Making Tax Digital Penalties

It is worth being clear from the outset that MTD has two separate sets of penalties, and they work in completely different ways:

• Late submission penalties — a points-based system for filing a quarterly update or final declaration late, even if no tax is owed.
• Late payment penalties — charged as a percentage of tax that is paid late, plus interest.

You can be caught by one, the other, or both. Most of the anxiety around MTD is about the first — the frequent quarterly deadlines — so we start there.

Every time you miss a submission deadline you receive one penalty point. You do not pay anything for a single point — points are a running tally. A £200 penalty is charged only when your points reach the threshold for how often you submit:

• Quarterly submissions (MTD Income Tax): 4 points
• Monthly submissions: 5 points
• Annual submissions: 2 points

Because MTD Income Tax involves four quarterly updates plus a final declaration, the threshold that matters for most people is four points. Once you are at the threshold, every further late submission triggers another £200 penalty, not just the one that tipped you over.

Points do not last forever. If you stay below the threshold, each point expires automatically two years after the month in which it was given. Once you have reached the threshold, expiry stops — to clear the points back to zero you must do two things:

• meet all your submission deadlines for a set period of compliance (12 months for quarterly submissions); and
• make sure every submission due in the previous 24 months has actually been filed, even if it was late.

In other words, once you are at the threshold, only a sustained run of on-time filing wipes the slate clean.

There is important relief for anyone joining in the first wave. HMRC has confirmed that taxpayers required to use MTD for Income Tax from 6 April 2026 will not receive penalty points for late quarterly updates during the first 12 months. This is a genuine easing while people adjust — but it is narrow: it covers only the quarterly updates, not the final declaration, and it does not cover late payment of tax, which is charged as normal throughout. Treat it as breathing room, not a reason to file late.

Paying your tax late is charged separately from the points system. The current regime works in stages: a first penalty applies once tax is a set number of days overdue and increases the longer it stays unpaid, followed by a second penaltythat accrues daily until the balance is cleared. The government increased these late payment penalty rates from April 2025, so the percentages are higher than under the old system.

On top of the penalties, interest runs on any tax paid late, from the due date until you pay, at HMRC’s published rate. Because the exact percentages change, always confirm the current figures on GOV.UK before relying on a number — the sources below link straight to it.

Suppose a sole trader misses their August and November quarterly updates in a later year (once the soft landing has ended). That is two points — no charge yet. They miss February and May as well, reaching four points, which triggers a £200 penalty. If they then also file the following August update late, that is a further £200, because they are already at the threshold. To get back to zero they would need 12 months of fully on-time filing with nothing outstanding.

You can appeal a penalty point or a £200 penalty if you have a reasonable excuse — for example a serious illness, a bereavement, or a genuine software or service failure outside your control. You normally have 30 days from the date of the penalty to appeal, first to HMRC and then, if needed, to the tax tribunal. “I forgot” or “I found the software difficult” are unlikely to count, which is why getting set up early matters.

The whole system rewards one behaviour: keeping your records current so your software can submit on time. Practical steps:

• record income and expenses as you go, not in a year-end rush;
• set reminders a week before each of the four quarterly deadlines;
• reconcile little and often so there are no surprises;
• if you would rather not manage it yourself, use a quarterly update service that files for you.

Let us handle your quarterly updates →