In the UK, many businesses must now comply with HMRC’s Making Tax Digital (MTD) regulations – or they must begin soon. While MTD offers exciting opportunities for quick and efficient tax filings, the penalty system for failing to follow the rules can feel daunting. Therefore, developing an understanding of MTD penalties is key to peace of mind as a business owner in 2025.
This guide will lay out all the information you need to get familiar with the MTD penalty system. How does the penalty system work? What challenges might your business face? What are some common mistakes, and how can you avoid them?
By the end of this article, we aim to equip you with practical advice and useful tips to stay compliant and avoid unnecessary fines. Read on to navigate your MTD compliance with confidence and success!
What Is Making Tax Digital (MTD)?
Making Tax Digital is a UK government initiative to transform the way businesses manage their tax compliance. With MTD, UK businesses, landlords and sole traders are shifting away from paper-based returns and using a more convenient, digital system.
By embracing HMRC-approved digital software such as AbraTax, it is hoped that taxation errors will be reduced and time can be saved both for businesses and the government. In turn, the freed-up resources can be applied to more productive pursuits and the general flow of business will improve.
Currently, all businesses registered for VAT must submit their VAT Returns via MTD using appropriate software (unless they have a special exemption). Beginning in April 2026, many sole traders and landlords will also be required by law to file Income Tax via the new system (Making Tax Digital for Income Tax, abbreviated MTD IT).
Some taxpayers may already have signed up for MTD for Income Tax voluntarily. However, a legal requirement to file MTD IT will be extended to many taxpayers in the coming months and years.
Once MTD is mandatory for you, failure to comply can lead to penalties. Therefore, it is essential to keep informed about what does or does not apply to you, and when.
Types of MTD Penalties and What They Mean for Businesses
With the arrival of MTD IT, HMRC is introducing what is believed to be a fairer system of penalties for failures to comply with tax obligations. The aim is to encourage more timely and accurate returns and payments. Below are some of the penalty types you might need to be aware of for your business:
Late submission
Correct compliance does not just involve paying taxes on time: businesses must also submit regular financial updates to HMRC. When it comes to Income Tax for small businesses (incl. landlords and sole traders), this traditionally involves annual Self Assessment reports.
Beginning in April 2026, taxpayers filing MTD IT will need to start submitting quarterly updates (in addition to the annual tax return) to avoid receiving penalties from HMRC.
Late payment penalties
All taxpayers who fail to pay taxes by the stipulated deadline(s) are at risk of penalty action against them. Not only does this create unnecessary hassle for businesses, using up precious time and resources, but it can also lead to significant financial punishment. This is because compliance with HMRC’s regulations is not a choice: it’s a legal requirement.
Record-keeping penalties
HMRC is has the power to charge up to £3,000 for failure to keep adequate tax-related records. This is something to bear in mind as MTD introduces the requirement to maintain digital records of your business’s financial data, including income and expenses.
HMRC guidelines recommend that such penalties are only to be applied in the most serious cases, and a simple written warning can be issued in the first instance. However, it is still in your best interests to adopt healthy digital record-keeping practices.
How MTD Penalties Work in 2025
Making Tax Digital penalties can vary depending on circumstances: there are distinct systems for late submissions vs. late payments. Furthermore, MTD penalties only apply to taxpayers eligible for MTD IT (Making Tax Digital for Income Tax) or MTD for VAT. Read below to learn how these penalty systems relate to MTD IT.
Late submission penalties in 2025
From April 2026, a new points-based penalty system will apply to all MTD IT taxpayers. You will receive a penalty point each time a submission deadline is missed. This includes missing your annual Income Tax report as well as any failed quarterly submissions.
Separate points totals will be kept for different taxes and submission types. For instance, MTD IT and VAT will have separate points totals, and quarterly MTD IT submission points will be separate from annual MTD IT submission points (where applicable).
Once a certain points threshold is reached, depending on the submission type (quarterly or annual), you will be charged a fine of £200. The typical penalty points thresholds for MTD IT will be:
- 4 points for quarterly submissions (‘quarterly updates’)
- 2 points for annual submissions (‘final declarations’)
Once you reach a threshold, a further £200 fine will be levied for each subsequent failure to submit on time – until you manage to reset your points.
In general, penalty points accrued will expire after 2 years. However, points will not expire when a penalty threshold has been reached. Instead, you must fulfil two conditions to reset your points to zero. The two conditions are:
- Achieve a specific period of compliance
- Submit any and all submissions which were due in the preceding 24 months
The period of compliance required depends on submission frequency:
- 12 months for quarterly submissions (‘quarterly updates’)
- 24 months for annual submissions (‘final declarations’)
Once you have met these two conditions – both a period of compliance and the successful submission of everything due in the last 24 months – your points will be reset.
Self Assessment (old system) late submission penalties
For those Self Assessment taxpayers who have not yet transitioned into MTD IT, the prior system will stand, with an immediate £100 fine for late submission and additional penalties starting at 3 months post-deadline.
