Making Tax Digital for Income Tax (MTD for ITSA) introduces a new penalty system for late submissions and late payments in respect of income tax. HMRC is moving away from the traditional fixed Self Assessment penalty structure towards a points-based approach.
Understanding the new rules is essential for businesses and landlords preparing for MTD.
What has changed?
Under MTD for ITSA, penalties are split into two areas:
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Late submission penalties
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Late payment penalties
The system is designed to encourage regular compliance while giving businesses some flexibility during the early stages of the rollout.
Late submission penalties
HMRC will operate a points-based system for missed deadlines.
Each time a taxpayer misses a required submission deadline, they receive one penalty point.
Once the threshold is reached:
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A £200 penalty is charged
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Further missed deadlines trigger additional £200 penalties
For MTD for ITSA quarterly reporting, the threshold is generally four points.
Importantly:
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Only one point applies per deadline
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Points expire after a period of compliance
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Separate systems apply for VAT and Income Tax
Soft landing for 2026/27
HMRC has confirmed there will be no penalty points for late quarterly updates during the first year of mandatory MTD for ITSA.
However:
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Businesses must still keep digital records
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Quarterly updates still need to be submitted
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Late end-of-year submissions can still attract penalties
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Late payment penalties still apply
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This first year is intended to help businesses adapt to the new system.
Why late payment penalties and submission penalties differ
If tax is unpaid:
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Penalties increase depending on how long payment remains outstanding
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Interest also applies
For taxpayers joining MTD in April 2026:
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No penalty applies if payment is made within 15 days
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Reduced treatment applies during the first year
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Penalties become stricter from 2027/28 onwards
The longer tax remains unpaid, the larger the penalty becomes.
Can penalty points be removed? Yes.
To clear points after reaching the threshold, taxpayers generally need to:
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Submit all returns on time for a compliance period
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Ensure outstanding submissions are fully up to date
This encourages ongoing compliance rather than repeated late filing.
What about incorrect quarterly updates?
Quarterly updates are not designed to be final tax calculations.
HMRC has confirmed that adjustments and corrections can still be made before the final declaration. This reduces pressure during quarterly reporting and recognises that businesses may need year-end adjustments.
However, deliberate inaccuracies or poor record keeping can still create problems.
Common Reasons Businesses May Receive Penalties
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Missing quarterly deadlines
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Delaying bookkeeping
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Failing to maintain digital records
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Using non-compatible software
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Ignoring payment deadlines
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Assuming the soft landing removes all obligations
The easiest way to avoid penalties is staying organised throughout the year.
How businesses can avoid problems
Practical steps include:
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Keeping bookkeeping up to date monthly
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Using MTD-compatible software
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Setting reminders for quarterly deadlines
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Working closely with an accountant
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Reviewing tax liabilities regularly
Businesses should also avoid waiting until deadlines to learn new systems.
The soft landing is only temporary
The new MTD penalty system is designed to encourage consistent compliance rather than punish occasional mistakes immediately. The first year gives businesses some breathing room, but the long-term direction is clear: HMRC expects regular digital reporting and timely submissions.
Businesses that prepare early and stay organised are likely to avoid most issues entirely and our team of experts is on hand and ready to help. We offer a full MTD for ITSA accounting service designed specifically for those impacted by the new requirements. Find out more here.
