Making Tax Digital: What Penalties Apply?

For many contractors, tax compliance has traditionally meant the annual completion of a Self Assessment tax return and paying any tax due.

However, HMRC has now introduced Making Tax Digital for Income Tax, bringing with it new reporting requirements and a different approach to penalties. While the new system is intended to be fairer than the traditional automatic fines, contractors who repeatedly miss deadlines could find themselves facing mounting penalties and increased HMRC scrutiny.

The good news is that understanding the rules and maintaining accurate digital records can make compliance much easier, and our MTD service combined with our CIS payment service will help you stay on track.

What is Making Tax Digital?

Under MTD for Income Tax, eligible self-employed individuals must:

• Keep digital records of income and expenses
• Use compatible software, like FreeAgent (we are a FreeAgent platinum partner and access to the platform is included in our MTD service)
• Submit quarterly updates to HMRC
• Complete a final year-end declaration to confirm their tax position

Remember, the rollout began in April 2026 for those with qualifying income above £50,000 and will expand to taxpayers with income above £30,000 from April 2027 and above £20,000 from April 2028. Even if you are not yet affected, it’s worth knowing the change is coming, and to consider how you will comply with the new rules because you’ll be expected to maintain digital records throughout the year and report regularly.

Understanding the late filing points system

MTD moves away from immediate fixed penalties for missed submissions. Instead, HMRC operates a points-based late submission system. Every time you miss a submission deadline, you receive a penalty point. Once you reach a specified threshold, a financial penalty is issued. For taxpayers making quarterly submissions, the threshold is four points. At that stage, HMRC will charge a £200 penalty.

After reaching the threshold each additional missed deadline triggers another £200 penalty and points remain on your record until compliance conditions are met. The system is designed to distinguish between occasional mistakes and persistent non-compliance. For those managing multiple income streams, keeping track of submission dates will become increasingly important.

Late payment penalties are separate

Submitting your updates and declarations on time does not remove your obligation to pay any tax owed by the relevant deadline. HMRC applies separate late payment penalties where tax remains unpaid. Under the current MTD penalty framework:

• No penalty applies if outstanding tax is paid within 15 days of the due date.
• If tax remains unpaid after day 15, an initial penalty may apply.
• Additional penalties can be charged where tax remains unpaid after 30 days.
• Interest continues to accrue on outstanding balances.
  This means you need to consider cash flow as well as compliance.Building tax liabilities into regular budgeting throughout the year can help avoid both penalties and interest charges.

Common triggers for HMRC investigations

MTD gives HMRC more frequent access to financial information, meaning anomalies may be identified much earlier than under the traditional annual reporting process. Some of the most common triggers for compliance checks include:

• Inconsistent reporting
• Repeated late submissions
• Unusual fluctuations in income or expenses
• Missing or incomplete records

How digital records protect you

While some contractors view MTD as an additional administrative burden, Digital record-keeping can offer significant protection. Maintaining accurate digital records throughout the year provides a clear audit trail – receipts, invoices, bank transactions and expense records can all be stored securely and retrieved quickly if questions arise.

Perhaps most importantly, regular record-keeping removes the stress of trying to reconstruct an entire year’s finances shortly before a filing deadline. It also means you can submit the correct information and receive a rebate without delay, if applicable.

What to do

We can help you comply with MTD by providing you with the FreeAgent software that enables you to maintain accurate digital records and make on-time, accurate submissions. Our hassle-free MTD solution aims is to make it as simple as possible to meet the new compliance obligations.