MTD Penalty: Making Tax Digital Penalties and Points System Explained

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Making Tax Digital (MTD) is changing how self-employed people and landlords report their income to HMRC, and understanding the mtd penalty rules is important if you want to avoid unnecessary fines. Instead of relying entirely on an annual Self Assessment tax return, people who fall within the new requirements must use compatible software to keep digital records and send quarterly updates to HMRC.

The new rules also introduce a points-based system for certain late submissions, alongside penalties for paying tax late. However, the rules do not apply in exactly the same way to everyone, and special transitional arrangements apply during the first year of mandatory Making Tax Digital for Income Tax.

Whether you are a sole trader, a landlord with rental income or someone preparing for the new reporting requirements, this guide explains how the penalties work, when they apply and what you can do to reduce the risk of being fined.

Table of Contents

• What is an MTD penalty?
• mtd penalty system
• mtd points system
• When do MTD penalties start?
• How much is an MTD penalty?
• What happens if you miss a quarterly update?
• What happens if you pay your tax late?
• How can you avoid MTD penalties?
• Can you appeal an MTD penalty?
• What should you do if you cannot afford your tax bill?
• Conclusion

What Is an MTD Penalty?

An MTD penalty is a financial penalty that HMRC may charge when someone who is required to use Making Tax Digital fails to meet certain tax reporting or payment obligations.

Under Making Tax Digital for Income Tax, the new penalty rules cover two main areas:

• Late submissions: Missing deadlines for quarterly updates or the final tax return can result in penalty points and, once the applicable threshold is reached, a financial penalty.
• Late tax payments: Failing to pay tax by the relevant deadline can result in financial penalties and interest on the outstanding amount.

These are separate systems. You can receive a penalty for repeatedly submitting information late even if you pay all your tax on time. Equally, you can face late payment penalties even if you submit every update and tax return by the deadline.

For example, imagine a self-employed electrician who keeps accurate digital records throughout the year but repeatedly forgets to send the required updates to HMRC. The electrician could accumulate penalty points despite having enough money to pay the eventual tax bill.

By contrast, a landlord who submits everything on time but does not pay the tax due could face late payment penalties and interest.

Understanding the difference helps you identify which deadlines matter and what action you need to take to remain compliant.

For the latest official rules, read HMRC’s guidance on penalties for Making Tax Digital for Income Tax.

mtd penalty system

The mtd penalty system distinguishes between late submissions and late payments. This is important because the consequences of missing a reporting deadline are different from the consequences of failing to pay a tax bill.

1. Penalties for late submissions

Under the points-based system, a penalty point is normally awarded when you miss a relevant submission deadline.

For mandatory MTD for Income Tax, the general threshold is four points. Once you reach that threshold, HMRC charges a £200 financial penalty.

If you subsequently miss another relevant deadline while the penalty-point rules continue to apply, you can receive another £200 penalty for each additional missed submission deadline.

This approach is intended to give people some flexibility when they make an occasional mistake, rather than automatically imposing a financial penalty for every late submission.

However, reaching the threshold has financial consequences, so you should not assume that missing several deadlines is harmless.

There is also an important transitional arrangement: HMRC will not award penalty points for late quarterly updates during the 2026/27 tax year. This does not mean you can ignore the reporting requirements, because the updates must still be submitted before you can complete the final tax return using MTD software. Penalty points can still apply to a late tax return.

From the 2027/28 tax year, the normal points-based rules are scheduled to apply to late quarterly updates as well as late tax returns.

2. Penalties for late payments

Late payment penalties work differently. They are based on the tax you owe and how long it remains unpaid.

Unlike late submission penalties, late payment penalties are not based on accumulating points.

The rules for the 2026/27 tax year provide a more gradual approach to late payment penalties than the rules scheduled for 2027/28. The first-year arrangements also give eligible taxpayers a longer initial period before late payment penalties begin.

You should nevertheless pay your tax by the due date whenever possible, because interest can start accruing from the first day the payment is late.

3. Penalties and interest are separate

A late payment penalty is not the same as interest.

Interest compensates HMRC for tax that has not been paid when due, while a penalty is an additional charge for late payment.

This means that even if a penalty has not yet been applied, interest may already be accumulating on your outstanding tax.

You can find the current rates and detailed conditions in HMRC’s official MTD penalties guidance.

mtd points system

The mtd points system is designed to distinguish occasional mistakes from repeated failures to meet submission deadlines.

