Soft landing for MTD income tax

The government has announced that taxpayers joining MTD income tax in April 2026 will not receive penalty points for late submission of their first four quarterly updates. It is understood that this soft landing will only apply to the first cohort of taxpayers and not those mandated to use MTD income tax from April 2027 and April 2028. 

It is important to note that taxpayers will still need to submit their quarterly updates before they are able to submit their tax return. Also, the penalty easement does not apply to the end of year tax return for 2026/27 that will be due on 31 January 2028. This means that taxpayers will still receive a penalty point if they do not submit their 2026/27 tax return by the due date. 

All taxpayers will have an additional 15 days before a late payment penalty is issued for their first year in the new penalty system. This provides 30 days in total to pay any outstanding tax before a late payment penalty is issued.

Penalty reform to be extended

There are two key changes: 

The government will apply the new penalty regime for late submission and late payment to all income tax self assessment (ITSA) taxpayers not already due to join the new system from 6 April 2027. This will remove concerns about a two-tier penalty regime being in play depending on whether the taxpayer is in MTD income tax or traditional ITSA.

However, the government will increase the penalties due for late payment of income tax (under self assessment and MTD for income tax) and VAT from 1 April 2027. The full details setting out how much penalties will be increased by has not yet been released. This is part of an overall drive to encourage timely payment of tax. 

Changes to payment of income tax

Where a self assessment taxpayer also has a PAYE income source, they will be required to pay more of their self assessment liabilities in-year via PAYE from April 2029. This is expected to raise £85m in 2028/29, £605m in 2029/30 and £235m in 2030/31. The spike will be caused by an overlap between payments on account being due for an earlier year at the same time as tax being collected in-year via PAYE.

The government will publish a consultation in early 2026 on delivering this change. While tax agents can apply to change payments on account on behalf of their clients, they currently struggle to get changes made to their client’s tax code. HMRC’s transformation roadmap did promise a new service to allow agents to digitally submit information which may impact their client’s tax code. Ideally, this service would be available well in advance of this planned change.

The consultation will also extend to timelier tax payment by those taxpayers with only self assessment income. 

Deferrals and exemptions from MTD income tax

The government has announced further deferrals and exemptions from MTD income tax.

A one-year deferral has been announced for more small groups of taxpayers. It is understood that the following groups will remain in ITSA until April 2027:

• recipients of trust and estates income;
• individuals who use averaging adjustments; 
• those eligible for qualifying care relief; and 
• non-UK resident foreign entertainers or sportspeople.

These groups join the deferral announced at the Spring Statement (ie, that taxpayers who use the residence, remittance basis etc (SA109) pages of the self assessment tax return will not be required to use MTD income tax until April 2027).

Note also that non-UK resident foreign entertainers and sportspeople who have no other income sources that count as qualifying income for MTD are exempt from MTD income tax.

It is understood that there will also be one further exemption. Taxpayers under a deputyship (as appointed by the Court of Protection) will be permanently exempt from MTD for income tax.

Further reading

• ICAEW’s MTD hub
• HC 1492 – Budget 2025 Strong Foundations, Secure Future – November 2025 (paragraphs 2.62, 4.149, 4.158 and 4.160)
• Budget 2025 policy (page 100)
• Penalties for Making Tax Digital for Income Tax volunteers
• HMRC's Transformation Roadmap (section 3.2)