Higher Penalties Coming for MTD Income Tax Filers

2026. Taxpayers must prepare for new digital requirements and a tougher penalty system.

Significant changes are on the horizon for self-employed individuals and landlords as HMRC continues to roll out Making Tax Digital (MTD) for Income Tax. From April 2026,

MTD will become mandatory for those earning over £50,000 per year, requiring them to:

• Keep digital records of income and expenses

• Submit quarterly updates to HMRC via approved software

• Comply with a new system of penalties for late filing and late payment

  
  

This marks a major shift in how tax is reported and paid, with the goal of reducing errors and improving efficiency across the tax system.

Phased Introduction of MTD for Income Tax

The rollout will take place in three key phases:

• From 6 April 2026 – MTD will apply to the self-employed and landlords with income over £50,000

• From 6 April 2027 – The threshold will lower to include those earning between £30,000 and £50,000

• From April 2028 – Sole traders and landlords with income over £20,000 will also be required to comply

  
  

HMRC has stated that it is also exploring options for eventually bringing those earning below £20,000 into the MTD regime, though no firm timeline has been announced.

Tougher Penalties for Late Filing and Payment

In preparation for the wider rollout, HMRC has introduced stricter penalty rules, effective 1 April 2025. These changes apply to VAT-registered businesses and early adopters of MTD for Income Tax.

The updated penalty structure is as follows:

• 15 days late – Late payment penalty increased from 2% to 3%

• 30 days late – A second penalty, also increased from 2% to 3%, will be charged

• From day 31 onwards – An ongoing penalty of 10% annually (up from 4%) will apply, with daily interest accruing from this point

  
  

This revised system is designed to encourage timely submissions and payments by imposing steeper financial consequences for delays.

Traditional Self Assessment Still an Option, For Now

Taxpayers who are not yet required to join MTD will remain under the current Self Assessment system, which has its own set of penalties for late returns and payments. However, with the government's long-term goal of full digitalisation, it is expected that MTD will eventually replace traditional Self Assessment for most income types.

What You Should Do Now

If your income places you within one of the upcoming MTD thresholds, it’s important to start preparing:

• Review your current record-keeping practices

• Research and select MTD-compatible software

• Consider working with an accountant or tax adviser to ensure compliance

• Keep an eye on HMRC updates as deadlines approach

  
  

With tougher penalties and new digital requirements, early preparation can help avoid stress, and fines, down the line.

Don’t wait until the deadlines are upon you. Take action now to future-proof your tax processes, avoid penalties, and stay compliant with HMRC’s evolving digital systems. If you need support, speak to a tax professional or contact your software provider to begin the transition to MTD today.