Skoda will unveil a concept car at the Frankfurt motor show in September that will sit between the Fabia and the Octavia.
The current Octavia is based on the previous-generation Volkswagen Golf, however the Octavia is much a roomier car than the Golf, giving Skoda the space to build a smaller hatchback.
A Skoda source says the concept car is about 85% the finished product and its styling will draw heavily on the Vision D concept car revealed at Geneva motor show earlier this year.
The new hatchback is part of Skoda's plans to release a new car or a face-lifted model 'every six months for the foreseeable future', with the aim of doubling sales by 2020.
The first new model to arrive will be a super-frugal city car that is Skoda's version of the VW Up. The car is expected to be on sale in the first half of next year.
It will be followed by the small family hatchback. The next Octavia is also likely to be influenced by the Vision D. It's expected to grow in size to create more of a gap between it and the new model. The Octavia will be pitched at more traditional Skoda buyers, too, with a focus on practicality and value for money.