When you volunteer for Making Tax Digital for Income Tax Self-Assessment (MTD ITSA), you immediately enter a new penalty regime that operates entirely differently from traditional Self-Assessment. This transition is permanent and irreversible, meaning once you agree to the new penalties during sign-up, you cannot return to the old system, even if you stop volunteering.
The MTD ITSA system uses a points-based approach for late submissions and a tiered structure for late payments, designed to target repeated non-compliance rather than one-off mistakes. This article explains exactly how the new penalty rules work for MTD income tax volunteers, what triggers financial penalties, and how to avoid them through straightforward compliance habits.
Key Highlights & Takeaways
New Penalty Regime: Volunteering for MTD ITSA places you under a permanent points-based submission penalty system and a tiered late payment regime. Once agreed, you cannot revert to old Self-Assessment penalties.
Points-Based Submission Penalties: Volunteers get one penalty point for the first late annual Final Declaration with no financial penalty. 2 points trigger a £200 charge, and subsequent late submissions add £200 each. Points expire after 24 months if the threshold isn’t reached.
Quarterly Updates: Filing quarterly updates is mandatory for record-keeping, but late penalties do not apply to volunteers during the testing phase.
Late Payment Penalties & Interest: Separate from submission penalties, they are percentage-based and escalate over time, with a slightly extended grace period for first-year volunteers. Interest accrues from day one of a missed payment.
What HMRC Requires When You Volunteer for MTD ITSA?
Volunteering for Making Tax Digital means full entry into the digital tax system. You agree to submit your tax information digitally through compatible software, and you accept that the new penalty rules now apply to your personal Self-Assessment tax return.
The Irreversible Switch
HMRC requires explicit consent when you sign up. You will be asked during the registration process whether you agree to the new penalties. Once you confirm, there is no mechanism to revert to the old Self-Assessment penalty regime. This applies even if your circumstances change and you decide to stop volunteering before MTD ITSA becomes mandatory for you.
What Falls Under MTD Penalties for Income Tax Volunters?
The new penalties apply exclusively to your personal Self-Assessment tax return. They do not extend to Self-Assessment obligations in other capacities, such as:
Partnership tax returns
Trust tax returns
Any other non-personal Income Tax submissions
This narrow scope is important. If you're a partner in a business or a trustee, those submissions remain under the old penalty rules until MTD ITSA is extended to those areas.
Your Filing Obligations as an MTD ITSA Volunteer
Once you sign up for MTD, you must:
Keep digital records of your income and expenses
Submit quarterly updates through MTD-compatible software (covering four periods throughout the tax year)
Submit an annual Final Declaration (which replaces the traditional SA100 tax return)
Quarterly updates must be filed to keep your digital record complete, but no penalties apply if you miss a quarterly deadline during the voluntary testing phase. Penalties apply only to the annual Final Declaration, which is due on 31 January following the end of the tax year.
For example, the 2024–25 tax year deadline is 31 January 2026.
How the Points-Based Late Submission Penalties Work
The most significant change from traditional Self-Assessment is the introduction of penalty points. Instead of an immediate £100 penalty for one late filing, MTD ITSA uses points to track repeat lateness.
How Points Are Awarded
For volunteers, you receive one penalty point each time you submit your annual Final Declaration late. Points accumulate until you reach a threshold, at which point financial penalties begin.
The Penalty Point Threshold
For volunteers, the threshold is 2 points. This means:
First late annual submission: You receive 1 penalty point. No financial penalty.
Second late annual submission: You receive a second penalty point, reaching the threshold. You are charged a £200 penalty.
Any subsequent late submission while at threshold: You receive another £200 penalty for each additional late filing.
This structure is intentionally forgiving of isolated mistakes. If you file late once due to illness, software issues, or oversight, you face no financial penalty, only a warning in the form of a penalty point.
How Penalty Points Expire
If you have not reached the penalty point threshold, HMRC automatically removes individual penalty points after 24 months. This creates a rolling window: stay compliant for two years, and your record resets.
Resetting Points After Reaching the Threshold
If you've reached the 2-point threshold and incurred a £200 penalty, automatic expiry no longer applies. To reset your points to zero, you must complete a 24-month period of compliance. This means submitting your next two annual Final Declarations on time.
