Making Tax Digital introduces a completely new penalty system — replacing the old fixed fines with a points-based approach. Understanding how it works is essential, because once you accumulate enough points, financial penalties apply to every subsequent missed deadline. This guide explains the system with worked examples.
The Points-Based Late Submission System
Under MTD, every missed submission deadline earns you one penalty point. The deadlines that count are:
- Each of the four quarterly updates
- The End of Period Statement
- The Final Declaration
For quarterly filers (which includes most MTD for ITSA taxpayers), the penalty threshold is 4 points. When you reach 4 points, a £200 financial penalty is triggered. Every subsequent missed deadline also incurs a £200 penalty — you do not need to accumulate more points.
Worked Example: How Points Accumulate
| Event | Points Total | Financial Penalty |
|---|---|---|
| Miss Q1 update (Aug 2026) | 1 | None |
| Submit Q2 on time | 1 | None |
| Miss Q3 update (Feb 2027) | 2 | None |
| Miss Q4 update (May 2027) | 3 | None |
| Miss EOPS deadline | 4 | £200 |
| Miss Final Declaration | 4+ | £200 |
| Miss next year Q1 | 4+ | £200 |
In this example, the taxpayer incurs no financial penalty for the first three missed deadlines. But once they hit 4 points, every subsequent miss costs £200.
How to Clear Penalty Points
Points are not permanent. They expire after a period of compliance:
- If you have fewer than the threshold (under 4 points): each point expires 24 months after it was incurred, provided you have met all deadlines in the interim
- If you are at or above the threshold (4+ points): you must submit all returns on time for a continuous 24-month period, after which your points reset to zero
This means once you reach 4 points, the only way to reset is two full years of perfect compliance.
Late Payment Penalties
Separate from submission points, late tax payments attract their own penalties:
| Days Late | Penalty |
|---|---|
| 1-15 days | No penalty |
| 16-30 days | 3% of tax owed at day 15 |
| 31+ days | Additional 3% of amount still outstanding at day 30, plus a daily rate of 10% per year on the outstanding balance from day 31 |
Worked Example: Late Payment
You owe £5,000 in tax and pay 45 days late:
- Days 1-15: No penalty
- Day 16-30: 3% × £5,000 = £150
- Day 31-45: Additional 3% × £5,000 = £150, plus 15 days at 10%/year daily rate on £5,000 = approximately £20.55
- Total penalties: approximately £320.55 (plus any interest charged separately)
Other MTD Penalties
- Failure to use compatible software: Up to £400 per return submitted through non-compatible means
- Failure to keep digital records: £5 to £15 per day for each day digital records are not maintained
- Failure to maintain digital links: Penalties apply if data is manually re-keyed between systems
- Inaccurate returns: Up to 100% of the understated tax for deliberate errors; 30% for careless errors
How to Avoid MTD Penalties
The best prevention is a consistent system:
- Set calendar reminders for each quarterly deadline (7 Aug, 7 Nov, 7 Feb, 7 May)
- Keep records up to date — scan receipts as they come in using an AI receipt scanner rather than doing a quarterly scramble
- Use accounting software that reminds you of upcoming deadlines
- Set aside tax money regularly — saving 25-30% of income prevents late payment penalties
- Automate where possible — automatic email receipt capture and bank feeds reduce manual work
- Work with your accountant — agree who handles quarterly submissions
For the full overview, see our Making Tax Digital 2026 complete guide. For record keeping requirements that underpin MTD compliance, see HMRC record keeping requirements.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified accountant or tax adviser for your specific situation.
