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

In this blog we will look at the announcement and how accountants should respond to the news.

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

It has been confirmed that, for the first year, HMRC will not apply a penalty for late quarterly submissions. However, a fine will be imposed in the event of late payment.

The following year will see a MTD penalty point system 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 in the 2026-27 tax year for ITSA (Income Tax Self Assessment) taxpayers required to join Making Tax Digital (MTD). The Government will apply the new late submission and late payment penalty regime to all ITSA taxpayers who are not yet due to join the new system from 6 April 2027.”

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

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

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

The points system for late submissions under MTD

Here’s a quick reminder of how HMRC’s MTD penalties work for VAT registered businesses: each late submission earns 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 carries a penalty of £200.

Late submissions – quarterly updates:

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

How do MTD penalty points reset?

Points are reset to zero if:

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

Late penalties

These apply to balances or amounts due after modification/assessment.

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

Interest is charged in addition.

Remember: suspension of sanctions is not a license to relax

With late payment penalties not being introduced for another year, what should accountants do?

MTD for IT’s quarterly updates could pose the biggest threat to accounting efficiency in a generation. The administration involved – for the accountants and the client – ​​means it’s not that different from having a busy season four times a year. Every minute will count.

Use this time to learn as many lessons as possible. This means you need to start MTD for IT the way you want: it’s the only way to test the real weaknesses in your processes. This will reduce the risk of late submission penalties from 2027.

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

Check that your systems are ready

You need to ensure that your company’s digital systems are not wasting time and are being used to their full capacity.

Your best place to start is to make sure your system synchronizes data, automates processes, and alerts you if something goes wrong. The best of them are cloud-based, allowing teams to work from anywhere with an internet connection. These systems also help you communicate with customers and maintain a centralized database – a central list where all data is kept. This way you don’t need to log into different applications or re-type data.

Your MTD IT Readiness Checklist

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

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

Make sure you have monitoring: Controls are essential, so make sure you’re connected to a system that can monitor workloads across your entire business. Your system should see submission status, adjustments, and deadlines in a single view.

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

• Dashboards for managers to track progress and bottlenecks.
• Centralized task management for quarterly updates and customer communications.
• Shared calendars and deadlines to keep everyone aligned.
• Workflow automation for recurring tasks, such as finding customer data.

Make sure you can collect information easily:It is essential that all documents are stored in a central location and are easily accessible to team members with the appropriate permissions. Use secure portals for client communication to protect sensitive data – and ensure smaller clients have their own accounting software or you can import their spreadsheets into your MTD recognized system.

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

Carefully review any manual processes

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

• Prevent errors
• Comply with HMRC compliance rules
• Work quickly
• Maintain an audit trail
• Large-scale operations during peak periods

Accounting resources and solutions for MTD for IT

See how we can help you. We have a range of solutions to suit your business.

We also have guides you can use – and give to your customers so they know how to help keep things running smoothly.