Last updated: January 2026 | Reading time: 10 minutes
Covers: Late submission penalties, late payment penalties, penalty points, interest charges, and how to appeal
| Key TakeawaysNew points-based system: Each missed quarterly deadline = 1 penalty point 4 points = £200 fine: Every subsequent late submission adds another £200 Late payments: No penalty for first 15 days, then escalating charges Interest applies immediately: Currently 7.25% per annum on unpaid tax Points can be reset: 24 months of perfect compliance wipes the slate clean |
A New Penalty System for Making Tax Digital
From April 2026, HMRC is introducing a completely new penalty regime for Making Tax Digital for Income Tax. The system is designed to be fairer than the old Self Assessment penalties — giving you more chances before hitting you with fines.
The new approach has two separate components:
- Late Submission Penalties — a points-based system for missing quarterly update deadlines
- Late Payment Penalties — proportionate charges based on how late you pay your tax
This guide breaks down exactly how each works, what the penalties cost, and how to avoid them.
Late Submission Penalties: The Points System
Under MTD for Income Tax, you must submit quarterly updates to HMRC. Miss a deadline, and you’ll receive a penalty point. Think of it like points on your driving licence — accumulate too many, and there are consequences.
How Penalty Points Work
| The Basic Rule 1 missed deadline = 1 penalty point Reach 4 points = £200 penalty + £200 for each subsequent late submission |
Here’s how the points accumulate over a tax year:
| Submission | Status | Points Total | Penalty |
|---|---|---|---|
| Q1 Update | Late | 1 point | None |
| Q2 Update | On time | 1 point | None |
| Q3 Update | Late | 2 points | None |
| Q4 Update | Late | 3 points | None |
| Final Declaration | Late | 4 points | £200 |
| Next Q1 Update | Late | 5 points | + £200 |
In this example, the taxpayer hit the 4-point threshold on their fifth late submission. They paid a £200 penalty. When they missed the next deadline too, they paid another £200 — and will continue to do so for every subsequent late submission until they reset their points.
Why Is the Threshold 4 Points?
The threshold depends on how often you’re required to submit. HMRC sets it based on your submission frequency:
| Submission Frequency | Points Threshold | Applies To |
|---|---|---|
| Annual | 2 points | N/A for MTD |
| Quarterly | 4 points | MTD for IT |
| Monthly | 5 points | MTD for VAT |
Since MTD for Income Tax requires quarterly submissions (plus a final declaration), your threshold is 4 points. This gives you some buffer for genuine one-off issues before penalties kick in.
How to Reset Your Penalty Points
Points don’t stay on your record forever. There are two ways to reset them:
Option 1: Automatic Expiry (24 Months)
Each individual penalty point expires automatically after 24 months of compliance — meaning you submit everything on time for two years from when that point was issued.
Example: You received a point in August 2026 for a late Q1 submission. If you submit every deadline on time from that point forward, that specific point expires in August 2028.
Option 2: Period of Compliance (Reset to Zero)
If you’ve reached the threshold (4 points) and want to wipe the slate clean faster, you need a sustained period of perfect compliance:
| Submission Frequency | Compliance Period to Reset |
|---|---|
| Annual submissions | 24 months with no late submissions |
| Quarterly submissions (MTD) | 12 months with no late submissions |
| Monthly submissions | 6 months with no late submissions |
For MTD quarterly submitters, this means submitting all 4 quarterly updates and your final declaration on time for a full tax year. Do that, and your points reset to zero — regardless of how many you’d accumulated.
What Counts as ‘Late’?
A submission is late if HMRC doesn’t receive it by 11:59pm on the deadline date. There’s no grace period for late submission points — even one minute late counts.
MTD Quarterly Deadlines:
- Q1 (6 Apr – 5 Jul): Due by 7 August
- Q2 (6 Jul – 5 Oct): Due by 7 November
- Q3 (6 Oct – 5 Jan): Due by 7 February
- Q4 (6 Jan – 5 Apr): Due by 7 May
- Final Declaration: Due by 31 January (following tax year)
Late Payment Penalties
Separate from submission penalties, you’ll also face charges for paying your tax late. The new system is proportionate — the longer you delay, the more you pay.
How Late Payment Penalties Are Calculated
| Payment Delay | Penalty | Example (£10,000 tax) |
|---|---|---|
| 1–15 days late | No penalty | £0 (but interest accrues) |
| 16–30 days late | 2% of tax owed | £200 |
| 31+ days late | 2% + additional 2% = 4% | £400 |
| 31+ days (ongoing) | + 4% per year on outstanding | + £400/year |
Worked Example: £5,000 Tax Bill Paid 45 Days Late
| Tax owed | £5,000 |
| First penalty (2% at day 16) | £100 |
| Second penalty (additional 2% at day 31) | £100 |
| Annualised penalty (4% × 14/365 days) | £7.67 |
| Interest (approx 7.25% × 45/365 days) | £44.69 |
| Total penalties + interest | £252.36 |
Interest Charges
On top of penalties, HMRC charges interest on any unpaid tax from day one. Unlike penalties, there’s no grace period for interest — it starts accruing immediately after the payment deadline.
| Current Interest Rate Late payment interest: 7.25% per annum (Base rate + 2.5% — rate changes when Bank of England base rate changes) |
Interest is calculated daily and compounds. The rate follows the Bank of England base rate, so it can change. Check HMRC’s website for the current rate.
