MTD Penalties: How the New Points-Based System Works
Last updated: February 2026
Making Tax Digital for Income Tax introduces a completely new penalty regime. The old Self Assessment system of automatic fixed fines is being replaced by a points-based approach for late submissions and a separate percentage-based system for late payments. Understanding both systems matters because the consequences of falling behind are very different from what you may be used to under Self Assessment.
How the points-based penalty system works
From April 2026, every time you submit a quarterly update late, you receive one penalty point. It does not matter whether the submission is one day late or three months late. The point is the same regardless.
The threshold for MTD Income Tax is four points. Once you reach four penalty points, HMRC issues a £200 fixed penalty. After that, every further late submission also triggers a £200 penalty, for as long as you remain at the threshold. There is no escalation beyond £200 per late submission, but the penalties accumulate quickly if you continue missing deadlines.
This is a significant shift from the old approach. Under Self Assessment, a single day late on your annual return triggered an immediate £100 penalty. The new system gives you more breathing room for occasional mistakes, but becomes persistent and repetitive once you hit the threshold.
How points expire
Penalty points do not stay on your record permanently. To reset your points total to zero, you must meet two conditions. First, you must submit all outstanding updates so that you are fully up to date. Second, you must then submit every update on time for a period of 24 consecutive months.
Only after both conditions are satisfied does HMRC wipe your points. This means that if you reach four points and trigger the £200 penalty, you face two full years of perfect compliance before the slate is clean. Miss a single deadline during that 24-month period and the clock resets.
The soft-landing period: 2026/27
HMRC has confirmed a soft-landing period for the first year of MTD ITSA. During the 2026/27 tax year, no penalty points will be issued for the first four quarterly updates. This applies to taxpayers entering MTD in Phase 1 (qualifying income above £50,000 from 6 April 2026).
The soft landing is more generous than it first appears. Since MTD ITSA requires four quarterly updates per year, the entire first year of quarterly submissions is effectively penalty-free in terms of points. HMRC has acknowledged that the transition to quarterly digital reporting is a major change and wants to give taxpayers time to adjust.
However, the soft landing has clear limits. It does not cover late Final Declarations. Your Final Declaration for 2026/27 is still due by 31 January 2028, and a late submission attracts penalties under the normal rules. It also does not protect you from late payment penalties, which operate under an entirely separate system described below.
Late payment penalties: a separate regime
Late payment penalties apply when you owe tax and do not pay by the due date. These work differently from submission points and run on a percentage basis rather than a points system.
The structure has three tiers:
- Days 1 to 15 late: no penalty is charged. This built-in grace period acknowledges that payments can occasionally be delayed by a day or two.
- Days 16 to 30 late: a penalty is calculated at an annualised rate of 4% on the amount outstanding at day 15. For a £5,000 tax bill still unpaid at day 15, this works out to roughly £8.22 for that 15-day window (4% ÷ 365 × 15 × £5,000).
- Day 31 onwards: a further penalty accrues at an annualised rate of 4% on the amount still outstanding, calculated daily until you pay in full. This runs alongside the first penalty, meaning the effective combined rate is 8% annualised from day 31.
For the first year of MTD ITSA (2026/27), HMRC extends the initial grace period from 15 days to 30 days. No late payment penalty applies until the payment is more than 30 days overdue. This is a separate concession from the soft landing on submission points.
Interest on unpaid tax
On top of late payment penalties, HMRC charges interest on any tax that remains unpaid after the due date. Interest runs from the original due date, not from the end of the grace period. The rate is set at the Bank of England base rate plus 2.5 percentage points and is published on GOV.UK. Interest is not a penalty and cannot be appealed. It is simply the cost of holding HMRC’s money.
How this differs from Self Assessment penalties
The old Self Assessment penalty regime worked on a fixed-fine escalation model. Miss the 31 January filing deadline by one day and you received a £100 penalty immediately. After three months, daily penalties of £10 per day began (up to 90 days, so £900 maximum). After six months, a further £300 or 5% of the tax due was charged, whichever was greater. After twelve months, yet another £300 or 5% followed.
