While there was a commitment in today’s budget to continue with the rollout of MTD for income tax, there were two key announcements in the budget detail.

Penalty soft landing  

A late filing penalty soft landing applies for MTD income tax in 2026/27. Under the soft landing, taxpayers that are late filing quarterly updates for 2026/27 are not awarded a penalty point. For further details of the penalties that apply under MTD income tax, including the soft landing, see ICAEW’s guidance.  

This penalty soft landing has been extended to those taxpayers who are due to join MTD income tax from April 2027. This includes taxpayers with gross income over £30,000, taxpayers who were previously exempt from MTD in 2026/27 and are due to join from April 2027, and any other taxpayer who becomes required to join MTD from April 2027.  

The penalty easement has not been extended into the second year of MTD income tax for those taxpayers who joined from April 2026. The penalty easement for those taxpayers will come to an end, and they will receive penalty points for missing quarterly updates for the 2027/28 tax year onwards. This means that if they do not file their quarter one update by 7 August 2027, they will receive a penalty point.   

The penalty easement does not apply to the late submission of the year end tax return for either 2026/27 or 2027/28. A late submission penalty point will be received by taxpayers if they do not file their year end tax return on time.  

MTD exemptions until further notice  

Budget 2026 also announced an exemption from MTD income tax until further notice for four groups of taxpayers, with secondary legislation to be introduced before April 2027. These four groups are:  

• those eligible for qualifying care relief (ie, foster carers);
• non-UK resident foreign entertainers or sportspeople;
• expected non-resident taxpayers (taxpayers who think that their residency status will change in the upcoming tax year); and
• taxpayers for whom HMRC cannot provide a digital service for MTD – the budget detail notes that this includes insolvent taxpayers who cannot currently sign up to MTD.  

The detail on how the exemption for taxpayers who expect they will become non resident is still to be confirmed, and HMRC guidance will be required. ICAEW’s understanding is that the taxpayer will need to contact HMRC to make HMRC aware of the change in their circumstances. The taxpayer would then be exempt from MTD income tax for that tax year, and the following tax year, until their non-resident status is established. Once non-resident status is established, any relevant UK income sources would fall back within the scope of MTD income tax.  

Some taxpayers are exempt from MTD income tax in certain circumstances. The exemptions can be complicated to understand as:  

• some apply automatically and some must be applied for; and 
• some are temporary, previously applying until April 2027 at the earliest, and some apply permanently, or at least until the person’s circumstances change.  

HMRC has published guidance on exemptions from MTD income tax to help clarify and explain the legislation.  

It was previously announced that a taxpayer would be temporarily exempt if their 2024/2025 tax return included, and they reasonably expected their 2025/2026 or 2026/2027 return to include, any of the following: 

• a claim for averaging relief using the SA103 supplementary page (Self Employment) or the SA104 supplementary page (Partnership); 
• a claim for qualifying care relief;
• the SA 107 supplementary page (Trusts, etc); and
• the SA 109 supplementary page (Residence and foreign income and gains regime, etc) in the self assessment tax return.  

The supplementary pages are available to view on GOV.UK. 

Further information

• Making Tax Digital | ICAEW 
• How to get help ahead of the next MTD deadline on 7 November | ICAEW
• MTD for income tax penalties | ICAEW