Understanding the Making Tax Digital Penalty System
Making Tax Digital (MTD) will take effect from 6 April 2026; for those impacted, this will mean a significant change in how you record and report your tax data to HMRC.
In this insight, Tax Director, Liam Coulter, outlines the potential consequences of getting MTD wrong, explaining the new MTD penalty system and who could be affected by it.
What is Making Tax Digital (MTD)?
MTD is a new way to report self-employment and property income to HMRC which is set to be introduced in phases from 6 April 2026.
Who needs to register?
MTD will apply to self-employed individuals and landlords with gross qualifying income above the relevant threshold.
Your gross qualifying income is your combined self-employment and property income before expenses.
Further information on signing up for MTD can be found here.
Are penalties different under MTD?
Yes, penalties for late submissions by taxpayers within MTD will move to a points-based system. Under these new rules, businesses or individuals will receive a ‘point’ every time their submission deadline date is missed. After you have built up a certain number of points, you will be hit with a fine.
Under the points-based system, no financial penalty arises for the first late submission.
Late payment penalties are also changing for taxpayers within MTD, which will be aligned with the new rules for VAT.
There are no changes to penalties for failure to keep adequate records; penalties for failure to keep or preserve adequate records can reach up to £3,000. Examples could include failing to maintain digital records or breaks in digital links within functional compatible software.
There are no changes to penalties for inaccuracies and there are no specific failure to notify penalties for MTD.
Who does the new MTD penalty system apply to?
The new points-based late filing penalty system and the new late payment penalty rules will apply from the tax year in which you are required to join MTD and will continue to apply even after you later leave MTD.
If you join MTD voluntarily, or during the testing phase, the new penalty systems will apply from the date you join. However, you will not receive penalty points for late quarterly updates during the MTD testing phase, or if you have chosen to be in MTD voluntarily. Penalty points for quarterly updates will only be issued once you are legally required to be in MTD.
Penalty points will still apply if your year-end submission is late.
Normal Self-Assessment penalty rules continue to apply if you’re outside MTD or the tax year you’re filing for relates to a year before you joined MTD.
How do the new MTD late filing penalties work?
You will receive a point each time you miss a submission deadline for either the year-end submission or quarterly update.
Points will accumulate until a threshold is reached and at this point a £200 penalty will be issued.
Once this threshold has been reached, any further late submissions will result in an immediate £200 penalty.
The thresholds are as follows:
- 2-point threshold for annual submissions
- 4 point threshold for quarterly submissions
To reset back to normal, certain conditions must be met. All points will expire after you have met your return obligations for a set period based on your submission frequency:
- Annual: 24 months.
- Quarterly: 12 months.
- Monthly: 6 months.
All returns due within the preceding 24 months must have also been received by HMRC.
HMRC will notify you if you receive a penalty point.
What happens if I have more than one trade or property business?
If you have multiple businesses, you will only have a single points total.
You will only ever accrue one penalty point per quarter for late filing of quarterly updates, no matter how many businesses or trades you have.
How does the new penalty regime work for late payments?
Penalties for late payment will be issued based on the number of days by which the payment is overdue, as outlined below:
- 15 days or less: no penalty
- 16 – 30 days: 3% of tax outstanding on the 15th day
- 31 days or more: 3% of the tax outstanding on the 15th day; an additional 3% of the tax outstanding on the 30th day; and an additional 10% p.a. charge will apply until the payment is made.
Interest will also be charged on any late payments at HMRC’s published rates.
Our in-house Tax Director, Liam Coulter, can assist with MTD registration, complete MTD returns and provide help and guidance with the new rules. To find out more, please get in touch.