Many salaried workers have been receiving CP500 tax instalment notices from the Inland Revenue Board (LHDN). A penalty waiver announced in January means you may not be fined for missing this year’s payments. It doesn’t cover everyone, though, and tax experts are warning against assuming you’re exempt or setting the notice aside. So what is CP500?

CP500 Is An Advance Tax Instalment, Not A New Charge

CP500 lets you pay income tax in instalments through the year instead of settling a larger amount when you file your return. It was set up for people with income outside their salary, such as rent, interest, royalties, or business profits. It isn’t an extra tax. You’re paying the same amount, just earlier and in parts.

Until recently, salaried workers rarely saw a CP500 at all, because their tax is already deducted every month through the Monthly Tax Deduction (PCB). LHDN is now using CP500 more widely to collect tax in advance on income that PCB doesn’t cover, such as a side business or rental, which is why people with a salary and a bit of extra income are getting the notices for the first time.

Who the Penalty Waiver Covers

The Prime Minister announced the penalty-free period on 5 January 2026. According to LHDN, in a reply to The Star, you won’t be penalised for missing your CP500 instalments in the Year of Assessment 2026 if you qualify. 

The relief comes down to your income, not whether the notice is new to you. If you earn a salary and also have side income such as rent, interest, or royalties, you’re covered. If all your income is from business, rental, or other non-salary sources, you’re not, even if this is the first CP500 you’ve received.

LHDN said the waiver is meant to help salaried earners with additional income adjust to the CP500 system during the transition period. Some tax experts had read the relief as aimed mainly at first-time recipients with a salary and side income, which is part of why the scope caused confusion.

A 10% Penalty Still Applies in Some Cases

The waiver doesn’t remove the penalty from the law. Under Section 107B(3) of the Income Tax Act, if you pay an instalment late, pay less than required, or don’t pay at all, you can face a 10% penalty on the amount due. If you fall outside the relief, that penalty still applies.

Tax consultant Datin Christine Koh, managing director of Owen KLCA Plt, said LHDN’s clarification wasn’t surprising but could confuse the public, since some people had taken the January announcement to cover every CP500 recipient. She noted that some of her sole proprietorship and partnership clients had asked back in January whether they were exempt too.

Side Income Now Comes With an Earlier Tax Bill

More salaried workers are adding to their pay with rental, commissions, freelance work, or a small side business. Because that income isn’t covered by PCB, LHDN is increasingly using CP500 to collect tax on it in advance, so the bill now arrives in instalments through the year rather than as one amount at filing.

The instalment figure is an estimate, so it can be higher than what you’ll owe, especially if your side income was a one-off or has since ended. If it looks too high and this is your first notice, you can ask to have it lowered instead of skipping payments. 

Sorting Out a Notice You Think Is Wrong

Both Datin Christine Koh and tax expert Datuk Koong Lin Loong advised against relying on your own reading of the rules. Check with LHDN on whether you qualify, and get written confirmation of any exemption, before you decide anything.

After checking, if you’re a first-time recipient and the figure seems too high, you can apply to revise it down, or to zero where appropriate. If you think the notice was issued in error, approach LHDN and apply for cancellation rather than leave it unanswered. If you genuinely have substantial side income and the amount is fair, Koong advised paying on schedule rather than leaning on the waiver, since taxpayers with additional income are generally still responsible for the instalments. He also urged LHDN to spell out the scope more clearly so taxpayers know how to handle their notices.

Skip payments on a notice that does apply to you, and the 10% penalty can still follow.

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