What the budget said about MTD penalties – and what you must do

In the Autumn Budget 2025, it was easy to miss an important update regarding penalties under Making Tax Digital for Income Tax Self Assessment (MTD for IT).

In this blog, we will look at the announcement and how accountants need to react to the news.

What the budget told us about MTD for IT’s penalty regime

It has been confirmed that, for the first year, HMRC will not enforce a penalty for late quarterly submissions. However, there will be a fine for late payments.

The following year will see a penalty points system for MTD for IT and higher fines for missing payments.

The announcement

In the budget, the UK Government explains: “The government will not apply late submission penalties for quarterly updates during the 2026-27 tax year for Income Tax Self Assessment (ITSA) taxpayers required to join Making Tax Digital (MTD). The government will apply the new penalty regime for late submission and late payment to all ITSA taxpayers not already due to join the new system from 6 April 2027.”

It adds, “This will be legislated for via secondary legislation. The government will increase the penalties due for late payment of ITSA and VAT from 1 April 2027. This will be legislated for via secondary legislation.”

What is likely to happen the following year – MTD for IT penalty points explained

The system will likely follow the same points-based penalty system as MTD for VAT-registered companies. However, it is important to appreciate that this penalty system could be subject to change.

The points system for late submissions under MTD

Here is a quick reminder on how HMRC’s MTD penalties work for VAT-registered companies: each late submission accrues one “point”. Annual and quarterly submissions have different point thresholds before a financial penalty is applied.

Late submissions – annual filing

• 2 “points” result in a £200 penalty.
• Each subsequent late annual return results in a £200 penalty.

Late submissions – quarterly updates:

• If you accrue 4 points, there is a £200 penalty.

How do MTD penalty points reset themselves?

Points reset to zero if:

• All submissions are on time for 24 months (annual) or 12 months (quarterly) and
• All previous due submissions have been received.

Late payment penalties

These apply to balancing payments or amounts due after amendment/assessment.

• After day 15: 3% of tax outstanding.
• Day 30: Additional 3%.
• After Day 30: 10% per year until paid.

Interest is charged in addition to this.

Remember: the suspension of penalties is not a licence to relax

With late submission penalties not being introduced for another year, what must accountants do?

MTD for IT’s quarterly updates could be the biggest threat to accounting efficiency for a generation. The admin involved – for the accountants and the client – means it’s not dissimilar to having busy season four times a year. Every minute will count.

Use this time to learn as many lessons as you can. That means you must begin MTD for IT as you mean to go on – it’s the only way you can test for genuine weaknesses in your processes. Doing so will cut the risk of late submission penalties from 2027.

It’s also important to remember that late payment penalties are still in effect.

Checking your systems are ready

You must ensure that your firm’s digital systems waste no time and are used to their fullest capabilities.

Your best starting place is to ensure your system syncs data, automates processes, and alerts you to any issues. The best of these are based in the cloud, allowing teams to work from anywhere with an internet connection. These systems also help you communicate with clients and maintain a centralised database – one central list in which all data is kept. That way, you don’t have to keep signing into different applications or retyping data.

Your MTD for IT readiness checklist

Make sure you have segmented your base: Can your system easily help you check which clients fall under MTD and when?

Confirm HMRC connections: Is your solution HMRC recognised? HMRC tests software to ensure it is compatible with filing MTD submissions.

Check you have oversight: Controls are everything, so make sure you are logged into a system that can monitor your whole firm’s workloads. Your system needs to see submission status, adjustments, and deadlines in one view.

Often called a “practice management” or “task management” solution, this part of your system should include:

• Dashboards for managers to track progress and bottlenecks.
• Centralised task management for quarterly updates and client communications.
• Shared calendars and deadlines so everyone stays aligned.
• Workflow automation for recurring tasks, such as chasing client data.

Ensure that you can collect information easily: It’s essential that all documents are stored in a central place and are easily accessible to team members who have the right permissions. Use secure portals for client communication to keep sensitive data safe – and see to it that smaller clients either have their own bookkeeping software or that you can import their spreadsheets into your MTD-recognised system.

Check your software has anomaly detection: With multiple submissions, can you see where errors might be creeping in?

Check carefully for any manual processes

Every manual process will slow you down and make record-keeping haphazard. Remove any workarounds you might have, such as spreadsheets, to make sure you can:

• Prevent errors
• Comply with HMRC compliance rules
• Work quickly
• Maintain an audit trail
• Scale operations in busy periods

Accounting resources and solutions for MTD for IT

See how we can help. We have a range of solutions made to fit your firm.

We also have guides that you can use – and hand to your clients so they know how to help things run smoothly.