Silver lining: If HMRC owes you a repayment (you’ve overpaid tax), they pay you interest too — currently at the base rate minus 1% (repayment interest is lower than late payment interest).
How This Compares to Old Self Assessment Penalties
The new MTD penalty system is more forgiving than the old Self Assessment regime. Here’s how they compare:
| Scenario | Old Self Assessment | New MTD System |
|---|---|---|
| First late submission | £100 immediate penalty | 1 point — no penalty |
| Second late submission | £100 + daily penalties | 2 points — no penalty |
| Third late submission | £100 + daily penalties | 3 points — no penalty |
| Fourth late submission | £100 + % of tax owed | 4 points — £200 penalty |
| Reset mechanism | No reset — cumulative | 12 months compliance resets all |
The new system gives you more chances to get things right. You can have three late submissions without paying a penny in penalties — impossible under the old Self Assessment rules.
How to Avoid MTD Penalties
The best penalty is the one you never receive. Here’s how to stay on the right side of HMRC:
1. Set Up Calendar Reminders
Put every quarterly deadline in your calendar with reminders one week and one day before. The deadlines are always the same: 7 August, 7 November, 7 February, 7 May, and 31 January for the final declaration.
2. Use Software With Deadline Alerts
Most MTD-compatible software includes built-in deadline notifications. Enable push notifications and email alerts so you don’t rely solely on memory.
3. Submit Early, Not Last Minute
Don’t wait until 11pm on deadline day. Technical issues, software problems, or HMRC system outages can strike at the worst time. Submit at least a few days early to give yourself a buffer.
4. Keep Records Updated Monthly
If you update your records monthly (or more frequently), quarterly submissions become trivial — just a button click. If you leave everything until the deadline, you’re creating unnecessary stress and risk.
5. Set Aside Tax Money Regularly
Late payment penalties come from cash flow problems. Set aside 25-30% of your income each month into a separate savings account. When the tax bill arrives, you’ve already got the money.
6. Use Time to Pay If Needed
If you genuinely can’t pay on time, contact HMRC before the deadline to arrange a Time to Pay plan. This won’t avoid all interest, but it demonstrates good faith and may reduce penalties.
What to Do If You Receive a Penalty
Check If the Penalty Is Correct
First, verify HMRC hasn’t made an error. Check your records to confirm:
- You actually did submit late (check confirmation emails from your software)
- The penalty amount matches what you’d expect based on your points
- You weren’t affected by an HMRC system outage on the deadline
Grounds for Appeal
You can appeal a penalty if you have a ‘reasonable excuse’ for the late submission or payment. HMRC accepts appeals for:
- Serious illness or hospitalisation
- Death of a close family member
- Fire, flood, or other disaster affecting your records
- HMRC service issues or system outages
- Postal delays (for paper submissions — rare under MTD)
- Software failure beyond your control
Not accepted as reasonable excuses: Being too busy, forgetting, your accountant failing to act, lack of funds (for late payment), or not receiving a reminder from HMRC.
How to Appeal
You have 30 days from the penalty notice to appeal. You can:
- Appeal online through your Government Gateway account
- Write to HMRC at the address on your penalty notice
- Ask your accountant to appeal on your behalf
Frequently Asked Questions
Do I get a penalty point for every day I’m late?
No. You receive one penalty point per missed deadline, regardless of how late you are. Whether you submit one day late or one month late, it’s still just one point. However, significantly late submissions may trigger HMRC enquiries.
Can I get penalty points removed if I have a reasonable excuse?
Yes. If HMRC accepts your appeal for a reasonable excuse, they can remove penalty points as well as waive any financial penalty.
What if I submit my quarterly update but it contains errors?
Submitting on time avoids late submission penalties, even if the update contains errors. You can correct mistakes in your next quarterly update or final declaration. However, deliberate errors may result in separate accuracy penalties.
Is there a cap on how much I can be penalised?
For late submission penalties, each breach after reaching threshold costs £200 — there’s no upper cap. For late payment penalties, the maximum is the 4% lump sum plus 4% per year ongoing, plus interest. In theory, penalties could exceed your original tax bill if you ignore HMRC long enough.
Do penalties affect my credit score?
HMRC doesn’t report to credit agencies directly. However, if you fail to pay and HMRC escalates to debt collection, that could affect your credit. Unpaid tax can also result in County Court Judgments (CCJs), which do appear on credit files.
Will HMRC send reminders before deadlines?
HMRC may send reminder emails if you’ve signed up for them, but there’s no guarantee. Not receiving a reminder is not a reasonable excuse for missing a deadline. Set your own reminders and don’t rely on HMRC.
Summary: MTD Penalties at a Glance
| Penalty Type | Key Details |
|---|---|
| Late Submission | 1 point per late submission; £200 at 4 points; £200 each thereafter |
| Late Payment (16-30 days) | 2% of tax owed |
| Late Payment (31+ days) | 4% lump sum + 4% per year ongoing |
| Interest | 7.25% per annum from day 1 (rate varies) |
| Points Reset | 12 months with no late submissions |
The new penalty system is designed to be fairer — giving you breathing room for occasional slip-ups while still encouraging compliance. The key is to use that buffer wisely: get organised now so you never need to test the system.
| Disclaimer: This article is for informational purposes only and does not constitute tax or legal advice. Penalty rules and interest rates can change. Always check GOV.UK for the latest information and consult a qualified accountant for advice specific to your circumstances. |