Making Tax Digital Penalties: The Points System Explained

Making Tax Digital replaced the old fixed fines with a points-based penalty system. The part most guides miss: late quarterly updates carry no penalty points at all during the 2026/27 tax year. That is a deliberate concession for the first mandated year, confirmed at Autumn Budget 2025.

That does not mean nothing can go wrong this year. Late payment penalties apply in full, the annual return still earns points, and the concession expires. This guide sets out what actually bites in 2026/27, and what changes afterwards.

What Carries a Penalty Point in 2026/27

Penalty points are not issued for late quarterly updates in the 2026/27 tax year, nor were they during the 2024/25 and 2025/26 testing periods. Points are issued for a late annual return.

Two things worth knowing beyond this year. After 2026/27, taxpayers who comply with MTD voluntarily still will not receive points for quarterly updates, because points only attach to mandatory obligations. And from 6 April 2027, the new penalty rules extend to all income tax self assessment taxpayers, not just those in MTD.

How the Points System Works

Every missed submission deadline earns one penalty point.

• Quarterly filing obligation — the threshold is 4 points. Reaching 4 triggers a £200 penalty.
• Annual filing obligation — the threshold is 2 points, then a £200 penalty.

Once you are at the threshold, every subsequent missed deadline costs a further £200. You do not accumulate more points; you just keep paying.

One point per deadline, however many businesses you run. If you have a sole trade and a UK property business, that is two separate quarterly filing obligations — but filing both late in the same quarter still earns you only one point. Filing just one of them late also earns one point.

Worked Example: How Points Accumulate

Assume a quarterly filer, from 2027/28 onwards (once quarterly updates carry points):

No financial penalty for the first three misses. Once the fourth point lands, every further miss costs £200.

How to Clear Penalty Points

Points are not permanent, and the reset rules differ depending on whether you have crossed the threshold.

Below the threshold — each point is removed automatically 24 months after it was incurred.

At or above the threshold — points are removed only when both conditions are met:

1. All submissions made on time for a continuous period: 12 months if you have a quarterly filing obligation, or 24 months if annual; and
2. All submissions due in the preceding 24 months have actually been received by HMRC.

Note the 12-month figure for quarterly filers — most MTD for Income Tax taxpayers. Guides that quote a flat 24-month reset are describing the annual-filer rule.

Income tax penalty points are tracked separately from VAT penalty points. Crossing the threshold on one does not affect the other.

Late Payment Penalties

This is where the real money is, and it applies in full from the first mandated year.

A late payment penalty is charged where a balancing payment, or an amount due following an amendment or assessment, is paid more than 15 days late. Payments on account do not attract late payment penalties.

First-year concession: for your first year in the new penalty system, you get an additional 15 days — 30 days in total — before a late payment penalty is issued.

Both 3% charges rise to 4% for the 2027/28 tax year.

Worked Example: Late Payment

You owe £5,000 and pay 45 days late, in a year where the first-year concession no longer applies:

• Days 1–15: no penalty
• Day 15: 3% × £5,000 = £150
• Day 30: a further 3% × £5,000 = £150
• Days 31–45: 15 days at 10% per year on £5,000 ≈ £20.55
• Total: approximately £320.55, plus interest charged separately

These penalties sit on top of interest, and they are harsh by design. They can be avoided entirely by agreeing a time to pay arrangement with HMRC before the relevant date — worth doing early rather than hoping the money arrives.

Record Keeping and Digital Links Penalties

No change was made to record keeping penalties when MTD arrived. HMRC has a £3,000 penalty available for failure to keep digital records, or for a break in digital links within compatible software.

In practice, there is no mechanism to charge this automatically — it would arise through a compliance check rather than landing in your account after a missed deadline. That is a reason to keep records properly, not a reason to assume nothing happens.

Inaccuracy Penalties

Inaccuracy penalties do not apply to quarterly updates. Quarterly updates are cumulative summaries, and figures that were wrong in Q1 are simply corrected by the year-to-date totals in Q2 — no amendment, no penalty.

They do apply to the annual return, on the same basis as income tax self assessment: up to 100% of the understated tax for deliberate errors, up to 30% for careless ones.

Failure to Sign Up

MTD covers only part of the self assessment population, so failure to notify penalties continue to work as they always have for people who fail to register for self assessment at all.

HMRC's sanction for failing to sign up to MTD specifically is late submission penalty points, not a failure to notify penalty.

How to Avoid MTD Penalties

The concession on quarterly updates in 2026/27 is a grace period, not a reason to let records slip — the habits you build this year are the ones that carry you into 2027/28, when points start counting.

• Diarise the quarterly deadlines — 7 August, 7 November, 7 February, 7 May
• Record as you go — scan receipts when you get them rather than reconstructing a quarter in one evening
• Set money aside — putting away 25–30% of income is what prevents late payment penalties, which are the expensive ones
• Automate the capture — email receipt fetching and bank statement extraction remove most of the manual work
• Agree who submits — if your accountant files on your behalf, confirm that in writing and confirm the deadlines they are working to
• Talk to HMRC early if you cannot pay — a time to pay arrangement agreed before the relevant date avoids the penalty entirely

For the full picture, see our Making Tax Digital complete guide, and our guide to keeping MTD-ready digital records for what HMRC expects you to hold behind each figure.

Penalty rules and rates verified against ICAEW Tax Faculty guidance and HMRC policy papers as of August 2026. Rates increase for the 2027/28 tax year and the rules extend to all self assessment taxpayers from 6 April 2027 — check current guidance before relying on any figure here.