With the gradual rollout of Making Tax Digital for Income Tax (MTD IT), HMRC is introducing a new penalties system. These updated rules are stricter, more structured and far more time-sensitive that many taxpayers are used to.
Who Will Be Affected By MTD Penalties?
Starting April 2026, MTD IT becomes mandatory for landlords and self-employed individuals earning over £50,000 annually. By April 2027, this threshold drops to £30,000.
Many are already participating in HMRC’s public beta programme. While HMRC offers volunteers some leniency, particularly regarding late submissions, penalties for late payments still apply from the outset.
How the Late Submission Penalty System Works
HMRC now uses a points-based system to track missed filing deadlines:
- You earn 1 point for each missed submission
- You will receive a £200 fine when you hit a threshold
The threshold depends on how often you file:
- 4 points for quarterly filers
- 2 points for annual filers
- 5 points for monthly filers
Points expire after 2 years, which HMRC calculates from the month after they issued them. However, if you have reached the penalty threshold, your points will not reset until you file on time for 12 straight months and bring all older submission up to date.
Crucially, HMRC tracks these points separately for VAT and Income Tax. Missing both can result in two separate £200 penalties.
Late Payment Penalties Explained
The new late payment system is stricter and works on a sliding scale:
- Days 1 to 15 – No penalty if you pay the tax or have a Time to Pay arrangement set up
- Days 16 to 30 – HMRC applies a 3% penalty to the unpaid tax
- Day 31 Onward – HMRC applies an additional 3% penalty, plus daily penalties at 10% per annum
HMRC also charges interest from Day 1 at the Bank of England Base Rate plus 2.5%. This can quickly add up, particularly for larger sums.
Can You Avoid or Appeal MTD Penalties?
Yes, but you must act fast.
If you cannot pay on time, you should contact HMRC before the 15-day mark to set up a Time to Pay agreement. This can stop penalties from accruing, although interest will still apply.
If you have a valid reason for missing a deadline, such as illness, bereavement or a technical error, you can appeal the point or penalty. Start with HMRC’s internal review process. If needed, escalate the appeal to the First Tier Tax Tribunal. You should also always keep records and evidence to support your case.
Volunteering for MTD Early
Joining MTD IT voluntarily before it becomes mandatory can help you get comfortable with the new system. HMRC has waived late submission penalties for volunteers until April 2026.
However, this leniency does not apply to late payments. From 2024 onwards, unpaid tax will trigger the new penalty regime, regardless of your participation status.
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