MTD ITSA Quarterly Payments: Avoid Underpayment Penalties

What MTD ITSA Means for Your Tax Payments

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is now live for sole traders and freelancers with qualifying income above £50,000, with the threshold dropping to £30,000 from April 2027. Under this regime, you are required to submit quarterly updates to HMRC through compatible software, reporting your income and expenses every three months. While these quarterly submissions are not tax payment deadlines in themselves, they directly inform how HMRC calculates what you owe — and getting your estimates wrong can lead to underpayment penalties and interest charges.

How the Payment on Account System Works Alongside MTD

The UK does not use a formal quarterly payment system in the same way the US does, but self-employed individuals are still required to make Payments on Account (POA) twice a year — on 31 January and 31 July. These are advance payments toward your current year's tax bill, each set at 50% of your previous year's liability. The danger with MTD ITSA is that if your income is growing significantly, your Payments on Account may be based on a much lower prior-year figure, leaving a large balancing payment due in January.

Using Your Quarterly Updates to Forecast Accurately

Your quarterly MTD submissions — due within one month of each quarter ending in April, July, October, and January — give you a real-time picture of your taxable profit. Use each submission as a forecasting checkpoint. After each quarter, calculate your projected annual profit and estimate your full tax liability including:

• Income Tax at the relevant bands (20%, 40%, or 45%)
• Class 4 National Insurance Contributions (6% on profits between £12,570 and £50,270, and 2% above)
• Class 2 NICs, now collected through Self Assessment
• Any student loan repayments if applicable

If your projected liability is materially higher than your Payments on Account, you can make voluntary additional payments to HMRC at any time via your online tax account. This reduces interest accumulating on any balancing payment due in January.

How to Reduce Payments on Account If Income Drops

If your income has fallen compared to the prior year, you can apply to reduce your Payments on Account by filing form SA303 or through your HMRC online account. Be cautious here — if you reduce them too aggressively and your income recovers, HMRC will charge interest on the shortfall from the original due dates. Only reduce if you have solid evidence your income will be lower.

Practical Steps to Avoid Underpayment

• Set aside tax monthly: A common rule of thumb is to reserve 25–30% of every payment you receive into a separate savings account earmarked for tax.
• Reconcile after each quarterly submission: Use your MTD software to run a profit estimate and recalculate your likely tax bill at that point in the year.
• Check your July Payment on Account: Your next Payment on Account is due 31 July 2026. If your 2024–25 liability was higher than expected, ensure funds are ready.
• Use HMRC's Simple Assessment tools: Log into your Personal Tax Account to see your current Payment on Account figures and adjust if necessary.
• Work with a bookkeeper or accountant: MTD-compatible software such as QuickBooks, Xero, or FreeAgent can automate much of this, but a professional can help interpret the numbers.

Penalties for Underpayment and Late Payment

HMRC charges interest at the official rate (currently 7.25% per annum) on late or underpaid tax from the due date. From April 2025, a new points-based penalty system also applies to late MTD submissions, so failing to file quarterly updates on time compounds your exposure. Staying on top of both your filings and your payment estimates is the most effective way to protect yourself.

The Bottom Line

MTD ITSA creates more touchpoints with HMRC throughout the year, which is actually an opportunity. Use each quarterly deadline not just as a compliance exercise but as a financial health check. Accurate forecasting, timely voluntary payments, and proper use of the Payment on Account system will keep penalties at bay and prevent any nasty surprises come January.