Making Tax Digital for Income Tax uses a points-based system for late submissions, but special rules apply during 2026/27, the first mandatory year.
HMRC will not issue penalty points for late quarterly updates during 2026/27. You must still send all quarterly updates before you can submit your tax return.
Penalty points can still apply if your MTD tax return is submitted late. From 2027/28 onwards, late quarterly updates can also generate penalty points.
For people required to use MTD for Income Tax, the penalty threshold is 4 points. When you reach 4 points, HMRC charges a £200 penalty, followed by another £200 for each further missed submission deadline while you remain at the threshold.
The MTD Penalty System Explained
One point per missed submission deadline: From 2027/28, a late quarterly update normally results in one penalty point. Late MTD tax returns can also generate penalty points.
Penalty threshold: 4 points: Once you reach 4 points, HMRC charges a £200 penalty.
Further missed deadlines: Each additional missed submission deadline while you remain at the threshold results in another £200 penalty.
2026/27 exception: HMRC will not issue penalty points for late quarterly updates during 2026/27.
Removing points: If you remain below the threshold, individual points normally expire 24 months after the missed deadline. Once you reach the threshold, the points do not simply expire individually. You must meet HMRC’s compliance conditions, including submitting on time for 12 months and clearing outstanding submissions from the previous 24 months.
Why Do MTD Penalties Happen?
MTD penalties can arise when required submissions or payments are made late.
Late tax returns: Missing your MTD tax return deadline can result in a penalty point.
Late quarterly updates: HMRC will not issue penalty points for late quarterly updates during 2026/27. From 2027/28 onwards, a missed quarterly update deadline can result in a penalty point.
Late payment: Late payment penalties are separate from the points-based submission system. HMRC also charges late payment interest from the first day the payment is overdue.
Digital record-keeping and software: You must keep the required digital records and use compatible software. Spreadsheets can still be used where compatible bridging software connects them to MTD.
How Much Could MTD Penalties Cost You?
Late submission penalties
Once you reach the 4-point threshold, HMRC charges a £200 penalty. Every further missed submission deadline while you remain at the threshold can trigger another £200 penalty.
Late payment penalties
Late payment penalties operate separately. If 2026/27 is your first year under the new MTD penalty regime, HMRC gives you 30 days from the payment due date to either pay in full or contact HMRC to arrange a payment plan.
Late payment interest still runs from the first day the tax is overdue. After the first year under the new regime, the initial period before late payment penalties start reduces to 15 days.
If you cannot pay on time, contacting HMRC early about a payment plan can help prevent or pause penalties where an arrangement is agreed and followed.
How to Avoid MTD Penalties
The simplest way to reduce the risk of MTD penalties is to keep your records and submissions organised throughout the year.
Use compatible software: Make sure your software works with MTD for Income Tax and supports your income sources and submissions.
Keep digital records up to date: Record your self-employment and property income and expenses digitally throughout the year.
Monitor quarterly deadlines: Even though HMRC will not issue penalty points for late quarterly updates during 2026/27, the updates still need to be submitted before you can complete your tax return.
Do not miss your tax return deadline: Penalty points can still apply to late tax returns.
Deal with payment problems early: If you cannot pay your tax bill on time, contact HMRC as soon as possible to discuss a payment plan.
For the reporting dates, see our MTD for Income Tax deadlines guide.
Can You Appeal an MTD Penalty?
Yes. If HMRC issues you with a penalty point or penalty and you believe it is incorrect, you can appeal.
HMRC will send you a notice explaining the penalty and how to challenge it. You will normally have 30 days from the date the penalty was issued to contact HMRC or appeal. If you appeal late, you will need to explain why.
A reasonable excuse may be relevant depending on the circumstances and evidence available. Always follow the instructions included with the HMRC penalty notice.
Valid reasons include:
- Serious illness
- Bereavement
- Software or system failure
- HMRC error
Even if you successfully appeal, you’re still expected to comply in future. One successful appeal won’t protect you from penalties next time.
MTD Penalties During 2026/27
2026/27 is the first mandatory year of MTD for Income Tax for qualifying sole traders and landlords with qualifying income over £50,000.
HMRC will not issue penalty points for late quarterly updates during this first tax year. However, you must still send all required quarterly updates before submitting your MTD tax return.
From 2027/28 onwards, late quarterly updates can generate penalty points. The threshold for people required to use MTD for Income Tax is 4 points, after which the £200 penalty applies.
Get Help With Making Tax Digital
If you are required to use MTD for Income Tax, we can help you set up compatible software, maintain digital records, manage quarterly updates and stay on top of your tax return obligations.
Speak to our Making Tax Digital accountants if you need support getting your MTD records and reporting organised.