Under the general mandatory MTD for Income Tax rules, you receive one penalty point for each missed relevant deadline. You do not normally receive multiple points for the same deadline simply because you have several businesses or income sources.

How the points system works

The following example illustrates how the system works under the general four-point threshold.

Missed submission deadlines	Penalty points	Financial penalty
First missed deadline	1	No £200 points-based penalty
Second missed deadline	2	No £200 points-based penalty
Third missed deadline	3	No £200 points-based penalty
Fourth missed deadline	4	£200 penalty
Each further missed deadline	Further points may apply	A further £200 penalty for each subsequent relevant missed deadline

This table illustrates the general rules rather than the temporary treatment of quarterly updates during 2026/27.

Example: A self-employed plumber

Suppose a plumber is required to submit quarterly updates and a final tax return under MTD for Income Tax.

During a tax year when the normal quarterly-update penalty rules apply, the plumber misses three quarterly update deadlines and later submits the annual tax return late.

If all four missed deadlines attract points, the plumber reaches the four-point threshold and receives a £200 penalty.

If the plumber subsequently misses another relevant submission deadline, another £200 penalty may apply.

The position would be different if those three quarterly updates were late during 2026/27, because HMRC is not awarding penalty points for late quarterly updates during that particular tax year. A late tax return can still attract a penalty point.

Do MTD penalty points expire?

Penalty points do not necessarily remain on your record permanently.

If you are below the relevant points threshold, individual points are normally removed automatically after 24 months.

However, if you reach the threshold, the rules change. You generally need to meet two conditions to have all your points removed:

• Submit your quarterly updates and tax returns on time for 12 months.
• Submit any outstanding quarterly updates and tax returns for the previous 24 months.

This means that reaching the threshold can have consequences beyond the initial £200 penalty. You need to demonstrate a sustained period of compliance before all your points can be removed.

You can check the points recorded against your account through HMRC’s online services.

Are MTD points separate from VAT points?

Yes. If you are registered for VAT as well as using MTD for Income Tax, your Income Tax penalty points are separate from your VAT penalty points.

For example, a sole trader could have penalty points under the Income Tax system without having any under the VAT system.

However, this does not remove the need to meet the separate reporting obligations for each tax.

When Do MTD Penalties Start?

The timing depends on the tax year concerned and whether you are required to use MTD for Income Tax or are participating voluntarily.

MTD for Income Tax is being introduced from April 2026 for eligible sole traders and landlords, with the initial mandatory group determined by qualifying gross income from self-employment and property.

The new penalty rules apply from the tax year in which you join MTD for Income Tax. They do not automatically replace the rules for earlier tax years.

For example, someone who starts using MTD for Income Tax in April 2026 will generally continue to follow the existing Self Assessment penalty rules for their 2025/26 tax return, which is due by 31 January 2027.

The new rules apply to the relevant obligations from the tax year in which the person joins MTD.

What happens during 2026/27?

The first mandatory tax year has a special arrangement for quarterly updates.

The relevant quarterly update deadlines are:

Quarterly update	Deadline
First quarter	7 August 2026
Second quarter	7 November 2026
Third quarter	7 February 2027
Fourth quarter	7 May 2027

HMRC will not award penalty points for late quarterly updates during this tax year. Nevertheless, you must still keep the required digital records and send the updates before you can submit the final tax return.

Penalty points can still apply if you miss the final tax return deadline.

What changes from 2027/28?

From the 2027/28 tax year, the normal penalty-point rules are scheduled to apply to late quarterly updates as well as late tax returns.

The late payment penalty rates are also scheduled to increase compared with the first year of the new system.

Because transitional rules can change the outcome, it is sensible to check the relevant tax year’s guidance rather than assuming that the rules for one year will apply indefinitely.

For more information about the wider requirements, read our guide to whether Making Tax Digital is compulsory.

How Much Is an MTD Penalty?

The amount depends on whether you have missed a submission deadline or failed to pay your tax on time.

Late submission penalties

Under the general mandatory rules, the main financial penalty is £200 when you reach four penalty points.

You can then face another £200 penalty for each subsequent relevant missed submission deadline while the rules apply.

For example, a taxpayer who reaches four points receives a £200 penalty. If they later miss another relevant deadline, they may receive another £200 penalty, bringing the total to £400.

