HMRC’s Making Tax Digital for Income Tax launched on 6 April 2026, introducing a new points-based penalty system for the self-employed and landlords. Under this new approach, you accumulate a penalty point for each late submission, with a £200 financial penalty only kicking in once you reach the threshold of four points.
So why the shift?
The old system drew widespread criticism for being disproportionate, issuing fines even for a single missed deadline. The new system moves away from that by focusing on repeated non-compliance rather than punishing one-off mistakes.
In this article, we break down exactly how the new penalty system works, who is at risk of racking up points, and what you can do to stay compliant.
Introducing The New MTD ITSA Penalty Regime
Under this new points-based penalty system, taxpayers who miss a submission deadline will receive a point instead of an immediate financial penalty. A financial penalty will only kick in once a certain threshold is reached.
This provides taxpayers with more time to correct their mistakes and penalise repeated offences rather than occasional mistakes.
Who is Likely to Be Affected?
This new measure will automatically apply to VAT-registered businesses with accounting periods starting on or after 1 January 2023 and to taxpayers who voluntarily join the MTD for ITSA service and their representative.
However, these changes will apply to ITSA customers such as self-employed individuals, landlords, and small business owners once they become mandated to Making Tax Digital.
Key Dates: When Do the New Rules Apply?
The first phase of the new point-based penalty system for Making Tax Digital (MTD) was introduced on 1 January 2023 for VAT submissions, followed by Income Tax Self Assessment (ITSA) volunteers, effective from 6 April 2024.
For mandated taxpayers, the new penalties apply from the tax year they join MTD. That means taxpayers with qualifying income above £50,000 come under the new regime from 6 April 2026, those above £30,000 from 6 April 2027, and those above £20,000 from 6 April 2028.
It is worth noting that the current Self Assessment penalties still apply to earlier tax years. For example, if you join MTD from 6 April 2026, the existing penalty rules still govern your 2025 to 2026 tax return, due 31 January 2027.
How do Late Submission Penalties Work?
The new late submission penalty system is points-based. Each time you miss a quarterly update deadline or your Final Declaration deadline, you receive one penalty point. No financial penalty applies until you reach the threshold.
The penalty point threshold for MTD users is 4 points. Once you reach that threshold, a £200 financial penalty is charged. Each subsequent missed deadline triggers another £200 penalty. No additional points are added once you are at the threshold.
You can only receive one penalty point per deadline. If you have more than one business and submit multiple quarterly updates late on the same date, it still counts as one point.
MTD for ITSA penalty points are entirely separate from any VAT penalty points you may have accumulated.
The Grace Period in the First Year
There are no penalty points for missing quarterly update deadlines in the 2026 to 2027 tax year. This grace period covers only the first year of mandation. You still need to keep digital records and submit quarterly updates during this period, as they are required before you can file your Final Declaration. Penalty points for late quarterly updates begin from the 2027 to 2028 tax year onwards.
Late payment penalties and late Final Declaration penalties do still apply in 2026 to 2027.
How Long Do Penalty Points Last?
If you are below the 4-point threshold, each point is automatically removed 24 months after the missed deadline. No action is needed on your part.
If you reach the threshold, points do not expire automatically. To clear all your points, you must meet two conditions: submit your quarterly updates and Final Declaration on time for 12 consecutive months, and also file any outstanding returns from the previous 24 months.
HMRC may also cancel penalty points in exceptional circumstances, such as insolvency.
How Long Does HMRC Have to Issue Penalty Points?
HMRC has 11 weeks from the date of the missed quarterly deadline to issue a penalty point, and up to 48 weeks for an annual submission. Once you reach the penalty threshold, HMRC has up to two years to charge a financial penalty.
How do Late Payment Penalties Work?
Late payment penalties under MTD are separate from submission penalties and are not points-based. They apply to each late payment individually and are designed to be proportionate to how long it takes you to pay.
Late payment penalties apply to balancing payments and to amounts due following an amendment or assessment. They do not apply to payments on account.
The First Year of Mandation (2026 to 2027)
In your first year under the new regime, HMRC gives you 30 days from the payment due date to either pay in full or contact HMRC to set up a payment plan. If you do neither within 30 days, penalties begin to apply as follows.
From the 2027 to 2028 Tax Year Onwards
After your first year, the 30-day grace window reduces to 15 days, and the penalty rates increase slightly.
Note that if you volunteered for MTD before being mandated, you will already be on the 15-day window and will not receive the 30-day first-year period again.
Late Payment Interest
Separate from penalties, HMRC also charges late payment interest from the first day your payment is overdue until the date it is paid in full. Interest applies regardless of whether a penalty is also charged.
How MTD Penalties Compare to Old Self-Assessment Penalties
The shift to a points-based system is a significant change in philosophy. Under the old Self Assessment rules, a single missed filing deadline triggered an immediate £100 fine, even if no tax was owed. Penalties then escalated quickly, with daily charges of £10 per day for up to 90 days after three months, and further percentage-based surcharges at six and twelve months.
