Money Matters

Making Tax Digital for Income Tax penalties: HMRC’s new systems explained

MTD for Income Tax brings a different penalty regime from HMRC. How does it work? And how do people get fined? Read our extensive guide to learn more.

3 March, 20269 min read Share

Making Tax Digital (MTD) for Income Tax is accompanied by two penalty regimes from HMRC that impact late submissions and payments.

If you use MTD for VAT then you might already know about them, because they were introduced for that tax in January 2023.

What’s more, from April 2027, the reformed penalty regime will apply to Self Assessment taxpayers, including those not yet mandated for MTD for Income Tax.

The good news is that the new systems are arguably fairer than the previous HMRC penalty systems. Their goal is better behaviour, rather than simply penalising mistakes.

In this article, we cover details on HMRC’s new penalties, how the systems work, and when they apply as the Making Tax Digital penalties regime rolls out:

When do the new MTD penalty systems apply?

With Making Tax Digital for Income Tax now underway—with the first phase starting from April 2026 aimed at sole traders and landlords with qualifying income over £50,000, over £30,000 in the second phase from April 2027, and over £20,000 in the third phase from April 2028—the new penalty systems apply.

From April 2027, the new penalty regime will also apply to Self Assessment taxpayers who are not already mandated for MTD (with the possible exclusion of less typical Self Assessment taxpayers like trustees, certain nonresident taxpayers, and so forth—if in doubt, consult a tax expert).

Therefore, while these systems were designed alongside Making Tax Digital, they are rolling out across all Self Assessment obligations—although it’s when attempting to comply with MTD that many are likely to encounter them first.

Notably, they have already applied to MTD for VAT since January 2023.

What is the new MTD late submission penalty system?

As with other penalties from HMRC, the new MTD late submission penalties system intends to encourage you to make timely submission of periodic tax returns and observe what HMRC refers to as “regular submission obligations”.

Making Tax Digital for Income Tax requires quarterly updates. This is an example of a regular obligation. In other words, this isn’t just about getting your tax return or payment in on time, as with previous penalty systems.

However, the late submission points system applies only to “regular submission obligations” (such as those quarterly updates and annual declarations). One-off or ad-hoc submissions continue to fall under existing penalty rules.

Nor does it apply to other problems associated with submissions to HMRC, such as getting your calculations wrong and/or paying the wrong amount. All of that also continues to be covered by existing penalty systems.

How does the new MTD late submission penalty system work?

Similar to speeding fines for motor vehicles, the new late submission system is based on a points system.

After a certain number of points are reached by a business or individual, a financial penalty of £200 is automatically applied.

In general terms, one point is applied each time a submission deadline is missed. HMRC will notify you at that time.

As you might expect, you can appeal both points and penalties—see below.

The points threshold for the penalty varies depending on how frequently the individual or business is required to make submissions to HMRC.

• Monthly: Five points are required for the financial penalty to be applied.
• Quarterly: Four points are required. This includes quarterly updates for MTD for Income Tax.
• Annual: Two points are required.

A key point to remember is that separate points tallies are recorded for each tax, and separate penalties could be subsequently applied. So you might have four points for MTD for Income Tax, and if you miss an MTD for VAT deadline, then you’ll still have just four points for MTD for Income Tax—plus one added to any MTD for VAT tally.

Points are intended to encourage compliance with submission dates, though, and so HMRC won’t apply two or more points for failures occurring at the same submission requirement.

There are notable and potentially commonplace exceptions, though. Here’s an example.

If you have three sole trader businesses using MTD for Income Tax and miss the deadline for quarterly reports for all three in one month, you’ll probably only get one point. This is the case because three quarterly returns have been missed. These are what HMRC refers to as the “same submission obligation”.

Should the same individual have to submit a quarterly update for one business and a tax return for another, both in the space of one month, then this would attract two points. This is because these are not the same kind of submissions.

Do MTD penalty points expire?

Points expire after two years, although this is counted from the month after the month in which the individual or business received the point.

In other words, this could effectively be two years and almost a whole month, if a submission deadline fell on the 1st, 2nd etc. of the month.

But points don’t expire in this period if the individual or business is at the penalty threshold (that is, a £200 fine has been applied).

