“There are no penalties in the first year” is the line doing the rounds in every London landlord WhatsApp group and freelancer Slack channel right now. It’s not wrong exactly, but it’s dangerously incomplete. HMRC’s soft landing for Making Tax Digital covers far less than most people assumes, and the gap between what taxpayers think is protected and what’s protected is where penalty letters come from.
We work with sole traders, contractors, and landlords across UK who are moving into MTD for Income Tax this year, and the same misunderstandings come up repeatedly. So instead of another generic rundown of HMRC’s rulebook, here’s what we are telling clients: the five rules that matter, why the easement is narrower than it sounds, and where people commonly trip up.
For a broader look at whether MTD applies to you at all, see our earlier guide on MTD for Income Tax for UK sole traders and landlords in 2026.
Rule 1: “No Penalties” Only Ever Meant Quarterly Updates
Here’s the misunderstanding we hear most often: taxpayers believe the entire 2026/27 tax year is penalty-free. It isn’t. The easement is specific and narrow; it applies only to the four quarterly update submissions.
Miss a quarterly deadline in 2026/27 and nothing happens to your points record. Miss your Final Declaration, due 31 January 2028, and you are hit exactly as hard as anyone under the standard rules, because the Final Declaration sits outside the easement entirely.
Take Priya, a graphic designer in Hackney with combined freelance and rental income above the mandation threshold. She assumes, like many, that her whole first MTD year is a write-off zone where deadlines don’t really matter. She files her Q1 update three weeks late without concern, which is fine under the easement, but she carries that same relaxed attitude into January 2028 and files her Final Declaration ten days late too. That one submission earns her a penalty point immediately, because the soft landing never covered it.
The takeaway: build your calendar around every deadline as if it counts, because one of them absolutely does.
Rule 2: Submission and Payment Are Two Completely Different Games
This is the second trap. People conflate “no penalty for late filing” with “no penalty for late paying.” These are unrelated systems under MTD, and the payment side has no soft landing attached to it at all.
Late payment penalties scale with time, not with a flat fee:
- Nothing is charged in the first fifteen days after your payment due date
- Between day 16 and day 30, a penalty applies to whatever’s still outstanding, calculated at an annualised rate
- From day 31 onwards, a second penalty starts accruing daily on top of the first, and keeps running until you clear the balance
Interest is separated again, and it has not changed under MTD. It runs from the due date until the day HMRC actually receives your money, regardless of any penalty.
The practical effect: a balance left unpaid for a full quarter cost meaningfully more than the same balance cleared within the first fortnight, because the second penalty compounds daily rather than sitting as a one-time charge. If quarterly cash flow is going to be tight while you adjust to MTD reporting, our guide to MTD for Income Tax quarterly deadlines covers how to plan around that.
Rule 3: Your First Year Buys You Double the Normal Grace Period
Not every rule in the new system works against you. For your first year under MTD’s penalty regime, the window before a late payment penalty starts is doubled, from the standard 15 days to 30 days.
Practically, if your balancing payment falls due on 31 January, you have until early March to either pay in full or agree a Time to Pay arrangement with HMRC before the clock starts on penalties. From year two onward, that window halves back to 15 days, so this concession is genuinely a one-off cushion, not a permanent feature.
One detail worth knowing: contacting HMRC before the grace period ends can pause penalties entirely from that point. Contact them after it’s already expired, and penalties pause from whenever you reach out, rather than being wiped retroactively. Acting early is always a stronger position.
Rule 4: The Points System Punishes Patterns, Not Mistakes
MTD’s late submission penalties work nothing like the old self-assessment fine-per-slip model. Instead, every missed deadline adds a point to your record, similar to how driving penalty points accumulate. A single point on its own carries no financial cost.
The threshold where a £200 fixed penalty kicks in depends on how often you’re required to report:
| Filing frequency | Points threshold | Financial penalty |
| Quarterly (most MTD users) | 4 points | £200, then £200 per further late submission |
| Annual only | 2 points | £200, then £200 per further late submission |
A useful protection here: even if you’re required to submit more than one update for the same period (say, one for a sole trade and one for a rental property), a late filing across both only ever earns a single point for that deadline, not two.
Points aren’t permanent. They expire automatically after 24 months if you haven’t crossed your threshold. If you have crossed it, getting back to a clean record takes sustained good behaviour, generally 12 months of on-time quarterly filing, plus clearing anything still outstanding from the prior two years. Under the old system, a late return was a one-off inconvenience. Under MTD, a pattern of lateness has lasting consequences, which is exactly the behaviour change HMRC is designing for.
Rule 5: Volunteering Early Comes with Its Own Safety Net
Some taxpayers are choosing to join MTD voluntarily before their mandation date arrives, often to get comfortable with the software ahead of time. HMRC extends a separate protection to this group: no penalty points for late quarterly updates until the taxpayer’s actual mandation date is reached, regardless of when they chose to start.
That protection has a hard stop, though. Once mandation kicks in, whatever easement applied to voluntary status ends, and the standard rules for that tax year take over from that point forward. If early adoption is something you’re weighing up, it’s worth mapping your specific mandation date against your income thresholds first, since guessing wrong here can mean losing the protection sooner than expected.
What This Looks Like for a Typical London Taxpayer
Multiple income streams are the norm rather than the exception across the UK, a consultancy plus a buy-to-let, or freelance design work topped up by a second rental property. Combined gross income across those sources is what determines your mandation date, so uk taxpayers with mixed income often cross the threshold earlier than they expect and end up needing more than one quarterly update per period.
The clients who navigate this most smoothly aren’t the ones leaning on the easement. They’re the ones who use this first, lower-stakes year to build the reporting habits that MTD will demand permanently from year two onward. By the time penalties are genuinely living for quarterly filing, on-time submission is already routine rather than a new discipline to learn under pressure.
Talk to Brayan & Spencer Associates Before Your First MTD Deadline
Every taxpayer’s mandation date, income mix, and filing frequency is different, and the penalty rules shift depending on all three. Rather than guessing where you stand, our team can confirm your exact obligations, set up your digital record-keeping, and manage your quarterly submissions and Final Declaration for you.
Get in touch with our MTD team: visit www.bsassociate.co.uk or call 0207 183 5956 to book a consultation ahead of your 2026/27 deadlines.
Browse more guidance in our full Making Tax Digital blog category.
Frequently Asked Questions
No, only the four quarterly updates are covered by the soft landing. Your Final Declaration, due 31 January 2028, is not protected and carries a penalty point if filed late.
Yes. HMRC requires all four quarterly updates to be filed before you’re able to submit your Final Declaration, even though no points are issued for lateness during 2026/27.
No. Late payment penalties operate on a separate system and are not covered by the quarterly update of easement at all.
Thirty days from your payment due date, rather than the standard 15 days that apply from your second year onward, provided you pay in full or arrange a Time to Pay agreement within that window.
Four points for quarterly filers, or two points for annual filers, before a £200 fixed penalty applies. Each further late submission after that adds another £200.
Yes, they expire automatically after 24 months if you stay under your threshold. If you’ve exceeded it, clearing your record requires a sustained run of on-time filing, generally 12 months for quarterly filers.
