MTD for Income Tax Penalties — What Happens If You Miss a Deadline
Making Tax Digital for income tax comes with a new penalty regime that applies to both late filing and late payment. It replaces the old fixed-penalty system with a points-based approach for filing and a tiered structure for payment. Here is how it works.
Late Filing — The Points System
Every time you miss a submission deadline under MTD, you receive one penalty point. Points accumulate across all submission types.
| Submission frequency | Points threshold before financial penalty |
|---|---|
| Quarterly (MTD updates) | 4 points |
| Annual (year-end declaration) | 2 points |
Once you cross the threshold, a £200 financial penalty applies immediately. Every further late submission after the threshold is crossed also attracts a £200 penalty.
Penalty points are reset after 12 months of full compliance for quarterly submissions and 24 months for annual submissions. You can appeal a penalty point on the grounds of reasonable excuse.
The 2026/27 Soft Landing
For the first mandatory year of MTD (2026/27), HMRC will not apply penalty points for missed quarterly submissions. This soft landing applies only to those who join MTD on 6 April 2026. Penalty points for quarterly returns begin from 6 April 2027, with the first affected quarter being the period to 5 July 2027, due 7 August 2027.
The soft landing does not cover late payment penalties — those apply from day one.
Late Payment Penalties — How They Work
Late payment penalties operate in two stages based on how long the tax remains unpaid after the due date.
First penalty — tax unpaid after 15 days: If the outstanding tax is paid between day 16 and day 30 after the due date, a penalty of 3% of the unpaid amount at day 15 applies. If you agree a time to pay arrangement with HMRC within the 15-day window, the first penalty rate stays at 3% of the day-15 balance rather than compounding.
Second penalty — tax unpaid after 30 days: If any tax remains unpaid after 30 days, a second penalty of 10% per annum accrues on the outstanding balance for every day it remains unpaid, until the tax is paid in full.
From April 2027, the first penalty rate increases from 3% to 4%.
First-year easement: In the first year any taxpayer enters the new penalty regime, HMRC will not apply a penalty until after the 30-day point — effectively giving a 30-day grace period before any financial penalty applies.
What Counts as Reasonable Excuse?
The reasonable excuse defence is available against both penalty points and financial penalties. HMRC considers factors such as serious illness, bereavement, technical failure of software or HMRC systems, and other genuinely exceptional circumstances. Reasonable excuse does not cover circumstances within your control, such as forgetting or being too busy.
HMRC Powers to Cancel Penalties
Finance Bill 2026 gives HMRC new powers to cancel individual penalty points and withdraw late submission or late payment penalties — for example, in periods immediately preceding insolvency. HMRC can also treat a person who is granted a digital exclusion exemption as never having been within scope, wiping out any historical non-compliance.
Frequently Asked Questions
Q: If I miss one quarterly deadline in 2026/27, do I get a penalty point? A: No. The soft landing for 2026/27 means no penalty points are applied for missed quarterly submissions in that year. Points begin from 6 April 2027.
Q: I owe tax and cannot pay by the due date — what should I do? A: Contact HMRC before the 15-day point and agree a time to pay arrangement. If you reach an agreement within 15 days of the due date, the first late payment penalty is capped at 3% of the day-15 balance, and the second penalty does not apply while the arrangement holds.
Q: Do the new penalties apply to my year-end final declaration as well as quarterly updates? A: Yes — the annual final declaration has its own penalty point threshold of two points. Missing the final declaration deadline in two consecutive years triggers a £200 financial penalty.
Need help staying on top of MTD deadlines? Contact Liberate Accountants for a free consultation, or learn more about our self assessment service.
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