MTD penalties are the financial charges and penalty points HMRC can apply when a sole trader or landlord under Making Tax Digital for Income Tax misses a quarterly update, files a tax return late, or pays tax after the due date.
Missing a tax deadline can be stressful enough without finding an unexpected penalty waiting in your HMRC account. For sole traders and landlords, that worry is becoming more relevant as Making Tax Digital for Income Tax starts to apply to more people. From 6 April 2026, sole traders and landlords with qualifying income above £50,000 have to use MTD for Income Tax. From 6 April 2027, the rules will extend to those with qualifying income above £30,000.
The good news is that MTD penalties are not designed to punish someone for one small mistake straight away. For late submissions, HMRC uses a points system. You normally receive penalty points when you miss relevant deadlines, and a financial penalty is charged once you reach the relevant threshold. However, late payment works differently, with penalties based on how long the tax remains unpaid.
In this guide, you will learn how MTD penalties work in 2026/27, how MTD penalty points are calculated, what happens when you file or pay late, how the rules differ for VAT and Income Tax, and what the first year of MTD means for penalties. Most importantly, you will learn practical ways to avoid MTD penalties and keep your tax affairs on track.
What are MTD Penalties?
MTD penalties are charges or penalty points that can apply when you do not meet certain Making Tax Digital obligations on time. For MTD for Income Tax, these obligations include sending quarterly updates, submitting your tax return and paying tax when it is due. Late submission penalties are points based, while late payment penalties are calculated according to how late the payment is.
For late submissions, you generally receive one penalty point for each missed deadline. Once you reach the relevant threshold, HMRC can issue a £200 financial penalty. For MTD for Income Tax, the threshold is four points for taxpayers who submit quarterly updates. Taxpayers whose only MTD obligation is the annual Final Declaration have a separate, lower threshold of two points. If you continue missing deadlines after reaching the threshold, another £200 penalty can apply for each later missed submission.
Late payment is separate. If you owe Income Tax and do not pay it on time, HMRC can charge a late payment penalty as well as interest. For the 2026/27 tax year, there is a special first year arrangement giving you 30 days from the payment due date to pay in full or contact HMRC to arrange a payment plan before late payment penalties start. This 30 day period is only available once under the new regime.
How the MTD penalty points system works
The MTD penalty points system is intended to deal with repeated late submissions rather than immediately issuing a fine after one missed deadline. This is why understanding your points balance is important.
1. You get a point for a missed deadline
For MTD for Income Tax, a penalty point can be given when you miss a relevant quarterly update or tax return deadline. There is one important exception in 2026/27: HMRC will not issue points for late quarterly updates during this first tax year.
2. Four points can trigger a £200 penalty
For taxpayers required to use MTD for Income Tax, the MTD penalty points threshold is four points. Reaching four points can result in a £200 penalty, with another £200 penalty possible for each later missed submission while you remain at the threshold.
3. Points can expire
If you are below the threshold, an individual point normally expires after 24 months. If you reach the threshold, you need to meet the required compliance conditions before all your points can be removed.
4. VAT and Income Tax points are separate
If you are registered for VAT and also have MTD for Income Tax obligations, the points are not combined. Your VAT points and Income Tax points are tracked separately.
5. The rules change after 2026/27
The first year is more relaxed for quarterly updates. From 6 April 2027, late quarterly updates can attract penalty points. This makes it important for sole traders and landlords to use 2026/27 as a chance to get their records and processes right.
The key point is simple: the MTD penalty points system gives you room to correct occasional mistakes, but repeated missed deadlines can become expensive.
MTD penalty for late payment vs late filing
Late filing and late payment should not be treated as the same thing. A late filing normally concerns a missed submission deadline and can lead to penalty points. A late payment concerns tax that has not been paid by the due date and can lead to a percentage based penalty and interest.
| Feature | Late payment | Late filing |
| What causes it? | Tax is not paid by the due date | A required return or update is submitted late |
| How is it calculated? | Based on how long payment is overdue | Based mainly on penalty points |
| First year 2026/27 | Special 30 day payment period applies | No points for late quarterly updates |
| Main Income Tax threshold | No points system | 4 points (quarterly) / 2 points (annual-only filers) |
| Financial penalty | Percentage of unpaid tax, in two stages, plus a daily rate | £200 once threshold is reached |
| Interest | Late payment interest also applies | No separate interest for late filing |
| Can later penalties apply? | Yes, if tax remains unpaid | Yes, if further deadlines are missed |
For 2026/27, HMRC gives first-year MTD filers a 30-day grace period (standard filers get 15 days): if you pay in full or contact HMRC to arrange a Time to Pay plan within that window, no late-payment penalty is charged, though interest still runs from the original due date. If tax remains unpaid at the end of the grace period, a first penalty of 3% of the outstanding amount is charged (rising to 4% from the 2027/28 tax year). A further penalty applies if the balance is still unpaid 30 days after that, and a daily penalty then accrues at an annualised rate of 10% on whatever remains outstanding until the tax is paid.
So, MTD penalties are not simply about filing. You need to watch both your submission dates and your payment dates.
First year penalty relief: why 2026/27 is different
The 2026/27 tax year is the first mandatory year for MTD for Income Tax for taxpayers with qualifying income above £50,000 based on the relevant previous tax year. HMRC has introduced some breathing space for this first year. Most importantly, there are no penalty points for late quarterly updates during 2026/27. However, the quarterly updates still need to be sent because you must complete them before you can submit your tax return.
There is also special late payment relief in the first year. For the 2026/27 tax year, you have 30 days from the payment due date to pay in full or contact HMRC about a payment plan before late payment penalties begin. This does not mean that tax can simply be ignored. Interest can still apply from the first day payment is late.
