diff --git a/editor/project_manager/project_manager.cpp b/editor/project_manager/project_manager.cpp
index 7c8a17ce992..fd7014b09f3 100644
--- a/editor/project_manager/project_manager.cpp
+++ b/editor/project_manager/project_manager.cpp
@@ -1073,11 +1073,6 @@ void ProjectManager::_set_new_tag_name(const String p_name) {
 		return;
 	}
 
-	if (p_name.contains_char(' ')) {
-		tag_error->set_text(TTRC("Tag name can't contain spaces."));
-		return;
-	}
-
 	if (p_name[0] == '_' || p_name[p_name.length() - 1] == '_') {
 		tag_error->set_text(TTRC("Tag name can't begin or end with underscore."));
 		return;
@@ -1085,9 +1080,10 @@ void ProjectManager::_set_new_tag_name(const String p_name) {
 
 	bool was_underscore = false;
 	for (const char32_t &c : p_name.span()) {
-		if (c == '_') {
+		// Treat spaces as underscores, as we convert spaces to underscores automatically in the tag input field.
+		if (c == '_' || c == ' ') {
 			if (was_underscore) {
-				tag_error->set_text(TTRC("Tag name can't contain consecutive underscores."));
+				tag_error->set_text(TTRC("Tag name can't contain consecutive underscores or spaces."));
 				return;
 			}
 			was_underscore = true;
@@ -1103,11 +1099,6 @@ void ProjectManager::_set_new_tag_name(const String p_name) {
 		}
 	}
 
-	if (p_name.to_lower() != p_name) {
-		tag_error->set_text(TTRC("Tag name must be lowercase."));
-		return;
-	}
-
 	tag_error->set_text("");
 	create_tag_dialog->get_ok_button()->set_disabled(false);
 }
@@ -1117,8 +1108,12 @@ void ProjectManager::_create_new_tag() {
 		return;
 	}
 	create_tag_dialog->hide(); // When using text_submitted, need to hide manually.
-	add_new_tag(new_tag_name->get_text());
-	_add_project_tag(new_tag_name->get_text());
+
+	// Enforce a valid tag name (no spaces, lowercase only) automatically.
+	// The project manager displays underscores as spaces, and capitalization is performed automatically.
+	const String new_tag = new_tag_name->get_text().strip_edges().to_lower().replace_char(' ', '_');
+	add_new_tag(new_tag);
+	_add_project_tag(new_tag);
 }
 
 void ProjectManager::add_new_tag(const String &p_tag) {
@@ -1880,6 +1875,7 @@ ProjectManager::ProjectManager() {
 		new_tag_name = memnew(LineEdit);
 		tag_vb->add_child(new_tag_name);
 		new_tag_name->set_accessibility_name(TTRC("New Tag Name"));
+		new_tag_name->set_placeholder(TTRC("example_tag (will display as Example Tag)"));
 		new_tag_name->connect(SceneStringName(text_changed), callable_mp(this, &ProjectManager::_set_new_tag_name));
 		new_tag_name->connect(SceneStringName(text_submitted), callable_mp(this, &ProjectManager::_create_new_tag).unbind(1));
 		create_tag_dialog->connect("about_to_popup", callable_mp(new_tag_name, &LineEdit::clear));