MTD Penalties: How HMRC Penalty Points System Work?

Quick answer: Under Making Tax Digital for Income Tax, HMRC uses a points-based penalty system. Miss four quarterly deadlines and you'll receive a £200 fine, plus another £200 for each late submission after that. Late payments attract separate percentage-based penalties starting from day 16. The new rules apply from April 2026, with a grace period on quarterly updates in the first year.

Key Takeaways

HMRC`s MTD for ITSA Policy Paper in 2025 says, "Over two million sole traders and landlords are being pulled into Making Tax Digital for Income Tax. Most are focused on the software, the quarterly updates, and the deadlines. Far fewer are focused on what actually happens when they miss one. That's a mistake."

HMRC has introduced an entirely new penalty regime alongside MTD, one that's different from the current Self Assessment penalties you might be used to. HMRC penalty points system works differently, it escalates differently, and in some cases, making tax digital penalties considerably harsher. Understanding it now means you won't be caught off guard later.

This guide cuts through the noise. No waffle, no unnecessary jargon; just a clear breakdown of every penalty you could face under MTD for Income Tax, who it applies to, when it kicks in, and what you can do to avoid it.

Am I Affected by Making Tax Digital for Income Tax?

MTD for Income Tax applies to sole traders and landlords registered for Self Assessment. The rollout is phased by income level.

Your qualifying income is your gross income from self-employment and property, before expenses. PAYE earnings, dividends, and pension income don't count.

One important point that trips people up: HMRC will not automatically sign you up. The responsibility to register falls entirely on you. And if you don't sign up when you're supposed to? HMRC's sanction for failing to sign up is late submission penalty points — the same system described below.

From April 2027, confirmed at Autumn Budget 2025, the new penalty rules will apply to all Income Tax Self Assessment taxpayers — not just those mandated into MTD.

What Are the Penalties for Not Complying with Making Tax Digital?

There are three distinct categories of making tax digital penalties you need to know about.

1. HMRC Penalty Points System

This is the HMRC penalty points system in action. Think of it like penalty points on a driving licence; they accumulate, and once you cross a threshold, the fine kicks in.

Each time you miss a quarterly update deadline or annual return deadline, you receive one penalty point. For taxpayers submitting quarterly (which covers most MTD users), the threshold is four points. Hit four points, and HMRC issues a fixed £200 penalty. Every additional missed deadline after that triggers another £200 fine.

Important grace period for 2026/27: No penalty points will be issued for late quarterly updates during the first year of MTD (the 2026/27 tax year), as confirmed at Autumn Budget 2025 (Source: GOV.UK, March 2026). However, late submission of the annual tax return for 2026/27 — due 31 January 2028 — will still attract a penalty point. The grace period does not extend to the final declaration.

Points thresholds by submission frequency (Source: HMRC GOV.UK, March 2026):

One thing worth knowing: if you have multiple income sources, say, a sole trade and a rental property, and you file both quarterly updates late for the same quarter, you only receive one penalty point for that quarter, not one per submission.

To see more about the fiscal consequences of owning multiple businesses as a sole trader, watch our experts explaining how HMRC treats your tax affairs.

2. Late Payment Penalties

These are separate from the submission penalty points and are not points-based. The HMRC tax filing deadline penalty for late payment is proportionate to how long you leave it but it escalates quickly.

Late payment interest applies from day one. The penalties then layer on top of that:

First-year protection: In your first year under the new penalty regime, you have 30 days from the due date to either pay in full or contact HMRC to arrange a payment plan before any late payment penalty is applied. After your first year, that window drops to 15 days. This applies once — if you've already been on the system as a volunteer, the shorter 15-day window already applies.

Note: late payment penalties do not apply to payments on account — only to balancing payments and amounts due following amendments or assessments.

3. Record-Keeping Penalties

Failure to maintain digital records or a break in digital links within your accounting software can trigger a penalty of up to £3,000 per quarterly period (ICAEW, updated June 2026). This isn't automatically charged, but the power exists. For this reason alone, choosing right software for MTD for ITSA has never been more paramount. This guide: 7 Best Apps To Automate your MTD for ITSA is to help you pick the right software in this brand new maze. If HMRC identifies that you've been keeping paper records or manually re-entering data instead of using approved digital software, this is the mechanism they can use.

What Happens If You Don't Do MTD?

Short Answer: HMRC begins accumulating penalty points on your record once your mandation date passes. Hiring a professional accountancy service like Debitam can help you avoid this never-ending penalty accumulation and to navigate the complicated MTD rabbit warren.

The submission penalty system is entirely separate from the current Self Assessment penalty regime. You can't argue you weren't aware; HMRC should write to you when your qualifying income crosses a threshold, and the guidance is publicly available on GOV.UK. Crucially, even if you don't receive a letter, compliance remains your legal responsibility.

One scenario that catches people out: if you sign up to MTD voluntarily before being mandated, you're immediately subject to the new penalty regime. The trigger isn't your mandate date, it's when HMRC migrates your record to their new tax platform (the ETMP). Once that happens, the old Self Assessment penalties no longer apply to you  (ICAEW Tax Faculty, June 2026).

What Happens If I Don't Register for Making Tax Digital?

HMRC's specific sanction for not signing up to MTD when required is late submission penalty points, not failure-to-notify penalties. So the same points-based system applies.

