MTD Penalties Waived for First Year to Ease Transition for Self Assessment Taxpayers

The UK government has announced a significant change for taxpayers preparing to join Making Tax Digital (MTD) for Income Tax. Those required to submit quarterly updates of their income and expenses under MTD in the 2026/27 tax year will not face penalties for late filing. This move aims to ease the transition for self assessment taxpayers, especially those earning non-PAYE income over £50,000, who will be the first group affected by the new system.

This blog post explains what this penalty waiver means, how the new MTD penalty system will work, and what taxpayers should expect as they prepare for these changes.

What Is Making Tax Digital for Income Tax?

Making Tax Digital is a government initiative designed to modernize the tax system by requiring taxpayers to keep digital records and submit tax information quarterly through compatible software. The goal is to improve accuracy, reduce errors, and make tax reporting more efficient.

From April 2026, self assessment taxpayers with income over £50,000 from non-PAYE sources will need to join MTD for Income Tax. This means they must submit quarterly updates of their income and expenses, rather than just an annual tax return.

Penalties Waived for the First Year

The Autumn Budget 2025 documents confirmed that HMRC will not charge penalty points for late submission of quarterly updates during the 2026/27 tax year. This means taxpayers joining MTD in April 2026 will have a grace period before penalties apply.

What This Means for Taxpayers

• No penalty points for late quarterly updates in 2026/27

Taxpayers can submit their quarterly updates late without penalty points being added.

• Penalty regime starts from April 2027

From 6 April 2027, HMRC will begin applying the new points-based penalty system for late submissions and payments.

• Focus on helping taxpayers adjust

The government recognizes that MTD is a major change and expects some initial difficulties. This waiver period allows taxpayers to get used to the new system without immediate financial consequences.

MTD digital tax filing interface on computer screen

Image caption: Digital tax filing interface used by self assessment taxpayers preparing for Making Tax Digital.

How the New Penalty System Will Work

Starting April 2027, HMRC will introduce a points-based penalty system for late submissions and payments under MTD for Income Tax. This system aims to encourage timely compliance while being fair to taxpayers.

Key Features of the Penalty Regime

• Penalty points for missed deadlines

Each time a taxpayer misses an annual submission deadline, they receive one penalty point.

• Threshold for financial penalties

A fixed penalty of £200 applies only after a taxpayer accumulates two penalty points for late submission of their final declaration.

• Focus on persistent non-compliance

The system targets taxpayers who repeatedly miss deadlines rather than penalizing occasional delays.

• Separate penalties for late payment

Late payment of tax will also attract penalty points under this regime.

Example Scenario

Imagine a taxpayer who misses the deadline for their annual final declaration twice. After the second missed deadline, they will receive a £200 penalty. If they continue to miss deadlines, further penalties may apply.

Why the Government Is Offering a Grace Period

Making Tax Digital represents the biggest change to the UK tax system since the introduction of self assessment. The government expects some taxpayers will face challenges adapting to quarterly reporting and digital record-keeping.

Sharron West, Technical Officer at the Low Incomes Tax Reform Group (LITRG), said:

"We're pleased to see the government defer penalties for the first year of Making Tax Digital. Making Tax Digital is the biggest change to the tax system since self assessment and because of that, we expect that there will be some teething problems when it goes live in April. This period of grace is especially good news for those who will be getting used to the new system without the help of a tax adviser."

This approach helps reduce stress and financial risk for taxpayers as they learn the new system.

Preparing for MTD: What Taxpayers Should Do Now

Even though penalties are waived for the first year, taxpayers should prepare early to avoid issues later.

Steps to Take

• Choose compatible software

Select digital tools approved by HMRC for submitting quarterly updates.

• Keep accurate digital records

Start maintaining income and expense records digitally to meet MTD requirements.

• Understand quarterly deadlines

Familiarize yourself with the schedule for submitting updates and final declarations.

• Seek advice if needed

Consider consulting a tax adviser or using HMRC resources to understand the new process.

• Plan cash flow for quarterly payments

Since tax payments will be more frequent, budgeting for quarterly payments is essential.

What Happens After the Grace Period?

From April 2027, the penalty system will be fully enforced. Taxpayers who do not meet deadlines will face penalty points and potential financial penalties.

Important Considerations

• Timely submissions become critical

Avoid accumulating penalty points by submitting quarterly updates and final declarations on time.

• Late payments will also be penalized

Ensure tax payments are made by the due dates to avoid additional penalties.

• Keep digital records up to date

Accurate and timely record-keeping will make compliance easier.

Summary

The government’s decision to waive penalties for late quarterly updates during the first year of Making Tax Digital for Income Tax offers a valuable transition period for taxpayers. This grace period allows self assessment taxpayers, especially those earning non-PAYE income over £50,000, to adapt to the new digital reporting system without immediate penalty risk.

Taxpayers should use this time to prepare by choosing the right software, maintaining digital records, and understanding the new deadlines. From April 2027, the new points-based penalty system will apply, so timely compliance will become essential.

Taking proactive steps now will help taxpayers avoid penalties later and make the most of the benefits that Making Tax Digital aims to deliver.