The Penalty-Free Period for MTD ITSA

HMRC has introduced a transitional easement for the first year of Making Tax Digital for Income Tax. This page explains what the penalty-free period covers, what it does not cover, and what happens when it ends.

What is the penalty-free period?

For taxpayers joining MTD in April 2026, HMRC will not charge penalty points for late quarterly updates during the first 12 months (tax year 2026-27).

This means if you miss one or more quarterly update deadlines in your first year under MTD, you will not accumulate penalty points for those missed deadlines.

What the penalty-free period does not cover

The easement is specifically for late quarterly update submissions. It does not cover:

• Late Final Declarations - penalty points for late Final Declarations apply from the start, even in 2026-27
• Late tax payments - payment deadlines and late payment penalties are separate from submission penalties
• The obligation itself - you are still legally required to submit quarterly updates on time. The penalty-free period means no financial consequence for lateness, not that the obligation does not exist

How the penalty points system works (after the penalty-free period)

From tax year 2027-28 onwards, the full penalty regime applies to all quarterly updates. Here is how it works:

Late submission penalties

Each missed deadline (quarterly update or Final Declaration) earns 1 penalty point.

• The penalty threshold for quarterly filers is 4 points
• When you reach the threshold, you receive a 200 financial penalty
• Each subsequent missed deadline while at the threshold incurs another 200 penalty

How points expire

• If you have not reached the threshold: points expire after 24 months of the point being issued
• If you have reached the threshold: points reset after a period of full compliance (submitting all updates on time)

Multiple failures in the same month

If you miss multiple deadlines relating to the same submission in the same month, that counts as just 1 point. However, different obligations (e.g., a quarterly update and a Final Declaration) in the same month can each generate a separate point.

Late payment penalties (separate system)

Late payment penalties are different from late submission penalties and apply from the start:

First-year easement for payments: In 2026-27, the day-15 penalty trigger does not apply. Late payment penalties start from day 30 instead.

You can arrange a Time to Pay agreement with HMRC to stop penalty accrual if you cannot pay on time.

Reasonable excuses

Both late submission and late payment penalties can be appealed if you have a reasonable excuse - for example, bereavement, serious illness, or a natural disaster. HMRC considers each case individually.

If you are an accountant

The penalty-free period gives your clients time to adjust to the new quarterly rhythm. Use this period to:

• Get clients set up with compatible software
• Establish a quarterly submission routine
• Iron out any issues with digital record-keeping

Even though penalties are not applied in year one, it is good practice to submit on time from the start. Clients who build the habit early will be better prepared when full penalties apply.

If you are filing for yourself

The penalty-free period is your safety net while you get used to MTD. Use it wisely:

• Set up your digital records and compatible software as early as possible
• Try to submit your first quarterly update on time, even if the penalty-free period means there is no financial consequence for lateness
• Familiarise yourself with the deadlines (see Quarterly Update Deadlines)

Think of the first year as a practice run with the safety net in place.

FAQ

Does penalty-free mean I can skip quarterly updates?

No. You are still legally required to submit quarterly updates. The penalty-free period only means you will not receive penalty points for late submissions during the first year. Your quarterly updates must still be submitted before you can file your Final Declaration.

What about voluntary participants who signed up before April 2026?

Those who signed up voluntarily during the testing phase are subject to the penalty regime from the start, with a lower threshold of 2 points (instead of 4) while volunteering.

When does the penalty-free period end?

The penalty-free period covers the first 12 months of mandation (tax year 2026-27). From tax year 2027-28, the full penalty points system applies to all quarterly updates.

Are late payment penalties also waived in the first year?

Not entirely, but there is a partial easement. In 2026-27, the day-15 penalty trigger does not apply - late payment penalties start from day 30 instead of day 15.