Edinburgh-based accounting software company FreeAgent has issued a warning to freelancers, sole traders, small business owners and landlords around the penalty system surrounding the imminent Making Tax Digital (MTD) for Income Tax.
An estimated 864,000 sole traders and landlords who earned qualifying income over £50,000 in 2024/25 will be impacted by MTD for Income Tax this year, however data from HMRC shows that only around 410,000 people have currently registered with them to report their income and costs under the new system.
Taxpayers can be penalised in two separate ways: for late submissions and for late payments. A points-based penalty system is used for late submissions, while late payments attract fines and interest. Both are aimed at discouraging repeated non-compliance, rather than punishing one off mistakes.
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Taxpayers within MTD for Income Tax are required to submit quarterly updates directly to HMRC. However, HMRC have said that they will not levy late filing penalties for quarterly updates this year, 2026/27.
For 2027/28 onwards, each time a quarterly submission is missed or is late, the offender will receive a penalty point. If four submissions are late, the taxpayer will have accrued four points and will be charged a £200 penalty. If this happens, it’s time to get back on track, because every further late submission thereafter will rack up another £200 penalty.
Anyone with fewer than four points will have each of their penalties removed 24 months after that point was levied. If you accrue four points or more, individual points will not automatically be removed even when you are fined. Instead, your points will be removed once you have filed all your quarterly updates and annual submissions on time for 12 consecutive months and have sent any outstanding quarterly updates and submitted any outstanding tax returns for the previous 24 months. It is worth noting that you can only be given one penalty per deadline, even if you own multiple businesses.
Penalties can also be accrued for failing to pay the tax owed beyond the deadline, and interest will be applied from the first day the tax is overdue.
Emily Coltman FCA, chief accountant at FreeAgent, said: “MTD for Income Tax is a big change and can feel daunting, but there are ways you can make it easier for yourself. The easiest way to stay penalty-free is to keep your accounting records up to date throughout the year, rather than rushing to do your books and get it all submitted at the end of every quarter. Using a MTD-compatible software to do a lot of the heavy lifting is key too, making keeping on top of your records really straightforward.
“Even if you don’t think you’ll be able to pay all the tax you owe at the end of the year, you should still submit all your returns on time – HMRC can offer payment plans to make it more manageable, but they’ll only do that if your submissions are fully up to date. If you’re ever worried about not being able to keep up with tax payments or submitting returns, talk to an accountancy professional as soon as you can.”
To support the transition to MTD for Income Tax, HMRC has introduced a one-year ‘soft landing’ period, whereby penalty points for late quarterly updates won’t be given for the 2026/27 tax year. However, there is no grace period for late annual final declarations, which typically take place in April as normal.
When it comes to paying tax, payments must be made before the payment due date, and HMRC will issue penalties on the tax owed if payment has not been made at 30 days, 6 months and 12 months past that payment date.
From next year, MTD for Income Tax will also apply to sole traders and landlords who earned qualifying income of £30,000 and more in the tax year 2025/26, so it’s worth getting up to speed on the system early to avoid any penalties down the line.
