News
Making Tax Digital – Understanding the new penalty regime
07 October 2025
With just six months to go before the first round of Making Tax Digital (MTD) for Income Tax gets rolled out, many sole traders are still not ready.
A survey carried out by IRIS earlier this year found that 45 per cent of UK sole traders felt unprepared for the changes.
That leaves almost half of those affected facing a serious risk of penalties once the rules take effect next year.
Who qualifies for MTD for Income Tax?
From 6 April 2026, anyone who files a Self-Assessment tax return and has gross self-employed and/or property income over £50,000 will be brought into the MTD regime.
The entry point will then reduce in stages, falling to £30,000 from April 2027 then is planned to fall to £20,000 the following year.
How the penalties work
Think of late submissions as penalty points on a driving licence. One missed quarterly update may not do too much damage, but repeated non-compliance will accumulate into a £200 fine.
Quarterly filers reach that stage at four points, while annual filers get there in just two.
The slate can be wiped clean, but only after a sustained period of meeting every single deadline.
Payment delays are treated under a new aligned system:
- No penalty if tax is paid within 15 days of the due date
- Payments made between day 16 and day 30 attract a penalty of three per cent of the balance outstanding
- By day 30, the penalty increases to six per cent
After 30 days, a second penalty begins to accrue daily at 10 per cent per year until the debt is cleared.
These charges will stop if a Time to Pay arrangement is agreed with HM Revenue and Customs (HMRC).
Additional consequences to be aware of
Besides the penalties for late submissions and payment delays, HMRC can also impose up to a £3,000 fine for failing to maintain adequate records in relation to a return. This includes not maintaining digital records or any issues with digital links within functional compatible software.
They can also issue a £300 minimum fine if you deliberately conceal information needed for HMRC to assess your liability.
Get in touch today to make sure you stay compliant and avoid MTD penalties.
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