MTD Penalties: How the Points System Works and How to Avoid Fines

How penalties work under MTD

Under Self Assessment, miss the deadline by one day and you get a £100 fine. No warnings, no build-up. Just a flat penalty.

MTD changes this. The new system uses penalty points, a bit like points on a driving licence. You build them up over time, and it's only when you hit the threshold that the financial penalties start.

On balance, it's a fairer system. One late submission won't cost you anything. But a pattern of late filing will.

How points work

Every time you miss a quarterly submission deadline, you pick up one penalty point.

The threshold is four points. Once you hit four, you get fined £200. And every late submission after that also triggers £200 until you sort yourself out.

In practice:

Your points cap at the threshold (4). They don't keep climbing to 5, 6, 7 etc. But each additional late submission at the cap level costs you £200.

So the message from HMRC is basically: we'll forgive a few mistakes, but if you're consistently filing late, we're going to fine you until you stop.

First year: no points on quarterly updates

This is the bit that gives people breathing room.

HMRC has said that penalty points will not be applied to late quarterly updates during your first year of mandation.

For the first wave (income over £50,000, started April 2026), that means the 2026/27 tax year is a free pass on quarterly penalties. You still have to file. And you should aim to file on time. But if you're a few days late with a quarterly update in year one, you won't pick up points.

This does NOT cover:

• The final declaration (due 31 January 2028). That deadline is enforced from day one.
• Late payment of tax. Separate penalty. See below.
• Deliberately wrong returns. Obviously.

Use the first year to get your process dialled in. Don't use it as an excuse to ignore the deadlines entirely.

Clearing your points

Points don't stick to your record permanently. You can reset them to zero.

The rule: submit all your quarterly updates and your final declaration on time for a period of 24 months. Do that and your points drop back to zero.

So if you've racked up three points, you've got a two-year window to clean your record. Miss even one deadline in that window and the clock resets.

It's worth noting that the 24-month period starts from the date of your most recent late submission, not from when you decide to get your act together. So the sooner you start filing on time, the sooner your points expire.

Late payment penalties

Filing late and paying late are two separate things under MTD, with two separate penalty regimes.

Miss a tax payment deadline and here's what happens:

These penalties apply to the usual payment dates: 31 January and 31 July. The quarterly updates don't have payment obligations attached. You're just reporting figures. The money side happens at year end.

Interest on unpaid tax

On top of late payment penalties, HMRC charges interest on any overdue tax. The rate is Bank of England base rate plus 2.5 percentage points. In 2026 that works out to roughly 7%.

On a £5,000 tax bill that's 30 days overdue, you're looking at about £29 in interest. Not catastrophic, but it adds up if you leave it.

If HMRC owes you money (you've overpaid), they pay interest too. At a lower rate: base rate minus 1%, minimum 0.5%.

Penalties for incorrect submissions

If your quarterly updates or final declaration contain errors, the penalty depends on why they're wrong:

• Careless (didn't take reasonable care): up to 30% of the additional tax owed
• Deliberate (knew it was wrong): up to 70%
• Deliberate and concealed (tried to hide it): up to 100%

For most people, this isn't a concern. If you're recording your actual income and expenses and submitting them honestly, you're not going to be accused of deliberate errors.

The test is "reasonable care." Use proper software, don't make up numbers, and correct mistakes when you spot them.

How to stay out of trouble

Avoiding penalties under MTD comes down to two things: filing on time and paying on time.

For filing: Set calendar reminders one week before each quarterly deadline (7 Aug, 7 Nov, 7 Feb, 7 May) and the final declaration (31 Jan). Keep your records up to date throughout the quarter so submitting isn't a big job when the deadline arrives. If you leave your bookkeeping until the last week, you'll hate the process and you'll eventually miss a deadline.

For payment: If you know you'll struggle to pay your full tax bill in January, contact HMRC before the deadline and ask about a Time to Pay arrangement. They're surprisingly accommodating if you reach out proactively. Much less so if you just don't pay and wait for them to come chasing.

For accuracy: Use software. Record things as they happen, not from memory weeks later. Review your quarterly summaries before you submit. If you spot an error after submitting, amend it. HMRC treats self-corrected mistakes very differently from ones they uncover during an investigation.

So is it harsh?

Not really. Compared to the old Self Assessment system, this is more forgiving. Three late submissions and you're still in the clear. The first year has a grace period. And you can wipe your record clean by filing on time for two years.

That said, four points is only a year's worth of missed deadlines. Once you're at the cap, every slip costs £200. File on time, keep your records current, and this whole section of the rules becomes irrelevant to you.

New to MTD? Start with our guide to what Making Tax Digital is or read about what you actually submit each quarter.