Making Tax Digital penalties explained for landlords and how to avoid them
Landlords earning over £50,000 face new Making Tax Digital rules with penalties for late submissions and payments. HMRC offers a penalty point system and a soft landing period for the 2026/27 tax year.
Edinburgh-based accounting software company FreeAgent has highlighted the penalty framework for landlords and sole traders under Making Tax Digital (MTD) for Income Tax. Landlords with qualifying income above £50,000 in the 2024/25 tax year must comply with MTD requirements, including quarterly income and expense reporting to HMRC.
Despite an estimated 864,000 landlords and sole traders being affected, only around 410,000 have registered for MTD for Income Tax so far, according to HMRC data. This gap suggests many landlords may be at risk of penalties if they fail to meet reporting obligations.
How the penalty system works under Making Tax Digital
MTD for Income Tax employs a points-based penalty system for late quarterly submissions and separate fines and interest charges for late tax payments. The system is designed to discourage repeated non-compliance rather than penalise isolated errors.
For the 2026/27 tax year, HMRC has introduced a ‘soft landing’ period where no late filing penalties will be charged for quarterly updates. However, this grace period does not apply to the annual final declaration, which must be submitted on time to avoid penalties.
From the 2027/28 tax year onwards, each late or missed quarterly submission will result in a penalty point. Accumulating four points triggers a £200 fine, with further late submissions incurring additional £200 penalties each. Points remain on record until the taxpayer files all quarterly and annual returns on time for 12 months and clears any outstanding submissions for the previous 24 months.
Regarding payments, HMRC charges interest from the day tax is overdue and levies penalties at 30 days, six months, and 12 months after the payment due date. This means landlords must ensure timely payments to avoid escalating charges.
Context and implications for landlords
The introduction of MTD for Income Tax represents a significant change for landlords, especially those with larger portfolios or higher rental incomes. The requirement to submit quarterly updates rather than annual returns demands more frequent and accurate record-keeping.
Landlords who have not yet registered for MTD should prioritise doing so to avoid penalties. The transition period in 2026/27 offers some leniency on late quarterly filings but not on final annual returns or payments, so compliance remains critical.
Software compatibility is essential. Using MTD-compliant accounting software can simplify record-keeping and submissions, reducing the risk of errors and late filings. Landlords should also be aware that penalties apply per deadline, not per business, which is relevant for those with multiple rental properties or businesses.
Practical steps for landlords to avoid penalties
Maintaining up-to-date accounting records throughout the year is the most effective way to avoid penalties. Landlords should regularly reconcile income and expenses, ensuring data is ready for quarterly submissions.
Even if a landlord anticipates difficulty in paying the tax owed, submitting returns on time is crucial. HMRC offers payment plans, but only for those who keep their filings current. Seeking professional advice early can help landlords manage cash flow and tax obligations more effectively.
Landlords should also monitor upcoming changes, as MTD will extend to those earning over £30,000 in 2025/26, broadening the scope of affected taxpayers. Preparing early for this expansion will reduce the risk of penalties.
Remaining uncertainties and what landlords should watch
While the penalty point system and soft landing period are clear, some practical details remain to be seen, such as how HMRC will handle borderline cases or technical issues with software submissions. Landlords should stay informed through official HMRC updates and professional advice.
The impact of MTD on landlords with complex portfolios or multiple income streams may also evolve as the system matures. Monitoring how penalties are applied in practice will be important for landlords to adjust their compliance strategies accordingly.
What landlords should consider now
- Register for Making Tax Digital for Income Tax if you have not already done so.
- Invest in MTD-compatible accounting software to streamline quarterly submissions.
- Keep accounting records current throughout the year to avoid last-minute errors.
- Submit all returns on time, even if you cannot pay the full tax owed, to maintain eligibility for payment plans.
- Seek professional advice early if you anticipate difficulties with compliance or payments.
- Monitor HMRC guidance for updates on penalties and compliance requirements.
Supporting landlords with Making Tax Digital compliance
The Landlord Association (TLA) offers membership that includes access to compliance resources and practical information to help landlords manage Making Tax Digital obligations. Members can benefit from document support and guidance on maintaining accurate records and meeting submission deadlines.
TLA is developing ORBIT, a new property management and compliance platform currently in BETA testing. ORBIT aims to assist landlords and letting agents in organising rental properties, managing rental documents, and keeping track of key compliance actions, including tax record-keeping relevant to MTD. While still in development, ORBIT may provide useful tools to help landlords stay on top of their accounting and reporting duties.
Explore TLA membership and learn more about ORBIT BETA access to enhance your compliance management and reduce the risk of penalties under Making Tax Digital.
Looking ahead, landlords should prepare for the extension of MTD to those earning over £30,000 in 2025/26 and continue to prioritise accurate and timely submissions to avoid escalating fines and interest charges.
Sources: Landlord Today
TLA - The Landlord Association