How MTD for Income Tax penalties work and how landlords can avoid them – BuyAssociation Group

Landlords affected by Making Tax Digital for Income Tax need to get used to a new system of quarterly reporting, with penalties for those who repeatedly miss submission or payment deadlines.

Accounting software company FreeAgent has issued guidance explaining how the new penalty system will work and what landlords need to do to avoid falling foul of it.

MTD for Income Tax came into force in April for landlords and sole traders with qualifying income of more than £50,000, based on their income in the 2024/25 tax year.

Around 864,000 sole traders and landlords are expected to fall within the first phase of the scheme. However, according to HMRC data cited by FreeAgent, only around 410,000 people have so far registered to report their income and expenses digitally.

The threshold will fall to £30,000 from April 2027, bringing another group of landlords and sole traders into the system.

The accounting software firm is therefore urging landlords affected by MTD, as well as those who will come within the system next year, to understand how the new penalty regime works and get into the habit of keeping their records up to date.

How the MTD penalty system works

It says there are two separate types of penalty landlords need to be aware of: those for filing information late and those for paying tax late.

Under MTD for Income Tax, landlords within the scheme are required to keep digital records and send quarterly updates to HMRC using compatible software, as well as completing their annual tax obligations.

HMRC, however, has introduced a one-year soft landing period for the first year of the new system.

It means landlords will not receive penalty points for submitting their quarterly updates late during the 2026/27 tax year. The concession, though, does not extend to annual submissions, so the normal filing deadline still needs to be met.

From 2027/28, late quarterly submissions will become subject to HMRC’s points-based penalty system.

Each missed deadline results in one penalty point. For landlords making quarterly submissions, the penalty threshold is four points. Once this is reached, a £200 penalty is charged.

Any subsequent late submission made while a landlord remains at the penalty threshold results in a further £200 penalty.

Landlords with several properties or more than one business will only receive one penalty point for each submission deadline, rather than separate points for each business.

How do you clear penalty points?

Where a landlord has fewer than four points, individual penalty points normally expire after 24 months.

Once the four-point threshold has been reached, however, simply paying the £200 penalty does not wipe the points from the record.

To reset them, landlords need to meet their filing obligations on time for a 12-month period and bring their previous submissions up to date.

That includes sending any outstanding quarterly updates and submitting any outstanding tax returns due within the previous 24 months.

The system is intended to penalise repeated late filing rather than an isolated missed deadline.

What happens if you pay your tax late?

Late payment is dealt with separately, and there is no equivalent soft landing period.

Interest starts to accrue from the first day a tax payment becomes overdue, with penalties potentially added depending on how long the amount remains unpaid.

FreeAgent Chief Accountant Emily Coltman FCA says: “MTD for Income Tax is a big change and can feel daunting, but there are ways you can make it easier for yourself. The easiest way to stay penalty-free is to keep your accounting records up to date throughout the year, rather than rushing to do your books and get it all submitted at the end of every quarter.”

She adds: “Even if you don’t think you’ll be able to pay all the tax you owe at the end of the year, you should still submit all your returns on time – HMRC can offer payment plans to make it more manageable, but they’ll only do that if your submissions are fully up to date.”

With the £30,000 threshold arriving next April, landlords who are not yet required to use MTD have time to prepare by moving their record-keeping onto compatible software and getting used to maintaining their accounts throughout the year.