MTD for Income Tax: Budget 2026 penalty easement and exemptions

Budget 2026 keeps Making Tax Digital (MTD) for Income Tax on track but softens the first year for the next wave of joiners. Sole traders and landlords who must start using MTD from 6 April 2027 will not get penalty points for late quarterly updates in 2027-28. Four groups of taxpayers are exempt until further notice. Taxpayers who started in April 2026 do not get a second year’s grace.

What was announced

The Treasury’s overview of tax legislation and the Budget document confirm two changes.

A penalty easement for the April 2027 cohort. The government will not apply late submission penalty points to quarterly updates for the 2027-28 tax year for taxpayers required to join MTD for Income Tax in April 2027. The Budget document describes this as no penalty points for late submission of their first four quarterly updates. Taxpayers must still send their quarterly updates before they can submit their tax return. The Treasury costs the easement at £15 million in 2027-28 and £40 million in 2028-29.

New exemptions until further notice. The following groups will not need to use MTD for Income Tax until further notice, with secondary legislation to follow before April 2027:

• people eligible for qualifying care relief, such as foster carers and shared lives carers
• non-UK resident foreign entertainers and sportspeople
• taxpayers who expect to become non-resident
• some customers for whom HMRC cannot yet provide a digital service, including a small number of insolvent customers who cannot currently sign up

ICAEW’s reading is that someone expecting to become non-resident will need to tell HMRC, and will then be exempt for that year and the following year until their non-resident status is established. HMRC guidance on how this works is still to come.

Who joins MTD and when

GOV.UK sets out the timetable based on qualifying income, which is gross income from self-employment and property:

The April 2027 cohort is therefore decided by 2025-26 Self Assessment returns, which are due by 31 January 2027. The easement covers anyone who becomes required to join from April 2027, including people who were previously exempt.

What the easement does not cover

ICAEW’s analysis highlights three limits that practices need to explain to clients:

• The April 2026 cohort loses its soft landing. Taxpayers who joined in April 2026 had no penalty points for late quarterly updates in 2026-27. That is not extended. For 2027-28, a late first quarterly update, due by 7 August 2027, will earn a penalty point.
• Year-end returns are not covered. A late tax return still attracts a late submission penalty point in both 2026-27 and 2027-28.
• Late payment is not covered. Payment deadlines and late payment penalties are unaffected.

What it means for accountants

Identify the April 2027 cohort now. Use 2025-26 figures to list every client whose qualifying income exceeds £30,000, including landlords with joint property where each owner’s share counts separately. Their 2025-26 returns should be prioritised so that sign-up, software and digital record keeping are in place well before April.

Do not treat the easement as a reason to wait. Quarterly updates still have to be submitted before the year-end return can be filed. A client who ignores quarterly updates in 2027-28 will face a backlog in early 2028, and lose the easement’s benefit when penalty points start in 2028-29.

Tighten processes for April 2026 clients. This group moves into the full points regime for 2027-28. Review which clients missed quarterly deadlines in 2026-27, because those habits now carry a cost.

Check the exemptions. Foster carers and shared lives carers who use qualifying care relief, and clients planning to leave the UK, may not need to join. Confirm eligibility rather than assuming it.

Expect more scrutiny of software. Budget 2026 also announced a package to improve HMRC’s oversight of software intermediaries, including a registration process and stronger standards for software providers that connect to HMRC. An intermediation roadmap covering tax advisers and software providers is due in spring 2027. See HMRC compliance and enforcement changes in Budget 2026.

Our guides to the MTD for Income Tax timeline, MTD for sole traders, MTD for landlords and MTD software requirements cover the underlying rules.

Frequently asked questions

Who gets the MTD penalty easement announced in Budget 2026?

Taxpayers required to join MTD for Income Tax from April 2027, mainly those with 2025-26 qualifying income over £30,000. They will not get penalty points for late quarterly updates for the 2027-28 tax year.

Does the easement extend to people who joined MTD in April 2026?

No. Their soft landing applied to 2026-27 only. From 2027-28 they receive penalty points for late quarterly updates, starting with the update due by 7 August 2027.

Do I still need to send quarterly updates in my first year?

Yes. The easement only removes penalty points for lateness. Quarterly updates must still be sent before the tax return can be submitted.

Who is exempt from MTD for Income Tax until further notice?

People eligible for qualifying care relief, non-UK resident foreign entertainers and sportspeople, taxpayers expecting to become non-resident, and some customers HMRC cannot yet serve digitally, such as certain insolvent customers.