The introduction of Making Tax Digital (MTD) for Income Tax in April 2026 brings a completely new penalty regime. HMRC is moving away from the old automatic £100 fine for a late Self Assessment return to a points-based system designed to penalise persistent offenders while being more lenient on those who make occasional mistakes.
However, the new late payment penalties are significantly harsher. For UK sole traders and landlords, understanding these "rules of engagement" is vital to avoiding unnecessary costs.
HMRC’s new system for late submissions works similarly to driving licence points. Every time you miss a quarterly update or a Final Declaration deadline, you will receive one penalty point.
In a significant move to support businesses, the UK government announced that late submission penalties will not apply to quarterly updates during the first year (2026-27) for those mandated to join. You will still receive points, but the financial fines for the quarterly updates themselves are deferred, giving you time to master the software without immediate financial risk.
While submission penalties have a soft landing, late payment penalties do not. Under the new regime starting in 2026, the charges for late payment are more aggressive:
These charges are on top of the usual HMRC interest rates, making it more expensive than ever to delay your tax payments.
Beyond just submitting on time, you must meet specific record-keeping standards. A common mistake is thinking you can keep paper receipts and just type the totals into your software at the end of the quarter.
HMRC requires a "Digital Link". This means that from the moment you record an expense—for example, by snapping a photo of a receipt in the Kletta app—the data must flow through to HMRC without any manual intervention or "copy-pasting." Failure to maintain digital links can result in a penalty of up to £3,000.
Compliance needs often vary by the nature of the local economy.
In fast-moving areas like The City or Canary Wharf, sole traders often have hundreds of small transactions monthly. The risk of "point accumulation" is higher here if record-keeping isn't automated. Using Kletta’s automated bank feed ensures that no transaction is missed, keeping your points at zero.
For tradespeople in Birmingham and Coventry, record-keeping for materials and fuel is often the weak link. HMRC frequently audits high-expense trades. Having a digital trail of every purchase made at local suppliers ensures you meet the strict MTD requirements for "contemporaneous" record-keeping.
Landlords in Edinburgh and Glasgow must ensure their software correctly applies Scottish tax bands to their digital declarations. While the MTD submission process is a UK-wide HMRC mandate, the underlying tax calculation must be accurate for the Scottish jurisdiction to avoid "Inaccuracy Penalties" on the Final Declaration.
Under Making Tax Digital for Income Tax Self Assessment (MTD for ITSA), HMRC uses a penalty points system for late submissions instead of the old automatic £100 fine. You receive 1 point for each missed submission deadline (e.g., quarterly update or final declaration). A £200 fixed penalty is triggered only when you reach the points threshold for your submission frequency (4 points for quarterly reporting). Each further missed deadline while at the threshold also results in a £200 penalty.
📌 Official MTD penalties guidance: https://www.gov.uk/guidance/penalties-for-income-tax-self-assessment-volunteers (scroll for late submission section).
For taxpayers required to join MTD for ITSA from 6 April 2026, HMRC has confirmed a “soft landing” for quarterly update penalties during the 2026–27 tax year. This means penalty points for late quarterly submissions will not be applied in that first transition year, but they will apply to late final declarations and future years after the soft landing period.
🧾 HMRC guidance on soft landing and MTD sign-up: https://www.gov.uk/guidance/sign-up-your-business-for-making-tax-digital-for-income-tax.
HMRC requires that digital records flow electronically through compatible software to HMRC without manual copy-paste steps. This is known as maintaining digital links. Penalties can apply if digital links are broken. While the official guidance on this specific requirement is part of the broader MTD digital recordkeeping rules, HMRC sets these standards under MTD compliance. These rules are outlined in the Making Tax Digital for Income Tax: guidance on what records to keep section of the UK government site. See HMRC’s general MTD requirements here:
➡️ https://www.gov.uk/guidance/sign-up-your-business-for-making-tax-digital-for-income-tax (includes reference to software and records requirements).