The new MTD system is more forgiving for occasional lateness but harder to escape once problems build up. Under Self Assessment, you could file one day late, pay the £100 fine, and move on with no ongoing consequences. Under the points system, each late submission adds a point that takes 24 months of perfect behaviour to remove. The design encourages consistent compliance rather than punishing isolated mistakes.
Late payment penalties have also changed. Self Assessment charged 5% of unpaid tax at 30 days, a further 5% at six months, and another 5% at twelve months. The new system charges lower rates but starts accruing sooner and runs continuously, which can result in higher total penalties for very long delays.
Worked example: how points accumulate
Consider Fatima, a freelance graphic designer in Leeds with qualifying income of £62,000. She enters MTD in Phase 1 from April 2026.
Year 1 (2026/27) — soft-landing applies:
- Q1 (Apr–Jul): submitted on time on 4 August 2026. No point.
- Q2 (Jul–Oct): submitted two weeks late on 21 November 2026. Normally 1 point, but soft landing applies. Points total: 0.
- Q3 (Oct–Jan): submitted on time on 5 February 2027. No point.
- Q4 (Jan–Apr): submitted three days late on 10 May 2027. Soft landing applies. Points total: 0.
- Final Declaration: submitted on time by 31 January 2028.
Fatima ends Year 1 with zero penalty points despite two late quarterly submissions, thanks to the soft landing.
Year 2 (2027/28) — normal rules apply:
- Q1 (Apr–Jul): submitted on time. Points total: 0.
- Q2 (Jul–Oct): submitted 10 days late on 17 November 2027. 1 point. Points total: 1.
- Q3 (Oct–Jan): submitted on time. Points total: 1.
- Q4 (Jan–Apr): submitted one week late on 14 May 2028. 1 point. Points total: 2.
Fatima now has 2 points. She has not reached the 4-point threshold, so no financial penalty applies yet. But those 2 points will remain on her record until she achieves 24 consecutive months of on-time submissions. If she misses two more deadlines before clearing the existing points, she will hit 4 points and trigger the £200 penalty, with every subsequent late submission costing a further £200.
Now suppose Fatima also underpays her balancing payment for 2027/28 by £3,000. She pays 20 days late. Under the first-year extended grace period (30 days), no late payment penalty applies. But HMRC charges interest from the original due date at the prevailing rate. If she had paid 35 days late without the extended window, the 16-to-30-day penalty would have been approximately £4.93 (4% ÷ 365 × 15 × £3,000), with further daily charges from day 31.
What to do if you disagree with a penalty
You can appeal an MTD penalty if you have a reasonable excuse for the late submission or late payment. HMRC accepts excuses such as serious illness, bereavement of a close relative, fire or flood destroying records, or IT failures at HMRC’s end. Being too busy, not knowing about the deadline, or finding the software difficult are not accepted as reasonable excuses.
The appeals process works as follows. You must appeal within 30 days of the penalty notice. You can do this online through your HMRC account or by writing to HMRC. Your appeal should explain what happened, when the reasonable excuse started and ended, and confirm that you submitted as soon as the excuse no longer applied.
If HMRC rejects your appeal, you can ask for an independent review by a different HMRC officer. If you are still unsatisfied after the review, you can take the matter to the First-tier Tribunal, which is an independent body outside HMRC. Tribunal hearings for penalties of this size are usually decided on paper without a formal hearing.
Keeping your record clean
The most effective way to avoid MTD penalties is to build quarterly reporting into your routine. Set calendar reminders for at least two weeks before each submission deadline. If you use accounting software with automatic bank feeds, categorising transactions regularly (weekly or fortnightly) means each quarterly update takes minutes rather than a scramble through three months of receipts.
Working with an accountant who handles MTD submissions on your behalf removes the risk of missed deadlines entirely. Jack Ross Chartered Accountants manages quarterly MTD submissions for sole traders and landlords across the UK, and our Xero team can help ensure your submissions are always on time. If you are concerned about the transition or have already accumulated points, get in touch to discuss your situation.