For late payment, the old system charged 5% of the unpaid tax at 30, 6, and 12 months, in addition to daily interest.
The table below shows how the two systems compare for a typical self-employed taxpayer or landlord.
The new system is designed to give taxpayers room to recover from a one-off mistake without an immediate financial consequence. The financial pressure increases only where non-compliance becomes a pattern.
Practical Example: How Points and Penalties Accumulate
Emma is a landlord who joins MTD from 6 April 2026. After a difficult year with tenants, she falls behind on her submissions.
2026 to 2027 (grace year): Emma misses her Q1 and Q2 quarterly update deadlines. Because penalty points for quarterly updates do not apply in the first year of mandation, she receives no points and no financial penalty. She must still submit the updates before she can file her Final Declaration.
2027 to 2028 (points begin):
- Q1 missed (August 2027): 1 penalty point. No financial penalty.
- Q2 missed (November 2027): 2 penalty points. No financial penalty.
- Q3 filed on time (February 2028): No new point. Emma stays at 2 points.
- Q4 missed (May 2028): 3 penalty points. Still no financial penalty.
- Final Declaration missed (January 2029): 4 points reached. £200 financial penalty triggered. Q1 2028/29 missed: No additional point is added once at the threshold, but a further £200 penalty is charged for each missed submission.
Emma now has £400 in financial penalties and cannot reset her points until she meets two conditions: filing all outstanding returns from the previous 24 months, and then submitting on time for 12 consecutive months. Until both are met, every missed deadline incurs an additional £200.
Special Cases & HMRC Discretion
HMRC holds discretionary power not to issue a penalty if it considers it appropriate. Where there is a genuine, reasonable excuse for late submission or payment, HMRC may decide not to assess a penalty without the need for a formal appeal.
If your circumstances change and you become exempt from MTD in the 2026 to 2027 tax year, you revert to the standard Self Assessment penalty rules. If you become exempt from 2027 to 2028 onwards, you remain under the new penalty regime, but your penalty point threshold reduces from 4 points to 2 points. Any points you already hold are reduced proportionally so that your distance from the new threshold matches your distance from the old one.
How to Stay Compliant & Avoid Penalties?
To stay compliant and avoid penalties, make tax payments on or before the due date. If payment is not possible, contact HMRC as early as possible to arrange a Time to Pay plan. Penalties are paused from the date you make contact, as long as you keep to the agreed terms.
Keep an eye on your penalty points total. As a quarterly filer under MTD, you need to submit on time for 12 consecutive months and clear any outstanding returns from the previous 24 months to fully reset your points if you have reached the threshold.
If you are facing difficulties meeting your tax obligations, contact HMRC promptly. They may exercise discretion and choose not to assess a penalty where there are genuine mitigating circumstances.
Conclusion
The new points-based penalty system under MTD ITSA provides flexibility and aims to encourage consistent compliance rather than punish occasional mistakes. Points only get turned into penalties after repeated failures.
As the rollout for MTD progresses, this new penalty regime will apply to all taxpayers once they come within the MTD regime. Thus, it is essential for taxpayers to stay informed of potential deadlines and act quickly.
So, review your processes, keep accurate records and start preparing now! Remember, a stitch in time saves nine! For accountants, bookkeepers, and tax advisers, the best stitch is the use of engagement letter templates for their MTD ITSA services.
Frequently Asked Questions (FAQs)
You can apply for an exemption from MTD if you meet specific criteria, such as a disability or health condition that prevents digital working, inability to access the internet due to your location, or religious beliefs incompatible with digital record keeping. Cost alone is not accepted as grounds for exemption. If your qualifying income falls below the relevant threshold, you will not be mandated until you exceed it.
No. MTD for Income Tax currently applies only to sole traders and landlords with qualifying gross income above the relevant threshold. Employees whose tax is collected through PAYE, as well as partnerships, trustees, and non-resident companies, are either out of scope or subject to a different timeline. Partnerships will be brought into MTD at a future date yet to be confirmed.
You submit four quarterly updates per year, one for each quarter of the tax year, plus a Final Declaration by 31 January following the end of the tax year. If you have both self-employment and property income, you submit separate quarterly updates for each source.
If you are required to use MTD and do not sign up, you remain liable for the new penalties as though you were in the regime. You will not receive the quarterly update grace period that applies in the first year, and HMRC may also issue penalties for failure to comply with the digital record keeping requirements.
If you are required to file a Self Assessment tax return, there is no safe period to go without doing so. The 31 January deadline is absolute and penalties begin the day after. That said, if your taxes are fully collected through PAYE, you have no rental income, capital gains, or other untaxed income, and you do not receive any HMRC notice to file, you may not be required to submit a return at all. In that situation you are not “avoiding” filing; you simply have no obligation to file. If you are unsure whether you need to file, check using HMRC’s online tool or speak to a tax adviser.