That said, failing to notify HMRC that you need to be registered for Self Assessment in the first place is a separate matter and continues to carry its own penalties, independent of MTD.

If you register late but then get your submissions in order, the path back to a clean record is achievable, but it takes time. "Points below the threshold expire automatically after 24 months. If you've already hit the four-point threshold and received a £200 fine, you'll need to demonstrate 12 consecutive months of on-time submissions, plus clear all outstanding submissions from the previous 24 months, before your points are removed." HMRC, Penalties for Late Submission.

How to Get Your MTD Penalty Points Removed

This is where a lot of people get stuck. The rules are specific:

• Below the threshold: Points automatically expire 24 months after each missed deadline. No action needed.
• At or above the threshold: Points do not auto-expire. To clear them, you must:
  • Submit all quarterly updates and your tax return on time for 12 consecutive months
  • Submit any outstanding returns from the previous 24 months

You can check your current penalty point status through your HMRC online services account. If you disagree with a penalty point or fine, HMRC will send you a letter explaining how to appeal. You can appeal against both penalty points and financial penalties.

Can You Appeal an MTD Penalty?

Yes. If you receive a £200 penalty or a penalty point you believe is wrong, you have the right to appeal. A reasonable excuse, such as serious illness, a technical failure outside your control, or circumstances that genuinely made compliance impossible, can result in the penalty being cancelled.

HMRC also has discretion to cancel penalties in exceptional circumstances, such as insolvency.

The key rule with appeals: act quickly. HMRC sends a penalty decision letter when a penalty is charged, and your letter will contain instructions on how to proceed.

TL;DR: HMRC Penalty Point System at a Glance

• First year (2026/27): No penalty points for late quarterly updates but your annual return still counts.
• From 2027/28: Miss four quarterly deadlines and you'll receive a £200 fine, plus £200 for every late submission after that.
• Late payments: Interest from day one. Fines from day 16. A 10% annual rate kicks in from day 31.
• Not keeping digital records: Up to £3,000 per quarter.
• Not signing up: Same points-based system applies.
• From April 2027: The new penalty regime applies to ALL Self Assessment taxpayers, not just MTD users.

Let Debitam Help You Navigate MTD for Income Tax Penalties

The Making Tax Digital penalties system is more forgiving than it might first appear one missed deadline won't immediately cost you. But repeated missed deadlines will, and the late payment penalties in particular, escalate fast once you're past day 30.

The practical answer is straightforward: get the right software, set up your digital records now, and know your deadlines before they arrive.

That's where Debitam comes in. Rated 4.8/5 on Trustpilot based on over 6,000 reviews and trusted by over 26,000 UK businesses, Debitam has been helping sole traders and landlords navigate HMRC requirements long before MTD became mandatory.

Your dedicated Debitam accountant can handle your quarterly updates, keep you on the right side of the HMRC penalty points system, and make sure no deadline goes missed. No jargon, no hidden fees, no chasing.

Get in touch with Debitam today and take MTD off your plate for good.

Frequently Asked Questions About MTD Penalties

Are there any Making Tax Digital penalties in the first year (2026/27)?

No penalty points will be issued for late quarterly updates in the 2026/27 tax year. However, this grace period does not cover the annual tax return for 2026/27 if that's submitted late, you will receive a penalty point. Late payment penalties also apply in the first year, though you get an extended 30-day window to pay or arrange a payment plan before fines start.

What is the HMRC penalty points threshold for MTD Income Tax?

For quarterly filers, the threshold is four points. Reaching four points triggers a £200 fine. Each additional missed deadline while at the threshold costs another £200. Points for VAT and Income Tax are tracked separately, so it's possible to accumulate points in both simultaneously.

What happens if I miss an MTD quarterly update deadline?

From the 2027/28 tax year onwards, missing a quarterly update earns you one penalty point. If you reach four points, a £200 fine is issued. During the 2026/27 tax year, missing quarterly updates carries no penalty points under the current soft-landing rules — but you must still submit all quarterly updates before you can file your final declaration.

How are MTD late payment penalties calculated?

Late payment penalties are calculated as a percentage of the outstanding tax. No penalty applies in the first 15 days. From day 16, a 3% charge applies to the amount owed at day 15. If still unpaid at day 30, an additional 3% is charged on the amount outstanding at day 30. From day 31, a further 10% annual rate accrues daily. From 2027/28, the 3% rates increase to 4%. Interest runs from day one, separate from the penalties.

What happens if I don't register for Making Tax Digital when required?

HMRC's sanction for failing to sign up when mandated is a late submission penalty, the same system used for late quarterly updates. You are not subject to failure-to-notify penalties specifically for not signing up to MTD, but you will begin accumulating penalty points once your required start date has passed.

Can I appeal against MTD penalty points?

Yes. HMRC will issue a penalty decision letter explaining how to request a review. A successful appeal typically requires demonstrating a reasonable excuse — for example, serious illness, a technical failure, or another event that made compliance genuinely impossible. You can appeal through your HMRC online services account or directly through HMRC.

What is the penalty for not keeping digital records under MTD?

HMRC can impose a penalty of up to £3,000 per quarterly period for failure to maintain digital records or for a break in digital links within compatible software. This penalty is not automatically charged but is available to HMRC where non-compliance is identified (ICAEW, June 2026).