Making Tax Digital for Income Tax self assessment developments announced in Budget 2025

2 December 2025

Last updated: 2 December 2025

David Menzies
Director of Practice, ICAS

Deep within the published Budget 2025 documentation was some important announcements about the launch of Making Tax Digital for Income Tax Self Assessment (MTD ITSA) and which help to clarify key questions which have remained unanswered until now.

Penalty reform

The government has announced that taxpayers joining MTD ITSA in April 2026 won't receive penalty points for late submission of their first four quarterly updates. This is an important concession to help smooth the transition while taxpayers and agents get used to the quarterly filing regime and in some cases become accustomed to digital record keeping and new software.

HMRC have emphasised that they still expect taxpayers to comply with the requirement to keep digital records and submit quarterly updates during this period and they'll still need to submit their quarterly updates before they are able to submit their tax return. The penalty relaxation doesn't apply to the end of year tax return for 2026/27 (due 31 January 2028). This means taxpayers will still receive a penalty point for not submitting their 2026/27 tax return by the due date.

For their first year in the new penalty system, all taxpayers will have an additional 15 days, giving 30 days in total to pay any outstanding tax before a late payment penalty is issued.

The sting in the tail however is that the government has also announced that it will increase the penalties due for late payment of ITSA and VAT from 1 April 2027. This will be legislated for via secondary legislation.

Further deferral to join for small groups of taxpayers

The government has also announced a one-year deferral for several small groups of taxpayers. This affects:

Recipients of trust and estates income.
Individuals who use averaging adjustments.
Those eligible for qualifying care relief (foster carers, shared lives carers, kinship carers and staying put care arrangements).
Non-UK resident foreign entertainers or sportspeople.

These taxpayers will now not be required to join until April 2027 and should continue to meet their tax obligations as they would now.

Permanent exemptions

In addition to the announcement that taxpayers who have a Power of Attorney will be permanently exempt from joining MTD ITSA, taxpayers under a deputyship (as appointed by the Court of Protection) will also be permanently exempt from MTD.

Guidance updates

The government has confirmed that HMRC will update its guidance to clarify that childminders within Making Tax Digital (MTD) for income tax from April 2026 must follow MTD rules. For other childminders, HMRC will clarify how existing arrangements apply to those working from non-domestic premises. This follows concerns raised by the sector that existing guidance doesn't deal sufficiently with the way in which digital records must be kept and how expenses can be claimed under the new regime.

Guidance will shortly be updated to reflect both the penalty easement and small package of additional deferrals/exemptions.

It's worth mentioning that prior to the Budget, there were also some updates to pre-existing guidance.

Guidance on working out your qualifying income for MTD ITSA has been updated to clarify which sources of income do and don't count toward qualifying income. Information about ‘Ceased income sources’, ‘Amendments to your Self Assessment tax return’, ‘If you use averaging relief’, ‘One off transactions in UK land’ and ‘If you get income from UK Real Estate Investment Trusts (UK REITS) or a Property Authorised Investment Fund (PAIFs)’ has been added.

Information about ‘If your accounting period is longer or shorter than 12 months’, ‘If you're a carer that is eligible for qualifying care relief’ and ‘How your tax residence affects your qualifying income’ has also been updated.

Use Making Tax Digital for Income Tax guidance has also been updated with information about what digital records need to be kept where the trading income allowance is applied, as well as information about digital record requirements relating to the property allowance and Rent-a-Room Scheme.

Information about records that have come through software that connects to bank accounts has been added as well as what digital records are required for new self-employment or property income, and the taxpayer is already using MTD ITSA. The information about what can be done if a third party tells you about your income has been updated to confirm this also includes disguised investment management fees or income based carried interest.

Information about changing your software and changing your tax agent has been added to the section on ‘If your circumstances change’.