This is why it is important to keep track of both your points and your outstanding submissions.

Late payment penalties for 2026/27

For the 2026/27 tax year, the late payment rules generally work as follows:

• Up to 15 days late: No late payment penalty.
• 16 to 30 days late: A penalty of 3% of the tax owed at day 15, except where the first-year concession applies.
• 31 days or more late: A further 3% of the tax owed at day 30, together with an annual rate of 10% on the outstanding amount, charged daily from day 31 until the tax is paid, for up to two years.

The first-year concession means eligible taxpayers who are subject to the new penalties for the first time have 30 days after the payment due date to pay in full or contact HMRC to arrange a payment plan before late payment penalties begin.

This longer initial period is not available a second time to someone who has already received it while volunteering for MTD.

Late payment penalties for 2027/28

For the 2027/28 tax year, the scheduled rates are higher:

• Up to 15 days late: No late payment penalty.
• 16 to 30 days late: A penalty of 4% of the tax owed at day 15, subject to the applicable first-year concession.
• 31 days or more late: A further 4% of the tax owed at day 30, together with an annual rate of 10% on the outstanding amount, charged daily from day 31 until payment, for up to two years.

These are penalties on unpaid tax, not fixed charges for each missed payment deadline.

For example, if £2,000 remains unpaid for long enough to trigger the 2026/27 penalties, the initial 3% charge on £2,000 would be £60. A further 3% charge could apply to the amount owed at day 30, followed by daily interest-like penalty calculations under the 10% annual rate.

The actual amount will depend on the outstanding balance and when payments are made.

Remember: These payment penalties are separate from the £200 points-based submission penalties. You may face both if you repeatedly miss reporting deadlines and fail to pay the tax due.

What Happens If You Miss a Quarterly Update?

Missing a quarterly update does not mean that you should wait until the next quarter to correct the problem.

You should send the outstanding update as soon as possible and continue preparing the records required for subsequent periods.

During 2026/27, HMRC will not award penalty points for late quarterly updates. However, the updates remain part of the MTD process, and you need to submit them before completing the final tax return.

From 2027/28, a late quarterly update can normally result in a penalty point.

Example: A landlord who forgets an update

Imagine a landlord receives rental income from two properties and must report that income through MTD for Income Tax.

The landlord becomes busy arranging repairs and dealing with tenants, then realises that a quarterly update has not been sent by the deadline.

The best approach is to:

1. Check the accounting records for the relevant period.
2. Complete the outstanding update using compatible software.
3. Submit it as soon as possible.
4. Check the next reporting deadline.
5. Keep evidence of submission and any communication with HMRC.

If a penalty point has been recorded and you believe it should not have been, you can review the decision and consider appealing.

Can you still submit your tax return if updates are outstanding?

You generally need to submit the required quarterly updates before you can complete and submit your final MTD tax return.

Leaving an update until the last minute could therefore delay the entire process, even where the late update does not attract a penalty point.

Keeping records up to date throughout the year makes it easier to complete the final tax return accurately and on time.

What Happens If You Pay Your Tax Late?

Late payment penalties apply to unpaid tax, and interest can accrue from the first day after the payment due date.

Under MTD for Income Tax, the relevant rules apply to amounts such as the balancing payment due after the tax year and additional tax due following an amendment or assessment.

The new late payment penalties do not apply to payments on account under the rules described in HMRC’s MTD guidance.

If you cannot pay the full amount by the deadline, you should contact HMRC promptly to discuss your options rather than ignoring the bill.

Depending on your circumstances, HMRC may agree to a payment plan that allows you to pay in instalments.

During the first year of the new penalties, eligible taxpayers can generally avoid late payment penalties by paying in full or contacting HMRC to arrange a payment plan within 30 days of the payment due date. In later years, the initial period is generally 15 days.

If HMRC agrees to a payment plan, penalties can be paused from the date you contacted HMRC, provided the relevant conditions are met and you follow the agreed arrangement.

Interest may still be payable.

For guidance on the existing Self Assessment system, see our article explaining the HMRC late filing penalty. Remember that the existing rules continue to apply to tax years and returns that are not covered by the new MTD penalty system.

How Can You Avoid MTD Penalties?

The easiest way to avoid most MTD penalties is to establish a routine that keeps your digital records and reporting deadlines under control.

