If you use Making Tax Digital (MTD), there are new penalties which apply. These are different to the penalties under Self Assessment.
When you sign up to use MTD, you are also agreeing to the new penalty regime described below.
Points-based penalty system
MTD uses a points-based penalty system. This means that points are issued for each late submission. A financial penalty only applies if you reach a certain number of points. This ensures that those who make a one-off mistake are not penalised and instead targets repeated failures.
How the points system works
- You’ll receive one penalty point each time you submit a quarterly update or a tax return late under MTD.
- If you reach four penalty points within a two-year period, you will receive a £200 financial penalty.
- If you receive penalty points but don’t reach four, HMRC will automatically remove your penalty points after two years.
If you receive four or more penalty points within two years, you’ll need to become compliant again before the points are removed. To do this, you need to send your quarterly updates and submit your tax return on time for 12 months and send any outstanding quarterly updates or outstanding tax returns for the past 24 months.
Voluntary users
If you’re using MTD voluntarily, the penalties work slightly differently during the voluntary period.
- You’ll only receive a penalty point for the late submission of the annual tax return.
- The penalty threshold is reduced to two points meaning a £200 penalty is issued once you have two points on your record.
It’s important to be aware that once you (or your agent) sign up for MTD, you are agreeing to this new penalty regime.
If you later become exempt in the 2026/27 tax year, you'll return to the current penalty regime under self assessment. If you become exempt after this, you'll remain under the new penalties but your penalty points threshold will reduce to two points.
From April 2027, the new regime will apply to everyone who submits a self assessment tax return.
Soft landing for penalties
HMRC is operating a soft landing period for MTD penalties.
For the first 12 months of MTD:
- No penalty points will be issued for late quarterly updates submission for the first year of MTD.
- Penalty points for the late submission of the tax return will still apply.
Example
Chris is required to use MTD from 6 April 2026.
He fails to submit all his quarterly updates on time during the first year. As this is within the soft landing period, he doesn’t receive any penalty points.
To submit your tax return through MTD, you must submit your last quarterly return. Chris is also late with his tax return for 2026/27. He receives a penalty point in February 2028.
Chris files all future quarterly updates and tax returns on time and receives no further penalty points. By February 2030, he only had one penalty point, and it’s automatically removed from his record.
Quarterly updates – some important points
It’s important to remember that you may need to submit more than one quarterly update. For example, you might have:
- A quarterly update for your property income.
- A quarterly update for your self-employment income.
If you file multiple quarterly updates late for the same quarter, you’ll receive a maximum of one penalty point per quarter, not per quarterly update.
Example
Eilidh owns properties in the UK and Spain. She also works as a self-employed management consultant.
She is required to use MTD from 6 April 2026. Each quarter, she submits three quarterly updates:
- One for her UK property income.
- One for her foreign property income.
- One for her self-employment income.
In the second quarter of 2027/28, Eilidh submits all her quarterly updates late. These were due to be submitted by 7 November 2027.
As this is outside the first 12-month soft landing period, Eilidh receives a penalty point for filing her quarter late. She now has one penalty point on her record.
She will not receive a financial penalty yet unless she reaches four penalty points.
If Eilidh submitted her tax return for 2027/28 late, she would receive one further penalty point.
Penalties for late payment
Under MTD, there are also penalties for late payment of tax.
These are issued based on how many days the payment is overdue.
- Days 1-15: No penalty.
- Days 16-30: A 3% penalty on the tax due at day 15.
- Day 31 onwards: Additional 3% penalty on the tax due at day 15, plus 3% of what is outstanding at day 30.
If you receive a second late payment penalty, an additional annual penalty of 10% per year applies to the outstanding balance charged from day 31.
The soft-landing period for penalties also applies to the payments. For the first 12 months, the first penalty is waived so that you have 30 days in total to pay before a penalty is issued.
However, late payment interest will apply from the first day that the payment is late.