During this compliance period, your quarterly updates are not considered; only your annual submissions matter while you are a volunteer.
What Happens If You Stop Volunteering for MTD ITSA
If you later become mandated to use MTD ITSA (because your income exceeds the threshold), the penalty rules change:
Your penalty point threshold increases from 2 points to 4 points
Late submission penalties begin to apply to quarterly updates, not just annual submissions
For those mandated from April 2026 onwards, HMRC will not apply penalty points for late quarterly updates during the first year (though late annual submission penalties still apply).
This means volunteers face a stricter regime initially (2-point threshold) but are shielded from quarterly penalties during testing. Find out if and when you need to use making tax digital.
Late Payment Penalties & Interest under MTD
Late payment penalties operate separately from submission penalties. They apply when you fail to pay your Income Tax Self-Assessment balance by the deadline, and they do not use a points-based system.
What Triggers Late Payment Penalties
Late payment penalties apply to:
Balancing payments due on 31 January following the end of the tax year
Amounts due following an amendment or HMRC assessment
They do not apply to payments on account (the advance payments made in January and July for the following year's tax).
The Penalty Structure
HMRC applies late payment penalties in stages based on how long the tax remains unpaid:
For the 2024–25 tax year: | For the 2025–26 tax year onwards: |
|---|---|
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Grace Period for First-Year Volunteers
In your first year under the new penalties, late payment penalties only begin if your payment is more than 30 days late. This gives you an additional 15-day buffer compared to the standard 15-day grace period.
After your first year, the normal 15-day grace period applies.
Interest on Late Payments
Separately from penalties, HMRC charges late payment interest from the first day your payment is overdue. Interest accrues daily at HMRC's published rate until you pay the outstanding balance in full.
Interest is not a penalty. It is a charge for the delayed payment of tax owed.
Time-to-Pay Arrangements
If you cannot pay your tax by the deadline, contact HMRC immediately to request a Time-to-Pay arrangement. This allows you to spread payments over an agreed period.
Crucially, setting up a Time-to-Pay arrangement can stop your late payment penalties from increasing, though interest continues to accrue. This makes early contact essential if you anticipate payment difficulties.
Practical MTD-Compliance Requirements for Volunteers
Volunteering for MTD ITSA requires you to adopt digital record-keeping and use HMRC-recognised software. Understanding these practical obligations is key to avoiding penalties.
Digital Record-Keeping for MTD volunteers
You must maintain digital records of your:
Business income and expenses (if self-employed)
Property income and expenses (if a landlord)
These records must be kept in a format that allows your software to extract and submit data to HMRC. Spreadsheets are acceptable if they integrate with MTD-compatible software, but paper records alone do not meet the requirements.
MTD-Compatible Software
HMRC maintains a list of software providers that support MTD ITSA submissions. You must use one of these products to:
Submit your quarterly updates
Submit your annual Final Declaration
Your software should automatically calculate your tax liability, but you remain responsible for ensuring the figures are accurate. Always review calculations before submission.
Quarterly Updates
You must submit quarterly updates covering:
Quarters | Standard Update period | Submission Deadline |
|---|---|---|
Quarter 1 | 6 April to 5 July | 7 August |
Quarter 2 | 6 July to 5 October | 7 November |
Quarter 3 | 6 October to 5 January | 7 February |
Quarter 4 | 6 January to 5 April | 7 May |
These updates summarise your income and expenses for each period. Also, the calendar period can be chosen for the quarterly updates, but the submission deadline remains same. And the updates are cumulative. While they must be filed, no late submission penalties apply to volunteers if you miss a quarterly deadline. However, you cannot submit your annual Final Declaration until all quarterly updates are complete.
The Annual Final Declaration
This replaces the traditional SA100 tax return. You must submit it by 31 January following the end of the tax year. This is where late submission penalties apply.
The Final Declaration includes:
A summary of your income and expenses from all quarterly updates
Any adjustments or additional information required
Your final tax calculation for the year
Other sources of income
You should verify all figures in your software before submitting. Once submitted, you cannot easily amend it without contacting HMRC or resubmitting through your software.
