higher energy costs have yet to filter through to other sectors.

 

The increase pushes inflation further from the Bank of England’s 2% target. At its September meeting, the Bank’s Monetary Policy Committee voted 6–3 to hold interest rates at 3.75%, with three members pushing for a rise to 4%. Some economists believe inflation could peak at around 4.1% by the end of the year as businesses continue to pass on higher energy costs.

 

The UK economy grew by 0.4% in July, supported by investment in artificial intelligence, though growth slowed in the second quarter.

 

Paul Dales, chief UK economist at Capital Economics, said: “Everyone knows that bigger rises in inflation are on their way.”

 

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The UK economy grew faster than expected in July, with the expansion partly linked to businesses using artificial intelligence (AI).

 

Gross domestic product rose by 0.4% in July, according to the Office for National Statistics (ONS), ahead of analysts’ forecasts of no growth. Growth was driven largely by the services sector, particularly computer programming, and follows a 0.3% rise in June and no growth in May.

 

The ONS said IT firms reporting the largest turnover appear to be linked to AI, though the overall contribution remains difficult to quantify; warm weather and the football World Cup were also cited as factors.

 

Economists were divided on the outlook. Capital Economics said the resilience seen earlier in the year had carried into the second half, though rising energy prices and borrowing costs were expected to weigh on growth soon. KPMG said the headline figure masks a weaker picture for households, with retail and hospitality activity contracting in July amid higher fuel costs and elevated mortgage rates.

 

The growth figures were published days ahead of the Bank of England’s rate decision, which saw the Bank hold interest rates at 3.75%, and ahead of Chancellor John Healey’s first Budget in October. Healey said UK growth, though still fragile, was the “fastest in the G7 in the first half of the year.”

 

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HMRC cancelled a record 48,189 tax penalties in 2025/26, the highest number in six years.

 

The figures, according to recent analysis, show 65% of penalties challenged by taxpayers were cancelled, relating primarily to automatic fines for late filing and late payment, including the £100 charge for missing the self assessment deadline.

 

This marks a 4% rise on the 46,266 penalties overturned in 2024/25, and a 75% increase since 2020/21, when just 5,499 penalties were cancelled during the pandemic.

 

Separate figures on HMRC’s statutory reviews, which cover more complex disputes, also show a rising number of decisions being revised. HMRC cancelled or amended 926 substantive decisions in 2025/26, up 35% from 688 the previous year, while the proportion of reviews upholding HMRC’s original decision fell from 73% to 67%.

 

Price Bailey highlighted a case of a taxpayer who faced £1,600 in automated late filing penalties after HMRC’s online system suggested the filing was complete, with follow-up emails diverted to a junk folder. The tribunal overturned the penalties, ruling that easily missed automated communications do not count as effective notice.

 

Andrew Park, tax investigations partner at Price Bailey, said: “Because these are high-volume, automatically generated fines, they lack human oversight at the point of issuance. HMRC’s independent internal reviewers act as an essential quality control layer, providing a more nuanced assessment before cases escalate to tribunal.”

 

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Six in 10 UK millionaires have considered leaving Britain because of high taxes, according to research that comes amid reports hedge fund billionaire Chris Rokos is relocating his tax residency to Greece.

 

A survey of more than 300 millionaire clients of investment platform Wealth Club, with average wealth of £4.5 million, found 61% had considered becoming non-UK tax resident. However, only 16% said they were actively considering leaving, while 36% said they had never thought about it.

 

The research found most respondents had built their own wealth, with 40% earning it through employment and 33% through investments. Just 12% made most of their money from starting a business, and 2% cited inheritance as their main source of wealth.

 

Almost all those surveyed (97%) believe taxes will rise over the next year, with inheritance tax, wealth taxes and capital gains tax the biggest concerns ahead of the Budget.

 

Reports suggest Rokos, founder of Rokos Capital Management, is moving to Greece, which charges non-doms a flat €100,000 (£85,000) annual fee for up to 15 years. Rokos, who paid £330m in tax last year, saw his firm report revenues of £1.23 billion in 2025.