You do not need to wait until the end of the tax year to start organising your accounting.

1. Use compatible accounting software

Choose software that supports the MTD requirements relevant to your business or property income.

Check with the software provider that it supports the required digital records, quarterly updates and final tax return.

2. Keep your records up to date

Record business income and allowable expenses regularly rather than leaving everything until a reporting deadline approaches.

For landlords, this means keeping track of rental income, repairs, insurance, agent fees and other relevant expenses.

For sole traders, it includes sales, purchases, business mileage and other allowable costs.

3. Set reminders for reporting deadlines

Add the quarterly update dates and the final tax return deadline to your calendar.

You may also want reminders several days before each deadline so that you have time to resolve missing information.

4. Check your penalty points

If you are subject to the points-based system, review your HMRC account to see whether points have been recorded and when they may be removed.

If you have received a penalty, read the notice carefully and check the deadline for appealing.

5. Plan for your tax bill

Quarterly updates help you report information to HMRC, but they do not necessarily mean that you must pay your Income Tax every quarter.

You should still estimate how much tax you are likely to owe and put money aside throughout the year.

Having a separate savings account for tax can help prevent you from spending money that will be needed to settle your bill.

6. Get help when you need it

If you are unsure how to maintain digital records or submit quarterly updates, an accountant can help you understand the requirements and establish a workable process.

Getting support before a deadline is usually easier than trying to correct several missed submissions afterwards.

Can You Appeal an MTD Penalty?

Yes. You can appeal if you disagree with an MTD penalty point or financial penalty.

HMRC will normally send you a letter explaining the decision and how to appeal.

Before appealing, check the notice carefully and establish why the penalty was issued. You should also identify whether you have a reasonable explanation for missing the deadline or whether HMRC may have made an error.

For example, you may need to explain circumstances that prevented you from submitting information on time, or provide evidence that you actually submitted the update before the deadline.

Keep relevant evidence, including:

• Copies of HMRC notices.
• Software submission confirmations.
• Records of technical problems.
• Relevant correspondence with HMRC.
• Documents supporting your explanation for the delay.

A penalty is not automatically cancelled simply because you forgot the deadline or were busy with your business. HMRC will consider the circumstances and the applicable rules.

If you receive a penalty, follow the appeal instructions and time limits stated in the notice.

You should also correct any outstanding submissions as soon as possible, even if you intend to appeal.

What Should You Do If You Cannot Afford Your Tax Bill?

If you cannot afford to pay your tax bill, contact HMRC as soon as possible.

Do not assume that leaving the tax unpaid without contacting HMRC will protect you from penalties or interest.

HMRC may agree to a Time to Pay arrangement, which allows you to pay outstanding tax in instalments if you meet the relevant conditions.

Before contacting HMRC, work out how much you can realistically afford to pay and review your income, essential expenses and other financial commitments.

Be prepared to explain your circumstances and provide information about your finances if requested.

If a payment plan is agreed, make sure you follow it carefully. Failing to keep up with the agreed payments could lead to further action or penalties.

You should also distinguish between a problem with paying tax and a problem with submitting information. A payment arrangement does not automatically remove submission obligations, so you should continue to file the required updates and returns.

Conclusion: Understand the MTD Penalty Rules Before a Deadline Is Missed

The new MTD penalty rules are designed to encourage taxpayers to submit information on time and pay their tax promptly, while giving some flexibility to people who make occasional reporting mistakes.

The mtd penalty rules include a points-based system for late submissions and separate financial penalties for late tax payments. Under the general mandatory rules, reaching four submission penalty points triggers a £200 penalty, with further penalties possible for additional missed deadlines.

However, the transitional rules matter. During 2026/27, HMRC will not award penalty points for late quarterly updates, although the updates must still be submitted and late tax returns can still attract penalty points. The normal quarterly-update points rules are scheduled to apply from 2027/28.

You can reduce the risk of penalties by using compatible software, keeping your records up to date, setting reminders and contacting HMRC promptly if you cannot pay your tax bill.

If you are a sole trader or landlord preparing for Making Tax Digital, getting your accounting process ready now can help you avoid unnecessary stress and make meeting future deadlines much easier.

Need help preparing for Making Tax Digital? Better Account provides accounting and bookkeeping support for sole traders and small businesses. Visit Better Account to find out how professional support can help you manage your records and tax reporting obligations.

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