The latest Budget included several important changes that will affect how small businesses and taxpayers will manage tax reporting, digital record-keeping, and payment deadlines over the next few years. Here are the key changes to income tax payments, penalties, and Making Tax Digital (MTD) you should know about.
If you run a small business, it’s worth understanding these updates now so you can prepare early and avoid unnecessary penalties or cash-flow surprises later.
A Softer Start to MTD for Income Tax (But Only for 2026 Joiners)
The countdown to Making Tax Digital (MTD) has already begun for the first group of businesses and landlords with qualifying income above the relevant threshold. To support that transition, the government has announced a soft landing for late quarterly submissions.
What this means for your business
If you are required to join MTD from April 2026:
- You won’t receive penalty points for the late submission of your first four quarterly updates.
- This soft landing is intended to help you settle into the new digital reporting system without facing immediate penalties.
However, there are two important cautions:
- You still must submit quarterly updates before filing your annual return.
Even with the penalty easement, the system won’t allow you to submit your end-of-year tax return until your quarterly updates are complete. Our recommendation, file everything on time to get used to the new way of submitting your figures. We are here to help you.
- Your 2026/27 annual return is still subject to penalties.
The soft landing does not apply to your 2026/27 tax return due on 31 January 2028. Missing that deadline will generate a penalty point under the new system.
Additional Deferrals and New Exemptions from MTD for Income Tax
To manage the rollout, the government has granted further one-year deferrals, meaning some taxpayers will now join MTD in April 2027 instead of 2026.
The groups benefiting from the deferral include:
- Those receiving trust or estate income
- Individuals using averaging adjustments
- People eligible for qualifying care relief
- Non-UK resident foreign entertainers and sportspeople
These deferrals sit alongside the earlier decision to postpone MTD for taxpayers who need to complete the SA109 (residence and remittance) pages.
A Single Penalty System for All Self-Employed Taxpayers (From 2027)
One long-standing concern was that some taxpayers would be subject to the new points-based penalty system, while others would remain under the old rules. To fix this, the government has confirmed:
The new penalty regime will apply to all Self Assessment taxpayers from April 2027.
This means:
- No more two-tier system
- Greater consistency in how penalties are applied
- Simpler rules for small businesses and their advisers
However, be warned, the penalty amounts will increase from April 2027
Alongside this harmonisation, penalties for late payment of Income Tax and VAT will rise from April 2027. The exact figures have not yet been released.
If your business sometimes struggles with cash flow or you tend to pay close to deadlines, it’s worth tightening your processes now. Higher penalties could make delays more costly.
You can find tips on managing cash flow here.
Extra time to pay in the first year
All taxpayers will get an additional 15 days before late-payment penalties apply, giving you 30 days in total to pay any outstanding tax. This should ease the pressure a little as you adjust to the new rules.
More Income Tax Will Be Collected Through PAYE (Starting 2029)
One of the most significant structural changes is how tax will be collected from taxpayers with both PAYE income (for example, from employment or company directorships) and Self Assessment income (like rental income).
From April 2029, as a taxpayer with a combined income, you will be required to pay more of your annual Self Assessment liability in-year via PAYE.
Why this matters
If you take a salary from your company and earn additional taxable income such as dividends, rental income, or self-employment income, your tax code may begin collecting more tax automatically each month.
This could create a cash-flow squeeze, especially in the transition year, because:
- PAYE will start collecting current-year tax
- Payments on account may still be due for the previous year
The government expects a significant short-term increase in tax receipts as a result.
A consultation will open in 2026
The consultation will focus on:
- How the PAYE changes will be implemented
- How to make Self Assessment tax payments “more timely,” even for taxpayers without PAYE income
For small businesses, this may signal a gradual move toward more regular, real-time tax collection.
Final Thoughts
Taken together, these Budget changes point to a tax system that is:
- More digital
- More frequent in its reporting requirements
- More focused on timely payment
We’ve known this has been coming for a while, but the last budget confirmed the direction we are heading. Here are our top three steps for you to take right now.
- Start using digital record-keeping systems now
Waiting until 2026 could leave you scrambling. Early adoption allows you to fix issues before MTD becomes mandatory.
- Build earlier tax payments into your cash-flow planning
With higher penalties and more tax being collected through PAYE, strong cash-flow management will become more critical.
- Keep up to date with HMRC announcements
Consultations and final rules are still evolving, particularly regarding how PAYE will be used to collect tax from mixed-income taxpayers.
You can follow us on LinkedIn and Facebook for regular updates.
In the meantime, if you are a client and have any questions, please contact your normal manager. If you are not a client and are interested in becoming one, please email us at enquiries@myersclark.co.uk