 

Alex Davies, founder and CEO of Wealth Club, said: “Almost all the investors we surveyed built their wealth themselves. Every tax rise that makes Britain less attractive to save and invest risks encouraging wealth creators to look elsewhere.”

 

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Chancellor John Healey will deliver his first Budget on Wednesday 28 October 2026, just over three months after taking charge of the Treasury.

Healey confirmed the date in a video posted on Instagram, saying the Government was moving quickly to “restore hope and bring Britain’s communities back”. He succeeded Rachel Reeves as Chancellor on 20 July, following Andy Burnham’s appointment as Prime Minister.

The announcement gives Healey 89 days to prepare his first major fiscal statement. The relatively short run-up may help limit the prolonged speculation surrounding the 2025 Budget and the uncertainty it created for businesses and households.

Healey said the Budget would shift money and decision-making away from Westminster and into communities across the country. Devolution is expected to be a central theme as the new Government sets out its economic priorities.

However, the Chancellor also emphasised that the plans would be underpinned by fiscal discipline. He confirmed that the Government would continue to meet its existing fiscal rules, despite pressure on the public finances and calls for additional spending.

Healey said the Budget would aim to provide businesses and families with the stability needed to plan for the future. The statement is therefore expected to balance the Government’s regional investment ambitions with a commitment to responsible borrowing and spending.

The Budget will be Healey’s first test as Chancellor and an early indication of how Burnham’s Government intends to combine greater regional control with economic credibility.

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Revised VAT capital goods scheme rules came into force on 29 July 2026, raising the expenditure threshold for property-related assets and removing computer equipment from the scheme.

Under the changes, the threshold for land, buildings and civil engineering works has increased from £250,000 to £600,000, excluding VAT. The capital goods scheme will therefore apply only where qualifying expenditure on these assets reaches at least £600,000.

Computers and computer equipment are no longer eligible. Capital expenditure on these items incurred from 29 July 2026 will fall outside the scheme.

HMRC said the reforms are intended to simplify VAT administration and reduce the burden on smaller businesses. The scheme requires businesses to monitor how certain capital assets are used over several years and adjust the VAT initially reclaimed when that use changes.

The property threshold had remained unchanged since the scheme was introduced in 1990. Rising property values meant that more small businesses were being drawn into adjustment calculations when buying or refurbishing relatively modest premises.

HMRC said increasing the threshold should reduce the number of assets covered and remove time-consuming calculations for affected businesses.

The changes are not retrospective. Assets and expenditure already within the scheme before 29 July 2026 will continue to be treated under the previous rules.

The reform was first proposed by the Office of Tax Simplification in 2017. A call for evidence followed in July 2019, but implementation took several more years. The Office of Tax Simplification was later abolished in 2022 during Liz Truss’s short-lived Government.

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More than 500,000 self-employed people and landlords had signed up for Making Tax Digital (MTD) for Income Tax ahead of the first quarterly reporting deadline, according to HMRC.

However, that still left an estimated 364,000 taxpayers, more than 4 in 10 of those expected to be within scope, unregistered before the 7 August deadline.

HMRC had identified around 864,000 taxpayers with qualifying income above £50,000 who were expected to join MTD from 2026/27.

The 7 August deadline covered both registration and submission of the first quarterly update, reporting income for the opening quarter of 2026/27. Updates had to be filed using compatible software, as HMRC does not provide its own online filing service.

HMRC said taxpayers who missed the deadline would receive reminder letters. It also said further figures on registrations and quarterly updates would be published.

Craig Ogilvie, HMRC’s director of MTD, said almost 30,000 quarterly update obligations had been recorded in a single day earlier that week, adding that HMRC was “regularly breaking MTD sign-up and submission records”.

ACCA raised concerns about the number yet to register. Yogesh Dhanak, senior technical advisory manager, said the figures highlighted shortcomings in HMRC’s awareness campaign and warned that implementation remained challenging.

