Episode 8: MTD penalties and the points system, explained calmly
If you have read anything about Making Tax Digital for Income Tax, you have probably seen something about penalties, usually in larger letters than the rules themselves.
That is a shame, because the penalty system for MTD is not really there to catch people out after one slip. It is there to deal with repeated non-compliance. Once you understand how it works, it stops feeling like a trap and starts feeling more like a warning system.
This episode is the calm version.
If you have missed the earlier parts of the series, Episode 1 explains what is changing, Episode 2 covers qualifying income, Episode 3 covers the deadlines, Episode 4 looks at digital records, Episode 5 covers software, Episode 6 is the landlord version and Episode 7 is the sole trader version.
If you would like us to look at your setup and tell you what a sensible submission routine looks like in your case, you can start here: MTD service page
Why the headlines feel scarier than the rules
A lot of the coverage of MTD penalties reads as though one missed submission leads straight to a fine. That is not how the system works.
HMRC uses a points based model for late submissions under MTD for Income Tax. The idea is that you only reach a financial penalty after repeated misses, not after a single slip. HMRC has also confirmed a soft landing for people joining MTD for Income Tax from 6 April 2026, which makes the first year more forgiving for missed quarterly update deadlines.
The headlines tend to jump straight to the fine. The rules themselves are more proportionate than that.
The points system in plain English
Under the new regime, late submissions can add points to your record. For MTD for Income Tax, quarterly obligations use a points based system, and the financial penalty only starts once the relevant threshold is reached.
For quarterly updates, that threshold is four points. Reach four points, and HMRC charges a £200 penalty. If you then keep missing deadlines while still at the threshold, further £200 penalties can follow. HMRC’s wider late submission rules also distinguish thresholds by submission frequency, which is why it is best to think about quarterly updates and year-end filing separately.
So a single late quarterly update does not mean an automatic £200 fine. It means a point on your record and a warning that you need to get back on track. That is a meaningful difference. It makes the regime feel more like a warning system than a trap.
The soft landing for 2026/27
For the first wave of taxpayers joining MTD for Income Tax on 6 April 2026, HMRC has confirmed that no penalty points will be issued for missed quarterly update deadlines during the 2026/27 tax year.
It is worth being precise about what that covers. The soft landing is for late quarterly updates only. Year-end filing and payment obligations still matter from the start. HMRC’s published guidance makes that clear.
In practical terms, that means HMRC is giving people a chance to learn the quarterly rhythm without picking up points straight away for quarterly update deadlines. That does not mean the deadlines do not matter. It just means the first year is designed to be more forgiving while people get used to the process.
We would still suggest treating the first year as though the points were live. The habit of submitting on time is really what you are trying to build.
How points come off your record
Points do not sit on your record forever. The rules are designed to reward people who get back into a regular submission pattern.
If you are below the penalty threshold, each individual point normally expires 24 months after the missed deadline that triggered it, provided you do not keep adding more. If you have reached the threshold, the points do not simply disappear with time. You need to show a period of full compliance and clear any outstanding submissions before the points reset. HMRC’s published framework sets that out clearly.
The logic behind that is straightforward. The system is trying to distinguish between someone who had a rough patch and someone who has stopped engaging altogether.
Late payment penalties are a separate thing
Late submission penalties and late payment penalties are not the same thing, and it helps to treat them separately.
Late submission is about not filing on time. Late payment is about not paying the tax on time. The points system deals with the late submission side. Late payment has its own rules and percentages.
HMRC’s current MTD penalties guidance says a late payment penalty can arise once payment is more than 15 days late, and then again if the amount is still unpaid after 30 days, with late payment interest running separately from the original due date. HMRC has also published that the late payment penalty rates increase for later years, so this is not an area to leave until the last minute.
That is why it is worth separating the two ideas in your head. Filing on time and paying on time are related, but the consequences are not identical.
The first year also has a grace period on late payment
For taxpayers joining MTD for Income Tax in the first wave, HMRC says you have 30 days from the payment due date to either pay in full or contact them to set up a payment plan before late payment penalties start to apply.
That is a real concession, and it is there to reduce the chance of a simple timing issue leading straight to a penalty in the first year.
One thing to be clear on, though. Interest on unpaid tax still runs from the original due date. So even where a first-year penalty does not apply immediately, paying late can still cost you.
Beyond that first year, the published rates become less forgiving. The direction of travel is clear. The earlier you get into a clean rhythm, the less this ever becomes a live issue.
Reasonable excuse and appeals
HMRC accepts that life happens. If something genuinely stops you filing or paying on time, you can appeal on the grounds of a reasonable excuse.
Reasonable excuse is always fact specific. It is not a general get out of jail free card, and HMRC is unlikely to accept forgetting the deadline or simply falling behind with admin. It is more likely to apply where something serious or genuinely unavoidable got in the way, such as illness, bereavement, or a real technical problem.
If you think you have a reasonable excuse, the right response is to act quickly, file or pay as soon as you reasonably can, keep evidence of what happened, and explain the situation clearly.
We help clients through this when it arises, because a clear appeal with the right supporting information is always a better starting point than a rushed one.
What good looks like in practice
The easiest way to deal with MTD penalties is to avoid engaging with them at all.
That sounds flippant, but it is serious. The people who never see a point on their record are not more clever than everyone else. They are just running a simple, predictable submission routine.
The core ideas we have already covered in this series apply directly here. Keep digital records as you go, following the approach in Episode 4. Use software that actually fits your work, following Episode 5. Build the quarterly habit, using the routines in Episode 7 for sole traders or Episode 6 for landlords.
None of that is complicated. It is also the cheapest form of insurance against the points system you can buy.
If you are local to Sutton Coldfield or Birmingham
If you are around Sutton Coldfield, Birmingham, Solihull, Tamworth, Burton upon Trent, or the wider West Midlands, and you want a sensible opinion on how MTD penalties might affect you, that is exactly the sort of conversation we have with clients.
Usually the answer is not “you are about to be fined”. It is “here is the routine that stops this ever becoming a problem”.
We would much rather help clients build a rhythm that means points never appear on their record than help them argue about a fine after the event. Both can be done, but the first is a much nicer way to run things.
If that sounds useful, start here: Get in Touch
FAQs: MTD penalties and points
Do I get fined for a single late quarterly update?
No. A single late quarterly update adds one point to your record. The £200 financial penalty only applies once the quarterly threshold is reached.
When does the points system start?
For the first group joining on 6 April 2026, HMRC has confirmed a soft landing, so no penalty points apply for missed quarterly updates in 2026/27. Year-end filing and payment obligations still matter from the start.
How do I get rid of points on my record?
Below the threshold, points normally expire after 24 months. At the threshold, you need a period of full compliance and any outstanding submissions dealt with before points reset.
What are the late payment penalties?
HMRC says late payment penalties and interest are separate from the late submission points system. In the first year there is extra breathing space before penalties apply, but interest still runs from the original due date.
Can I appeal a penalty?
Yes, if you have a reasonable excuse. The key is to act quickly, sort the issue as soon as you can, and keep evidence of what happened.
Coming next, and how Daykin Scott can help
Next time we move back to the practical side. Episode 9 is the “get ready in a weekend” checklist, which will pull together the things that actually make MTD easier once you sit down to set them up.
If you would like to know how Daykin Scott can help you avoid MTD penalties in the first place, get in touch today and we will walk you through whether you are in scope and what the right setup looks like.
Start here: Get in Touch