Think of 2026/27 as a useful preparation year. It gives you time to build a routine before the full points system applies to quarterly updates.
MTD penalties for VAT vs Income Tax (ITSA)
MTD VAT penalties have already been operating under the newer penalty system for VAT accounting periods beginning on or after 1 January 2023. MTD for Income Tax is newer, with mandatory use beginning in stages from April 2026. Although both use points for late submissions, the detailed rules and deadlines are not identical.
| Feature | Late payment | Late filing |
| VAT | Same staged percentage penalty as Income Tax, since VAT and ITSA late payment rules were harmonised | Points based |
| Income Tax ITSA | Special first year rules for 2026/27 | Points based, with quarterly relief in 2026/27 |
| Standard first late submission | Not applicable | One penalty point |
| Quarterly threshold | Not applicable | 4 points |
| VAT financial penalty | £200 at the quarterly threshold | £200 at 4 points |
| Income Tax financial penalty | Based on overdue tax | £200 at 4 points |
| Interest | Charged on late VAT or Income Tax | Not a filing charge |
| Points kept separately | VAT payment penalties are separate from ITSA | VAT and ITSA points are separate |
For VAT, a quarterly filer reaches the penalty threshold at four points. Once at four points, a £200 penalty can apply for the late return that takes them to the threshold and for each later late return while they remain at the threshold.
VAT late payment penalties now follow the same staged structure as Income Tax under MTD: no penalty in the initial grace window, a first penalty of 3% (4% from 2027/28) of the outstanding amount if unpaid at the end of that window, a further penalty if the balance remains unpaid 30 days later, and a daily penalty accruing at an annualised 10% from day 31 until paid.
For example, if a small business owes £1,000 VAT and leaves it unpaid, the penalty can increase as the debt remains outstanding. A sole trader under MTD for Income Tax in 2026/27 has different first year rules, so it is important not to assume that VAT and ITSA penalties work in exactly the same way.
How to avoid MTD penalties going forward
The easiest way to deal with MTD penaltiesis to prevent them before they happen. Waiting until a deadline is close can make a simple tax task much harder, especially if records are incomplete.
1. Know your MTD filing deadline
Keep a written record of every quarterly update, tax return and payment date. For 2026/27, HMRC lists quarterly update deadlines of 7 August, 7 November, 7 February and 7 May for the standard update periods.
2. Keep digital records up to date
Do not leave income and expenses until the end of the quarter. Entering records regularly makes it easier to spot missing invoices, receipts and payments.
3. Use compatible software
MTD for Income Tax requires compatible software for digital records and quarterly updates. Check that your software supports the MTD requirements before relying on it.
4. Set reminders before the deadline
A reminder one or two weeks before the deadline gives you time to deal with missing information. A second reminder a few days before can prevent a simple oversight.
5. Keep money aside for tax
Late payment can become costly. Put money aside regularly so that your tax bill does not come as a surprise when payment is due.
6. Contact HMRC if you cannot pay
If you know you cannot pay on time, do not simply ignore the bill. HMRC says you should contact them as soon as possible to discuss a payment plan. An agreed Time to Pay arrangement can help reduce further penalty problems.
7. Check your penalty points
If you have received points, check your HMRC account and keep track of them. Points can normally expire after 24 months when you remain below the threshold, but different rules apply once you reach the threshold.
8. Understand the record-keeping penalty.
Separately from submission and payment penalties, HMRC can penalise a failure to keep the required digital records under MTD. Using compatible software from day one avoids this exposure as well as the deadline-based ones above.
Following these steps can make how to avoid MTD penalties much simpler. The aim is not to create more paperwork. It is to build a regular routine so that tax reporting does not become a last minute task.
FAQs: Frequently Asked Questions
What is the penalty for missing an MTD deadline?
For MTD for Income Tax, a missed relevant submission deadline can result in one penalty point. Once you reach four points, a £200 financial penalty can apply, with further £200 penalties for later missed submissions while you remain at the threshold.
Do MTD penalties apply in the first year?
Yes, but there is important relief in 2026/27. HMRC will not issue penalty points for late quarterly updates during the first MTD for Income Tax year. Penalties can still apply to late tax returns and late payments.
How many points before I’m fined?
For mandatory MTD for Income Tax, the threshold is four points. Reaching four points can result in a £200 penalty. VAT has its own separate points total and threshold based on the filing frequency.
Do MTD penalties apply to self-employed people?
Yes. MTD for Income Tax applies to qualifying sole traders and landlords based on their qualifying income. From April 2026, the first mandatory group is those above £50,000, with the threshold reducing to above £30,000 from April 2027.
Do MTD penalties apply to landlords?
Yes, landlords can be required to use MTD for Income Tax when their qualifying property income meets the relevant threshold. The rules apply to qualifying property income alongside relevant self-employment income when working out whether MTD applies.
Conclusion
MTD penalties are becoming an important part of tax planning for sole traders and landlords. The key thing to remember is that late submission and late payment are treated differently. Late submissions can build penalty points, while late payment penalties depend on how long tax remains unpaid.
The 2026/27 tax year gives people new to MTD for Income Tax some useful protection. There are no penalty points for late quarterly updates during the first year, although the updates still have to be submitted. Late tax returns and late payments can still lead to penalties, so the first year should be treated as a chance to get your systems in order rather than a year when deadlines can be ignored.
If you are unsure whether MTD applies to you, worried about MTD penalties, or need help keeping your tax records and Self Assessment obligations on track, MyIVA can help. MyIVA supports individuals, sole traders and small firms with tax and accounting needs, including Corporation Tax and personal tax filing.
Need help getting ready for MTD? Contact MyIVA today and get professional support with your tax obligations before a missed deadline turns into a costly problem.