There are no penalties for missing a quarterly update deadline during 2026/27, although taxpayers must still submit the required information.

From 6 April 2027, the points-based late-submission penalty regime will apply. A taxpayer will receive a point for each missed quarterly deadline, with a £200 penalty charged once four points are accumulated.

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Tips to help your business get paid on time.

 

Late payment can turn a profitable sale into a cashflow problem. A business may have completed the work, paid its employees and suppliers, and accounted for tax before the customer settles the invoice.

 

The scale of the problem remains significant. Research commissioned by the Department for Business and Trade and the Office of the Small Business Commissioner estimates that late payments cost the UK economy almost £11 billion a year. Around £26 billion is owed to businesses in late payments at any one time, affecting more than 1.5 million businesses, or 28% of the business population. Among businesses affected, the average amount outstanding is approximately £17,000.

 

The same research estimated that 14,000 businesses close each year because of late payments, while affected businesses spend an average of 86 staff hours a year chasing overdue invoices.

 

Payment performance has improved in some parts of the economy. The latest Department for Business and Trade statistics, published in July 2026, show that large businesses paid suppliers in an average of 32 days during 2025. They paid 15% of invoices late, compared with 25% when reporting began in 2018.

 

For SMEs, good cashflow management therefore starts before an invoice becomes overdue.

When does a business payment become late?

The rules on late commercial payments apply to qualifying transactions between businesses for goods and services.

 

Where businesses agree a payment date, payment terms for private-sector business transactions should usually be no longer than 60 days. Businesses can currently agree a longer period, but it must be fair to both parties.

 

Public authorities are generally expected to pay within 30 days.

 

Where no payment date has been agreed, a commercial payment normally becomes late 30 days after the later of the customer receiving the invoice or the goods or services being supplied.

 

These rules make written payment terms particularly important. An invoice that simply says “payment due” without matching clear contractual terms can create unnecessary uncertainty when payment is chased.

 

Terms should establish when an invoice falls due, which payment methods are accepted, what information the customer needs to approve it and what happens if payment is late.

 

For larger or longer projects, businesses may also want to consider deposits, staged invoicing or payments linked to agreed milestones rather than waiting until all work has been completed before raising a single invoice.

Statutory interest on late commercial debts

Under the Late Payment of Commercial Debts (Interest) Act 1998, businesses can have a statutory right to charge interest when another business pays late.

 

The statutory rate is 8% above the applicable Bank of England base rate.

 

For this purpose, the reference rate is fixed for six-month periods. The Bank of England rate in force on 30 June applies from 1 July to 31 December, while the rate on 31 December applies from 1 January to 30 June.

 

The Bank Rate was 3.75% on 30 June 2026, so the statutory late-payment interest rate for qualifying debts becoming late between 1 July and 31 December 2026 is 11.75% a year.

 

For example, suppose a business has a qualifying £5,000 invoice that becomes overdue during this period and remains unpaid for 45 days.

 

At 11.75%, the statutory interest for those 45 days would be approximately £72.43.

 

Interest normally runs from the date the payment becomes late until payment is made.

 

Businesses should check their contracts before applying statutory interest. If a contract already provides its own late-payment remedy or rate of interest, the statutory regime may not apply.

Compensation for recovering late payments

Interest is not the only amount that may be recoverable. Businesses can also claim a fixed amount towards the cost of recovering a qualifying late commercial payment. The statutory compensation currently depends on the size of the debt:

 

Amount owed	Fixed compensation
Up to £999.99	£40
£1,000 to £9,999.99	£70
£10,000 or more	£100

 

The charge applies to each qualifying late payment. Reasonable additional recovery costs may also be recoverable in appropriate circumstances.

 

Using the previous £5,000 example, the business could potentially claim £72.43 of interest after 45 days plus the £70 fixed recovery amount – a total of £142.43, before considering any further qualifying recovery costs.

