A guide to penalties under the Making Tax Digital regime

HM Revenue and Customs (HMRC) have recently updated their guidance note on penalties that apply during the voluntary sign-up phase for Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA).

The new scheme is mandatory for certain individuals and businesses and is being introduced in phases.

Starting from April 6, 2026, Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) will become mandatory for some self-employed individuals or those who earn income from property, and are registered for self-assessment.

If your total self-employment and/or rental income exceeds £50,000, you will need to comply with MTD for ITSA from this date. From April 6, 2027, this threshold will lower, requiring compliance from those with total self-employment and/or rental income exceeding £30,000.

Alongside these changes, there are new penalties under MTD for those who don’t comply, so make sure you understand how the new points-based penalty system works to avoid any surprises.

What is the MTD penalties regime?

Under the new points-based penalty scheme, you will receive one point for every late submission.

The penalty point thresholds are as follows:

  • Annual submissions (such as the tax finalisation, the equivalent of the tax return) – two points
  • Quarterly submissions – four points
  • Monthly submissions – five points

If you reach these thresholds, you will be fined £200.

The new late payment penalties system is already operating for MTD for VAT and will also apply to MTD for income tax when that program starts in April 2026.

It’s important to understand that MTD for VAT and MTD for Income Tax Self-Assessment (ITSA) have separate compliance frameworks. This means that each type of return you submit—whether for VAT or ITSA—will accumulate its own set of penalty points for late submissions.

For those of you operating more than one business under MTD for ITSA, there’s a crucial point to note: while you may need to submit multiple quarterly MTD for ITSA returns (one for each business), these submissions contribute to a single penalty points total per quarter.

For example, if you have two businesses and you file each of their quarterly returns late, this will result in only one penalty point being incurred for that quarter, not two.

Understanding this system can significantly help in managing your compliance efforts and avoiding unnecessary penalties.

Remember, staying on top of your filing deadlines across all your businesses is key to maintaining a clean penalty record and ensuring smooth operations.

The MTD for ITSA private beta went live on 22 April 2024 and will run to April 2025. Participants in the beta programme should be aware that they will be subject to penalties for late filing and late payment.

However, it’s important to note that during the beta phase, penalties will only apply to missed annual obligations.

You will not accumulate penalty points for late quarterly MTD for ITSA submissions. This provides some leeway as you adjust to the new system, but you should still strive to meet all deadlines to establish good habits for when the full penalty regime takes effect.

Transitioning to MTD-compatible software, if you haven’t done so already, should be treated as a priority.

To manage these changes effectively, consider engaging with a professional who can provide guidance and support in integrating MTD requirements into your business practices.

Proper preparation and adherence to these requirements will help you avoid penalties and maintain compliance with the evolving tax regulations.

Expiration of penalty points

If a taxpayer hasn’t reached their threshold, penalty points will automatically expire two years after issuance.

However, once the threshold is reached, a “period of compliance” must be fulfilled before the penalty points can be removed from their record.

Similar to determining an individual’s threshold, the required period of compliance depends on the frequency of return submissions.

  • Annual submissions – 24-month period of compliance
  • Quarterly submissions – 12-month period of compliance
  • Monthly submissions – 6-month period of compliance

Throughout the compliance period, all submissions must be filed correctly and on time and the taxpayer must ensure that all outstanding submissions from the previous 24 months are accurately filed.

You will need to meet both conditions for your accumulated points to reset to zero.

How to minimise the risk of MTD for ITSA penalties

To avoid these penalties, you will want to ensure you are compliant with HMRC’s MTD for ITSA regulations. This will include:

  • Enrolling in MTD for ITSA if your self-employment and rental income meets the minimum thresholds starting from April 2026 (£50,000) and April 2027 (£30,000).
  • Maintaining records of income and expenses using MTD-compatible software.
  • Submitting your quarterly updates to HMRC on time.

If you have any questions about MTD for ITSA and the associated new penalty system, please contact our team.

Posted in Making Tax Digital, Making Tax Digital 2020, News, Newswire, Tax.