Old Self-Assessment vs the New MTD ITSA Penalty System
The shift from Self-Assessment to MTD ITSA penalties represents a fundamental change in how HMRC enforces compliance.
Key Differences
Aspect | Old Self-Assessment | New MTD ITSA (Volunteers) |
|---|---|---|
Late submission penalty | £100 immediately for one late filing | No penalty until 2nd late filing (2-point threshold) |
Penalty progression | £10/day after 3 months, then higher fixed penalties | £200 at threshold, then £200 per additional late filing |
Late payment penalties | Penalties of 5% of the tax unpaid are applied at 30 days, 6 months, and 12 months. | Percentage-based: 2–3% at 30 days, then daily interest at 4–10% annually |
Focus | Punishes single instances of non-compliance | Targets repeated non-compliance; forgives one-off mistakes |
Reversibility | N/A (default system) | Irreversible once you volunteer |
The Philosophy Behind MTD Penalties
Self-Assessment penalties were designed to penalise any lateness immediately. This approach treated all late filers equally, regardless of whether they were consistently late or had an isolated lapse.
MTD ITSA penalties distinguish between occasional errors and persistent non-compliance. The points system creates a buffer for one-off mistakes while escalating penalties for repeated failures. This is intended to be fairer but requires taxpayers to understand the accumulation mechanism.
Late payment penalties under MTD are proportionate to how long tax remains unpaid, rather than applying fixed amounts at arbitrary intervals. This incentivises earlier payment but can result in higher penalties if debts are ignored for extended periods, particularly from 2025–26 onwards.
How to Avoid Penalties under MTD
Avoiding MTD ITSA penalties does not require complex strategies. The system rewards consistent, timely compliance. Here are straightforward steps to ensure you stay penalty-free.
Use Reliable MTD-Compatible Software
Choose software that integrates with your existing bookkeeping processes, sends reminders for quarterly and annual deadlines, automatically calculates your tax liability and has strong customer support.
Free and paid options exist. Test software during a trial period to ensure it suits your needs before committing. Try Rentalbux for free.
Set Reminders for Annual Deadlines
The annual Final Declaration deadline, 31 January is the only submission date that carries penalties for volunteers. Create calendar reminders well in advance, begin preparing your Final Declaration early January and submit your Final Declaration to avoid last-minute issues by mid-January
Do not wait until the final days. HMRC's systems experience high traffic near deadlines, and software providers may face delays.
Keep Digital Records Consistently
Update your records regularly throughout the year rather than retrospectively. Consider updating records weekly or monthly, depending on your transaction volume. This approach reduces the risk of errors, makes quarterly updates and final declaration smoother.
Budget for January and July Payments
Late payment penalties are avoidable if you plan for tax payments in advance. Set aside funds throughout the year to cover:
Your balancing payment (due 31 January)
Your first payment on account (due 31 January)
Your second payment on account (due 31 July)
If your income fluctuates, maintain a separate account for tax savings to avoid cash flow issues.
Contact HMRC Early for Time-to-Pay
If you anticipate difficulty paying your tax on time, contact HMRC before the deadline. Early contact demonstrates good faith and increases the likelihood of an approved Time-to-Pay arrangement.
Time-to-Pay arrangements can prevent late payment penalties from escalating, making them a critical tool for managing temporary cash flow problems.
Submit Early to Avoid Bottlenecks
Submitting your Final Declaration weeks before the 31 January deadline protects you from software outages, HMRC system downtime, personal emergencies that prevent last-minute filing
Conclusion
Volunteering for MTD ITSA places you immediately under a new penalty regime that you cannot exit, even if you stop volunteering. The points-based submission penalties are designed to forgive one-off mistakes but escalate quickly if you repeatedly miss deadlines. Late payment penalties become significantly harsher from 2025–26, making timely payment essential.
The good news is that penalties are entirely avoidable. Use reliable software, maintain digital records consistently, set reminders for annual deadlines, and budget for payments throughout the year. If payment difficulties arise, contact HMRC early to arrange Time-to-Pay.