What are the tax penalties under Making Tax Digital for Income Tax?

Making tax digital for Income Tax (MTD ITSA) is mandatory from 6 April 2026 for self-employed individuals and landlords with qualifying income above the relevant thresholds.

From 6 April 2026, a new penalty system replaces the existing Self Assessment late filing and payment rules for anyone within Making Tax Digital for Income Tax. The new regime uses a points-based approach for late submissions and a tiered structure for late payments designed to be more proportionate than the current system, giving occasional mistakes less severe consequences while still penalising persistent non-compliance. Whether you have been mandated into MTD ITSA or have chosen to join voluntarily, understanding how these penalties work and how to avoid them, is essential from the moment you enter the regime.

Filing requirements under MTD for Income Tax

If you are impacted by MTD ITSA, then digital records of business income and expenses must be kept from 6 April 2026. These records are then sent to HMRC as quarterly updates. The quarters and their due dates are:

*NOTE: you can elect to file based on standard calendar quarters (quarter ending 31 March, 30 June, 30 September, 31 December). The filing deadlines remain the same regardless of which quarter dates you apply.

The final year-end tax return is due by 31 January each year; this deadline has not changed for MTD ITSA. However, there are now two parts to the year-end process, and both are due by 31 January.

However, taxpayers who have joined MTD ITSA should note that the filing method for their year-end tax return will change. At the end of the first tax year in which a taxpayer joins MTD ITSA, the Government Gateway self-assessment filing will no longer be available to the taxpayer. Instead, the year-end tax return must be submitted via MTD compatible software. For example, if joining MTD in April 2026 the 2025/26 self-assessment tax return can be submitted in any of the currently acceptable ways, but the 2026/27 tax return must be submitted via MTD compliant software.

Your accountant can still file your tax return on your behalf, but they too must have MTD compliant software to do so. At Moore South, we have MTD compliant software in place ready for our clients’ tax return filings under MTD ITSA.

What are the late submission penalties for making tax digital?

Penalties for late submission will follow a points-based system, similar to the system already in place for VAT. Each time you miss a submission deadline, you get 1 penalty point. When you accumulate points up to a penalty threshold you receive a £200 fine. Once the threshold has been reached, every additional missed deadline results in another £200 fine.

The applicable penalty threshold depends on whether you have voluntarily joined MTD ITSA, or were mandated to join. If you have been mandated into MTD ITSA, the penalty point threshold is 4. You will receive points for late quarterly updates or late MTD tax return submission. If you have voluntarily opted into MTD ITSA, the threshold is only 2, but you will only receive penalty points for late MTD tax returns; no penalty points will be issued for late quarterly updates.

Points will only reset following the submission of all the returns that are outstanding for the previous 24 months, along with making all future submissions on time for a period of 12 months. If you are voluntarily registered, 1 point will automatically reset after 24 months, but 2 points will only reset if you submit your next 2 tax returns on time as well as any backlog for the previous 24 months.

If you are joining MTD ITSA for the 2026-27 tax year, a relaxation is in place for quarterly updates in this year whereby no late submission penalties will apply. This is only for quarterly updates, and only for the 2026-27 tax year.

What are the late payment penalties for making tax digital?

In addition to late submission penalties, there are also late payment penalties for making tax digital. As quarterly updates do not generate a tax liability, late payment penalties can only apply to the year-end tax return. These late payment penalties will apply to MTD tax returns from April 2026, and to all self-assessment taxpayers from 6 April 2027; regardless of whether they are in MTD or not.

If the payment is between 0 – 15 days late then there is no penalty if it is paid within this window.

If payment falls within 16 – 30 days late then a penalty of 3% of unpaid tax on the 15th day (increasing to 4% from April 2027) will be applied.

If you find yourself in a situation where you make payment 31+ days late then another 3% penalty based on the outstanding tax on the 30th day will be charged (increasing to 4% from April 2027). Additionally, a 10% per annum charge will apply until the payment is made in full.

Late payment interest will also continue to apply on late payments, in line with current legislation. HMRC charges interest from the due date until payment is made. There are no changes to this for MTD ITSA.

If you do not have the funds to pay your liability in full on time, you can still avoid late payment penalties by setting up a Time To Pay agreement with HMRC before the penalty would be charged. However, interest will continue to accrue, and if you default on your plan penalties could be reinstated.

Next steps

While missing a deadline under MTD ITSA doesn’t automatically result in a financial penalty, it’s important to act quickly and understand your position. Speaking to a trusted adviser such as Moore South can give you clarity and help you take the right next steps with confidence.

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Making Tax Digital for Income Tax FAQ’s