Late payments penalties in 2025
MTD IT taxpayers can expect two charges for late payments (source). The first penalty will be charged at 30 days after the due date, and it is calculated as follows:
- No penalty – if tax is paid within 15 days of due date
- 3% charge – for any unpaid tax between 15 and 30 days after due date
- 6% charge – for any tax still unpaid by 30 days
The second charge will be levied as follows, starting from 31 days after the due date:
- 10% per annum – for any remaining unpaid tax, accrued daily and charged until the full amount is paid or until a TTP (‘time to pay’) agreement is settled
Self Assessment (old system) late payment penalties
For taxpayers who have not yet transitioned into MTD IT, there will remain the following late payment penalty stages for (legacy) Self Assessment:
- At 1 month, 5% of unpaid tax is charged
- At 6 months, 5% is charged again on any unpaid tax
- At 12 months, 5% is charged again on remaining unpaid tax
Common Reasons Businesses Face MTD Penalties
Despite HMRC making clear that compliance is essential, many businesses still fail to meet their tax obligations, thereby risking penalties. Here are some of the most common reasons:
Missing submission deadlines
Probably the most common reason leading to penalties is failing to meet submission deadlines. Although simple in theory, running a business can be overwhelming and involve unexpected events. Juggling your business with personal life commitments is a challenge for just about everyone. With all this going on, it’s easy to lose sight of deadlines.
Using non-compliant software
If you do not use appropriate software, issues might arise when it’s time to file your tax reports or send payments. For example, did you know that Microsoft Excel is incompatible with HMRC’s VAT Returns system?
It is essential to identify in advance what will or will not work for you – and have a plan ready. This is especially important as MTD IT introduces a requirement to find compatible third-party software for both the quarterly and annual tax reports.
Failure to plan ahead and use appropriate software could lead to last-minute delays and place stress on your business’s resources. This in turn could lead to penalties from HMRC for non-compliance due to late submission.
Filing incorrect or incomplete data
We are all human, and errors are easily made – especially when it comes to financial figures and calculations. However, submitting correct and complete financial and business-related data is a legal requirement for your tax compliance. If you fail to do so, even through error or lack of attention to detail, you could be subject to penalties from HMRC.
Failure to keep proper digital records
As part of MTD, it is a legal obligation for taxpayers to maintain digital records (and backups) for their business and Self Assessment purposes. This changeover encourages higher overall efficiency while allowing less scope for human error. Theoretically, HMRC could fine you up to £3,000 for non-compliance if you continue to use non-digital record-keeping.
For those not yet using MTD, it might be tempting to continue with paper-based accounting for now. However, this places you at more risk of losing vital business data, and more likely to submit erroneous figures. These issues could delay your timely submission or lead you to submitting incorrect information to HMRC, leading to penalties.
How to Avoid MTD Penalties in 2025
The good news is that avoiding MTD penalties is quite simple if you take some proactive steps! Here are some practical tips to avoid the issues discussed above, and to stay tax compliant:
Schedule in your tax deadlines
The most essential way to avoid MTD penalties is to ensure that you meet all annual, quarterly and/or monthly submission deadlines. Although filing Income Tax returns and completing other MTD tasks should, in theory, be relatively simple, unexpected issues can cause considerable setbacks.
Accordingly, it is best to plan well ahead and aim to comply several weeks (or months, if possible) before any approaching deadlines. This will allow you room for delays without concern for a missed deadline. Adding multiple reminders to your calendar throughout the year could go a long way in helping you stay compliant.
Use HMRC-approved software and bridging tools
Always make sure that any software you use to submit tax data is appropriate for the task or that you have taken steps to make it work. For instance, if you want to continue using Microsoft Excel for your business’s accounting, set up appropriate bridging software (such as AbraTax) in advance and try to file your VAT Returns early (when applicable).
When selecting MTD-compliant software, always check that it is officially HMRC recognised. Not only will this guarantee a smooth submission process, linked directly to HMRC’s system, but it will give you peace of mind that the software can be trusted with your sensitive data.
Slow down and regularly review digital records
Take the time you need to submit accurate data. Remember always to pay attention to the small details and double-check your figures (even if that takes more time than you would like). Ensuring that you input data correctly now could save you even more time later when deadlines approach. It could even help you to avoid a hefty financial penalty.
Ensure you (and your staff) are trained
If you haven’t already done so, start keeping digital records today. Try to make use of digital tools wherever appropriate – such as adding automated calculations into your spreadsheet, or using digital links instead of relying on manual data manipulation. This change in practice should increase your efficiency in the long run and reduce any potential human error.
Best Tools and Resources for Staying Compliant
To help you and your business stay compliant, numerous tools and resources are available for use:
1. HMRC-recognised MTD software
Tools like AbraTax are available to help you submit Self Assessment, MTD IT, and VAT Returns with ease.
2. Bridging software
For those using Excel spreadsheets, bridging software can connect you directly with HMRC’s MTD system.
3. Professional accounting support
Accountants and professional tax advisory services can be hired to complete your submissions and maintain your record-keeping (although at a cost!)
4. Useful tax blogs
Resources such as the AbraTax blog can provide top tips and advice about staying tax compliant, avoiding penalties, and getting the most out of taxation software.
How We Help Businesses Avoid MTD Penalties
At AbraTax, we provide cost-effective and efficient solutions for your tax compliance. Best of all, we are HMRC recognised, meaning that our platform integrates directly with HMRC’s system – so you can trust us to help you stay compliant!
We offer a range of tools and services, including free-of-charge MTD for Income Tax (MTD IT) and Self Assessment submissions, as well as low-cost bridging software for VAT Returns.
Ready to make your tax simple? Open an AbraTax account today to submit accurate, timely returns with ease!
Conclusion
MTD penalties can be a serious concern for taxpayers and businesses. However, with the right tools and knowledge, compliance is certainly achievable. By following the tips in this guide, we are confident that you can avoid common mistakes and pitfalls, ensuring your success in meeting HMRC’s requirements.
Take control of your MTD today – register with AbraTax for free!