From 2026, taxpayers in the UK, with combined annual self-employment and property income of over £50,000 will be subject to filing their tax position through Making Tax Digital for Income Tax (MTD ITSA). 

With Making Tax Digital for Income Tax, taxpayers will not only submit one annual tax return, but also quarterly submissions of income and expenditure, to give a real time snapshot of their tax position throughout the year. HMRC’s reason behind this is to reduce the so-called “tax gap”.

What is the “Tax Gap”?

The Tax Gap is the difference between the amount of tax liability submitted to the revenue vs what was actually liable. In theory if every transaction is logged digitally, and then quarterly updates submitted to HMRC, then the number of mistakes will be reduced, and therefore the tax gap will be narrowed. For the 20/21 tax year, the tax gap was estimated at 5.1% of total tax liability - a whopping £32 billion pounds.

Why is there a new penalty system for Making Tax Digital for Income Tax?

With a change in the tax system, there needs to be a change penalty system. HMRC have chosen to implement a new points based penalty system to better align with the changes brought in by Making Tax Digital for Income Tax. 

According to HMRC the aim of the new penalty system is to be more supportive of those with genuine reasons behind mistakes or late filing, whilst still penalising those who are consistently late.

How is the penalty system for Making Tax Digital for Income Tax different?

Some could argue that the new MTD penalty system, rather than being simpler, is actually more complicated! Currently the system goes by length of time since late submission, with the penalties accruing over the time past since the due date. 

The new Making Tax Digital for Income Tax system works in a similar way to the UK driving licence! You receive points on your record if you have a late submission - and once you pass a certain point “threshold” then you receive a penalty.

How does the new penalty system for Making Tax Digital for Income Tax work?

When a taxpayer misses a submission deadline then they will incur a point. These points build up to penalty thresholds, with each submission obligation (i.e quarterly, annually) having a different threshold. Once this point threshold is reached, then a fixed penalty amount of £200 will be issued for every missed submission.

The Penalty thresholds are as follows;

Submission Frequency  Penalty Threshold 

Annual 2 Points 

Quarterly  4 Points 

If the penalty threshold isn't passed, then the points will be cleared after 2 years. If the points threshold is passed, then all the points gained will be wiped only AFTER they have met a period of compliance as set by HMRC (Annual submissions 24 months, Quarterly submissions 12 months)  AND submitted all the submissions due from the previous 2 years. 

For Late Payment, penalties are issued by length of time passed from the due date. However, HMRC have said that they will take a “lighter” approach for the first year of implementation, and a way of easing taxpayers into the system.

The basic structure surrounding penalties for late payment is;

Number of days late  Penalty 

0-15. No Penalty 

16-29 2% of outstanding amount 

30 4% of outstanding amount 

31+ (2nd penalty only)  4% per day on outstanding amount 

But don't worry: This will not come into effect until Making Tax Digital for Income Tax mandation, and HMRC will be releasing more information in the lead up to the new system going live. 

Want to know more about MTD? We created the Ultimate Guide to Making Tax Digital for YOU!