Making Tax Digital (MTD) is changing how many sole traders keep records and report their income to HMRC. If you are required to use MTD for Income Tax, you will need to keep digital records, send quarterly updates and complete a final tax return.
Missing deadlines or failing to follow the rules can result in penalty points, fines or late payment charges. For sole traders using MTD for Income Tax, penalties mainly apply to missed submission deadlines, late tax payments and failures to meet digital record-keeping requirements.
HMRC has also introduced a more gradual penalty system to give taxpayers time to correct occasional mistakes.
MTD for Income Tax applies to sole traders and landlords whose qualifying income is above the relevant threshold.
The rules are being introduced in stages:
|
Tax year |
Qualifying income threshold |
MTD starts |
|
2024/25 |
More than £50,000 |
6 April 2026 |
|
2025/26 |
More than £30,000 |
6 April 2027 |
|
2026/27 |
More than £20,000 |
6 April 2028 |
The income test is based on qualifying income, which can include income from self-employment and property. If you are above the relevant threshold, you need to follow the MTD rules from the applicable date.
There are three main areas to be aware of:
The penalty system for late submissions is points-based. Late payment penalties work differently and depend on how long the tax remains unpaid.
Under MTD for Income Tax, you receive one penalty point for each missed submission deadline.
This can include a missed quarterly update or the final declaration. You do not receive a £200 fine immediately after missing one deadline.
For most sole traders making quarterly submissions, the penalty threshold is four points. Once you reach four points, HMRC charges a £200 penalty.
If you continue to miss deadlines after reaching the threshold, you can receive another £200 penalty for each additional missed submission.
For example, imagine you miss one quarterly update. You receive one penalty point, but no £200 fine.
If you later miss three more deadlines, you reach four points. HMRC can then issue a £200 penalty.
This means a single mistake does not automatically result in a financial penalty. However, repeated missed deadlines can become costly.
There is an important transitional rule for the 2026/27 tax year.
HMRC has confirmed that there are no penalties for missing quarterly update deadlines during 2026/27. However, sole traders who are required to use MTD must still keep digital records and send their quarterly updates. All required quarterly updates must be submitted before the final tax return can be completed.
Penalty points for missed quarterly updates start from tax years after 2026/27.
This gives sole traders using MTD from April 2026 some time to become familiar with the new reporting process.
If you have fewer than four penalty points, each point can be automatically removed after 24 months, provided the relevant conditions are met.
If you reach the four-point threshold, the rules are different. You need to:
You can check your penalty points and the dates they may be removed through your HMRC online account.
If you do not pay your Income Tax in full by the deadline, HMRC can charge a late payment penalty. The amount depends on how long your payment is overdue. These penalties are separate from the points-based penalties for late submissions.
HMRC will also charge late payment interest from the first day your payment is late.
|
How late is the payment? |
Penalties for 2026 to 2027 tax year |
Penalties for 2027 to 2028 tax year |
|
Payment up to 15 days late |
No penalty |
No penalty |
|
Payment 16 to 30 days late |
3% of the tax owed at day 15, or no penalty if it is your first year |
4% of the tax owed at day 15, or no penalty if it is your first year |
|
Payment 31 days or more late |
3% of the tax owed at day 15, plus 3% of the tax owed at day 30. An annual rate of 10% is then charged on the outstanding amount, calculated daily from day 31 until the tax is paid, or for up to 2 years. |
4% of the tax owed at day 15, plus 4% of the tax owed at day 30. An annual rate of 10% is then charged on the outstanding amount, calculated daily from day 31 until the tax is paid, or for up to 2 years. |
For your first year under the new penalty rules, you have 30 days from the payment deadline to either pay the tax in full or contact HMRC to arrange a payment plan. If you do neither, the relevant late payment penalties will apply after 30 days. From your second year onwards, this initial period is reduced to 15 days.
It is also important to remember that late payment penalties do not apply to payments on account. They can apply to a balancing payment or other amounts that remain unpaid after the relevant deadline.
If you are struggling to pay your tax bill, contact HMRC as soon as possible. If HMRC agrees to a payment plan and you follow the agreed payments, penalties are paused from the date you contacted HMRC.
Once you are required to use MTD for Income Tax, you will generally need to send four quarterly updates each tax year.
The standard deadlines are:
|
Accounting period |
Quarterly update deadline |
|
6 April to 5 July |
7 August |
|
6 July to 5 October |
7 November |
|
6 October to 5 January |
7 February |
|
6 January to 5 April |
7 May |
You will then need to submit your final declaration by 31 January following the end of the tax year. Your Income Tax payment deadline remains 31 January, with a 31 July payment on account where applicable.
Avoiding MTD penalties is easier when you stay organised. Follow these simple steps:
1. Keep digital records up to date: Record your income and expenses regularly instead of waiting until the deadline.
2. Use MTD-compatible software: Choose software that lets you keep digital records and submit updates to HMRC.
3. Set deadline reminders: Add quarterly updates and tax payment deadlines to your calendar.
4. Check your figures: Review your income and expenses before submitting each update to avoid mistakes.
5. Save money for tax: Set aside money throughout the year so you are ready to pay your tax bill on time.
6. Contact HMRC if you cannot pay: If you cannot pay on time, contact HMRC as soon as possible. You may be able to arrange a payment plan.
If you are a sole trader or landlord and need help staying compliant with Making Tax Digital, PHS Associates can help. We can help you understand your MTD requirements, keep your records organised and meet your reporting deadlines.
Our support can make it easier to manage your tax responsibilities and reduce the risk of avoidable penalties. Contact us at 0208 8611685 and email us at info@phs-uk.co.uk.
Making Tax Digital penalties can seem confusing, but they are easier to manage if you stay organised.
In 2026/27, there are no penalties for missed quarterly updates, although you still need to keep digital records and submit the updates. From later tax years, repeated missed deadlines can lead to penalty points and £200 fines.
Late tax payments can also result in penalties and interest. Keep your records up to date, use suitable software, check your deadlines and contact HMRC if you cannot pay on time. This can help you avoid unnecessary penalties and keep your tax affairs on track.
Yes. HMRC may remove a penalty if you have a reasonable excuse or if the penalty was issued incorrectly. You can appeal if you disagree with the penalty.
A penalty point normally expires after 24 months if you meet HMRC’s conditions for having it removed.
Yes. You can appeal if you had a reasonable excuse for missing the deadline or believe the penalty is incorrect. You should explain what happened to HMRC.
Yes. Landlords who are required to use Making Tax Digital (MTD) for Income Tax can receive penalties for failing to meet the relevant MTD requirements.
You can correct errors in your records and updates. The MTD penalty point system mainly applies when you miss a submission deadline.
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