MTD Penalty Exemption First Year 2026: What Sole Traders Need to Know

Published 12 March 2026 · Updated 12 March 2026

        🟢 The good news: HMRC has confirmed that sole traders entering Making Tax Digital for Income Tax in April 2026 will be exempt from penalty points for late quarterly submissions during their first 12 months.
    

If you've been panicking about MTD starting on 6 April — take a breath. The government has acknowledged that moving 860,000+ self-employed people to quarterly digital reporting is a massive change, and they're building in a grace period.

But before you get too comfortable, there are important details. The exemption doesn't cover everything. Here's exactly what's protected and what isn't.

What the First-Year Penalty Exemption Covers

Under the new MTD penalty regime, late quarterly submissions normally earn you penalty points. Accumulate enough points and you face a £200 fine.

The first-year exemption means:

No penalty points will be applied for late quarterly updates during your first 12 months on MTD (April 2026 to March 2027)
Your first four quarterly submissions effectively have a free pass on timing
This applies to everyone entering MTD in Phase 1 (sole traders and landlords earning over £50,000)

What the Exemption Does NOT Cover

⚠️ Important: The exemption is specifically for late quarterly submission penalties. These things are NOT covered:

Late payment penalties — if you owe tax and don't pay on time, you'll still face interest and penalties as normal
Your 2025/26 self-assessment — this must still be filed by 31 January 2027 in the traditional way (before your MTD obligations start)
Your final declaration — the end-of-year summary that replaces the annual return under MTD still has its own deadline
Record-keeping requirements — you still need to keep digital records from 6 April 2026, even if the quarterly submission timing is more relaxed

The Quarterly Submission Schedule (From April 2026)

Even with the penalty exemption, you should aim to submit on time. Building the habit now means you're ready when the exemption ends:

Quarter	Period	Deadline
Q1	6 Apr – 5 Jul 2026	5 Aug 2026
Q2	6 Jul – 5 Oct 2026	5 Nov 2026
Q3	6 Oct – 5 Jan 2027	5 Feb 2027
Q4	6 Jan – 5 Apr 2027	5 May 2027

After your first year, the standard penalty points system kicks in. You get a point for each late submission, and at 4 points you receive a £200 penalty. Points expire after 24 months of compliance — so once you're in the rhythm, they drop off.

What You Still Need to Do Before 6 April

The penalty exemption means you have breathing room on timing — but you still need the infrastructure in place from day one:

Choose MTD-compatible software — you need HMRC-recognised software to submit quarterly updates. See our comparison of the best MTD software options.
Set up digital record-keeping — from 6 April, your income and expense records must be kept digitally. A spreadsheet that feeds into MTD software counts (this is called "bridging software").
Link your software to HMRC — you'll need to authorise your chosen software through your Government Gateway account.
Understand what a quarterly update includes — it's simpler than a full tax return. See our guide to quarterly updates.

📋 Get MTD-Ready in an Afternoon

Our MTD Readiness Toolkit includes the complete compliance checklist, quarterly submission templates, expense categorisation guide, and a record-keeping system that works with any MTD software.

Get the MTD Readiness Toolkit — £14 →

Do I Still Need an Accountant?

The penalty exemption doesn't change the underlying MTD requirements — it just gives you time to get comfortable with the system. Whether you need an accountant depends on your situation:

Simple sole trader (one income source, standard expenses): You can likely handle MTD yourself with good software and templates. Our guide to whether you need an accountant breaks this down.
Multiple income sources or complex expenses: An accountant is worth the cost, especially in year one. Expect to pay £300-600/year for basic MTD support.
Landlord + self-employment: You'll likely need separate quarterly updates for each income source. An accountant helps here.

What About Phase 2 (April 2027)?

If you earn between £30,000 and £50,000, you're in Phase 2 — starting April 2027. The government hasn't yet confirmed whether Phase 2 will also get a first-year penalty exemption, but it's widely expected.

The income threshold will eventually drop to £20,000 in April 2028, bringing millions more self-employed people into the system.

The Bottom Line

The first-year penalty exemption is genuinely good news. It means you can:

✅ Take your time getting familiar with the new system
✅ Make mistakes with quarterly submissions without financial consequences
✅ Focus on getting your record-keeping right rather than rushing to meet deadlines

But you still need to:

❌ Set up MTD software before 6 April
❌ Keep digital records from day one
❌ Pay any tax owed on time (no exemption for late payments)

The best approach: use the grace period to build good habits, not to procrastinate. By the time your second year starts, quarterly submissions should feel routine.

📊 Track Your Income & Expenses from Day One

Our Tax Tracker Spreadsheet is pre-built with HMRC expense categories, quarterly summary tabs, and tax estimate formulas. Works as a standalone tracker or alongside MTD software.

Get the Tax Tracker — £7 →