 

Charging interest and compensation is a commercial decision as well as a legal one. Some businesses include the possibility of statutory charges in their standard payment reminders before formally applying them.

Preventing late payment before it starts

A large part of effective credit control happens before the due date. Businesses should build payment management into their sales process rather than treating debt collection as a separate task once something has gone wrong.

 

A practical system should cover the following:

1. Check new customers before extending credit. Review Companies House information where relevant, carry out proportionate credit checks and establish a sensible credit limit. For significant contracts, consider whether the level of exposure would create a problem if payment arrived one or two months late. It can also be a good idea to ask a customer for their full set of statutory accounts (rather than just the ones available on Companies House).
2. Agree payment terms before starting work. State the payment deadline clearly in contracts, quotations or engagement documents. Make sure the customer has accepted the terms rather than introducing them for the first time on the invoice.
3. Understand the customer’s payment process. Larger organisations may require purchase-order numbers, supplier registration, specific invoice portals or departmental approval. Find out what is required before the first invoice is raised.
4. Invoice promptly and accurately. Delaying an invoice by ten days effectively gives the customer ten extra days of credit. Incorrect addresses, missing purchase-order numbers and unclear descriptions can also give customers legitimate reasons to delay approval.
5. Make payment straightforward. Provide clear bank details and appropriate payment options. For regular customers, automated payment methods such as Direct Debit can reduce administration and missed due dates.
6. Send reminders before and after the due date. Accounting software can automate reminders, but communication should become more personal as an invoice becomes increasingly overdue. A telephone call can often identify an approval problem or genuine dispute faster than repeated automated emails.
7. Escalate consistently. Set internal points at which an overdue account moves from a reminder to a call, formal demand, suspension of further credit or external recovery action. Avoid allowing a large balance to accumulate simply because the customer has historically paid eventually.
8. Monitor customer concentration. A business may have healthy overall sales while becoming too dependent on one or two slow-paying customers. Review how much of the trade debtor balance relates to individual customers and sectors.

Use payment data before accepting large customers

Businesses selling to larger companies can access useful information before agreeing substantial credit terms.

 

Large companies and LLPs that fall within the reporting requirements must publish information on their payment practices at least twice a year. Current size tests include businesses meeting at least two of the following thresholds: £54 million turnover, £27 million balance-sheet total and 250 employees.

 

Published information can show how long a business typically takes to pay suppliers, the proportion of payments made within 30 days, between 31 and 60 days and after 60 days, and the proportion of payments that were late against agreed terms.

 

This can provide useful evidence when deciding whether to accept a customer’s requested payment terms or how much credit to offer.

What the Fair Payment Code tells suppliers

The previous Prompt Payment Code has been replaced by the Fair Payment Code, administered by the Office of the Small Business Commissioner.

 

It operates through three award levels.

 

A Gold Award requires businesses to pay at least 95% of all invoices within 30 days. Silver requires at least 95% of all invoices to be paid within 60 days, including at least 95% of invoices to small businesses with fewer than 50 employees within 30 days. Bronze requires at least 95% of all invoices to be paid within 60 days.

 

Businesses dealing with a Fair Payment Code award holder can therefore use its award status as one indicator of payment performance, although normal credit checks should still form part of the decision.

 

What to do when an invoice becomes overdue

The first step should usually be to establish why the payment has not been made.

 

Confirm that the customer received the invoice and has all the supporting information required. Ask whether the invoice has been approved, whether there is a genuine dispute and when payment will be released.

 

Where the customer acknowledges the debt but has temporary financial difficulties, a written payment plan may sometimes provide a better outcome than immediate legal proceedings. Any arrangement should set out instalment dates and amounts clearly.

 

If normal reminders fail, a business can send a formal demand setting out the amount outstanding, the original payment date, any interest or recovery costs being claimed and the deadline for settlement.

 

Before commencing court proceedings, businesses should consider the likely recovery costs, the value of the debt and the financial position of the customer. Winning a claim does not guarantee recovery if the customer has no funds or is insolvent.