For those at the threshold, a period of good behaviour must occur in which the individual or business meets all submission deadlines. They must also have made all submissions that had been due in the preceding 24 months—regardless of whether these were late or not.

The required periods of good behaviour are 24 months for an annual submission frequency, 12 months for a quarterly submission frequency, and six months for monthly submission frequency.

What are the new Making Tax Digital late payment penalties?

Alongside the new late submission penalty points system, HMRC is also introducing a late payments penalty system for MTD for Income Tax.

Like the points system, this is automatically applied. The rates below reflect the increases introduced from 1 April 2025:

• Up to 15 days after payment was due: no penalty.
• Day 15 after the payment was due: 3% of the outstanding amount.
• Day 30 after the payment was due: 3% of what was due on day 15, plus a further 3% is charged on the amount still outstanding at that date.
• Day 31 onwards: 10% per annum of the outstanding amount, applied daily.

Note that from April 2027, the government has announced day 15 and day 30 penalty rates will increase from 3% to 4%. The 10% per annum rate for the ongoing daily penalty will remain unchanged.

First-year easement: In the first year a taxpayer is subject to the new late payment penalty regime, the day 15 penalty will not apply. Taxpayers will have until day 30 before a late payment penalty is charged.

Furthermore, late payment interest is charged at the Bank of England base rate plus 4 percentage points (increased from the previous base rate plus 2.5%, effective from 6 April 2025). This is in addition to any penalties.

To avoid or mitigate the above penalties, if you miss the payment deadline you can either make a payment, or arrange a payment schedule with HMRC (known as a Time to Pay arrangement). Agreeing a Time to Pay arrangement stops further late payment penalties from accruing, though interest will continue to be charged on outstanding amounts.

What is the ‘soft landing’ period for MTD for Income Tax?

HMRC has confirmed that, for taxpayers mandated for MTD for Income Tax from April 2026, late submission of the first four quarterly updates does not attract penalty points, provided other conditions are met.

These cover quarterly updates due on:

• 7 August 2026—covering the period 6 April 2026 to 5 July 2026
• 7 November 2026—covering the period 6 July 2026 to 5 October 2026
• 7 February 2027—covering the period 6 October 2026 to 5 January 2027
• 7 May 2027—covering the period 6 January 2027 to 5 April 2027

The periods above will run from the 1st of each month if you’ve previously arranged with HMRC to use calendar months for your basis period, as some businesses have in order to match with their VAT stagger.

This penalty relief does not apply to your end-of-year MTD tax return for 2026/27, which is due by 31 January 2028. Penalties apply for late submission of this final, annual declaration.

To be clear, once you’ve started MTD for Income Tax, from year two onwards penalties apply for late submission of quarterly updates for the following dates and beyond:

• 7 August 2027—covering the period 6 April 2027 to 5 July 2027
• 7 November 2027—covering the period 6 July 2027 to 5 October 2027
• 7 February 2028—covering the period 6 October 2027 to 5 January 2028
• 7 May 2028—covering the period 6 January 2028 to 5 April 2028

Learn more: MTD For Income Tax penalty delay explained (soft landing period)

Can I appeal against the points or penalties for MTD?

Points and penalties are applied automatically but HMRC may, at its discretion, choose not to do so. This will be in line with “published guidance” that HMRC says it will follow, such as there being a reasonable excuse or special circumstances.

Once a point or penalty has been applied, HMRC can’t remove it unless you use the reviews and appeals process.

This can be used in any event if you wish to challenge points or penalties that have been applied.

The first stage of this will be an HMRC review process. Then you can move to the First Tier Tax Tribunal if you believe the outcome is unsatisfactory.

Appeals must include a reasonable excuse for missing a deadline.

Final thoughts: What businesses need to do

Other than being educated about what to expect, there’s not much businesses can do to prepare for the new penalty systems apart from ensuring they’re ready in plenty of time to meet the submissions deadlines.

To ensure this is the case, you should start preparing your business processes and systems for Making Tax Digital now, rather than later.

The one-year soft landing/grace period for quarterly submission penalties is designed to help sole traders and landlords adjust to quarterly reporting, provided the taxpayer is making a genuine attempt to comply. Don’t see it as extra time—use it to set up your systems and get comfortable with the process.

MTD penalties: FAQs