Support from the Small Business Commissioner

The Office of the Small Business Commissioner provides free support to small UK businesses facing payment problems with larger private-sector customers.

 

For its existing complaint service, it defines a small business as one with fewer than 50 employees. The office can provide guidance and, in qualifying cases, contact a larger customer and investigate an unresolved payment dispute.

 

Businesses considering this route should normally contact the Commissioner before starting court proceedings, as the office may no longer be able to assist once legal action has begun.

Protecting cashflow from unpaid invoices

Credit control should sit alongside broader cashflow planning.

 

An aged-debtor report should be reviewed regularly rather than only at the financial year end. Tracking amounts that are current, 30 days overdue, 60 days overdue and older can highlight deteriorating payment behaviour early.

 

Cashflow forecasts should also use realistic collection dates. If a significant customer routinely pays 15 days after its contractual deadline, assuming that every invoice will arrive on the due date can overstate the cash available to the business.

 

Businesses should also distinguish between turnover and cash. Increasing sales on lengthy credit terms can increase reported revenue while placing additional pressure on working capital.

Consider the VAT effect of late payment

VAT can add another cashflow pressure. Under standard VAT accounting, a business normally accounts for VAT based on its sales and purchase invoices even when the customer has not yet paid. This can mean paying VAT to HMRC before collecting the corresponding cash from the customer.

 

Eligible VAT-registered businesses can consider the VAT Cash Accounting Scheme, under which VAT on sales is generally paid when customers pay the business.

 

For 2026/27, businesses can generally join where estimated VAT-taxable turnover for the next 12 months is £1.35 million or less. A business normally has to leave if its VAT-taxable turnover rises above £1.6 million.

 

The scheme will not suit every business because input VAT is also normally reclaimed when suppliers are paid rather than when their invoices arrive.

 

Where VAT has already been accounted for under normal VAT accounting and a debt later proves irrecoverable, VAT bad debt relief may be available. Among the conditions, the debt must normally have remained unpaid for at least six months after the later of the payment due date and the date of supply, and the debt must have been written off in the business’s VAT records.

 

Claims generally need to be made within four years and six months of the later of those dates.

Late-payment law is set to change

Businesses should also be aware that the Government is progressing significant changes to commercial payment law.

 

The Commercial Payments Bill was introduced in May 2026. As at 7 August 2026, it has completed committee stage in the House of Lords but has not yet become law. Its report stage is still to be scheduled.

 

The Government’s proposals include a firm maximum payment period of 60 days for many business-to-business contracts, subject to limited exemptions. Current proposals indicate that the new maximum would begin no earlier than 2027. The Government has identified possible exemptions where both parties are large businesses, where the purchaser is the smaller party and for certain imports and exports.

 

The Bill would also make statutory late-payment interest mandatory rather than leaving suppliers to decide whether to claim it, strengthen the Small Business Commissioner’s enforcement and dispute-resolution powers and introduce additional scrutiny of poor payment behaviour by large businesses.

 

These proposed measures should not yet be treated as part of the current late-payment regime. Businesses should review their contracts and credit-control procedures again once the legislation receives Royal Assent and commencement dates have been confirmed.

Make payment management part of financial management

Late payment cannot always be prevented, but businesses can reduce their exposure.

 

Clear contracts, prompt invoicing, sensible credit limits, regular debtor reviews and consistent follow-up all improve the chances of getting cash into the business when expected.

 

Where payment is delayed, businesses should understand the legal rights available to them, including statutory interest and recovery compensation. They should also consider the tax and cashflow effects of carrying unpaid invoices for long periods.

 

Most importantly, debtor management should not begin when an invoice is already 60 or 90 days overdue. Treating payment terms, invoicing and credit control as part of the normal financial management cycle gives businesses much more opportunity to identify problems before an unpaid invoice starts affecting payroll, tax payments, supplier commitments or investment plans.

 

If you need help improving your cashflow, managing late payments or strengthening your credit-control processes, contact us to discuss how we can help.