If you are required to use Making Tax Digital for Income Tax from April 2026, it is worth understanding how the new penalty system works before it kicks in. The rules are different from the current Self Assessment penalties, and knowing what applies to you can help you avoid unexpected charges.
One thing that has not changed is late payment interest. That continues to work the same way it always has.
If you are voluntarily using MTD for Income Tax before you are required to do so, different penalty rules apply to you. This article covers those who are mandated from April 2026.
What Is Included in the VAT Charge?
The new penalties apply from the tax year you join Making Tax Digital for Income Tax. So if you join on 6 April 2026, the new rules apply from the 2026/2027 tax year. Your 2025/2026 tax return, due on 31 January 2027, is still covered by the existing penalty rules.
It is also worth noting that the new penalties do not apply to all types of Self Assessment returns. They do not cover:
- Non-resident company returns submitted on behalf of the company
- Trust or estate returns submitted by a trustee
- Partnership returns submitted by a nominated partner
The current penalties continue to apply to those.
Key MTD Deadlines to Know
MTD Penalties can apply if you miss deadlines for sending quarterly updates, submitting your tax return, or paying what you owe. Your tax return and any tax due must be submitted and paid by 31 January after the end of the tax year.
The four quarterly update deadlines each year are:
- 7 August
- 7 November
- 7 February
- 7 May
How Late Submission Penalties for Making Tax Digital for Income Tax Work
The late submission penalty system is points-based. Each time you miss a quarterly update deadline (from 2027/2028 onwards) or a tax return deadline, you get one penalty point. Even if you have more than one business and miss multiple quarterly update deadlines, you only receive one point per deadline.
Once you reach four points, a £200 financial penalty is charged. After that, a further £200 is added each time you miss another submission deadline.
If you are registered for VAT as well, your MTD for Income Tax penalty points are kept completely separate from your VAT penalty points.
Good news for the first year: There are no penalties for missing quarterly update deadlines during the 2026/2027 tax year. You still need to keep digital records and send your updates, though, as you cannot submit your final tax return without them.
How Late Payment Penalties Making Tax Digital for Income Tax Work
Unlike submission penalties, late payment penalties are not point-based. They apply to every late payment individually, and the amount depends on how long the payment remains outstanding. The sooner you pay, the less you pay in penalties.
These penalties apply to balancing payments on your tax bill and to amounts arising from an amendment or assessment. They do not apply to payments on account.
Your first-year grace period: In your first year under the new rules, you have 30 days from the payment due date to pay in full or contact HMRC to set up a payment plan. After that first year, this reduces to 15 days. This 30-day period only applies once. If you previously volunteered for MTD for Income Tax before being mandated, you continue to have 15 days rather than 30.
Here is how the late payment penalties break down:
What to Do If You Cannot Pay Making Tax Digital for Income Tax Penalties
If you are struggling to pay on time, contact HMRC as soon as possible. Getting in touch early gives you the best chance of agreeing on a payment plan and avoiding penalties altogether.
If a plan is agreed and you keep to it, penalties are paused from the date you contacted HMRC. If a plan cannot be agreed upon, or you do not adhere to the terms, penalties may still apply.
Getting Rid of MTD for Income Tax Penalty Points
If you are below the four-point threshold, each penalty point is removed automatically 24 months after the missed deadline.
Once you hit the four-point threshold, automatic removal stops. To clear all your points from that position, you need to meet two conditions:
- Send your quarterly updates and submit your tax return on time for 12 months
- Submit any outstanding quarterly updates and tax returns covering the previous 24 months
Self-Employed & Landlords: Avoid MTD Penalties Hassle-Free
Stay fully compliant with HMRC’s new points-based penalty system using our trusted, MTD-approved tax solution
Simple, accurate, and designed specifically to track your quarterly deadlines so you never miss a submission or face unnecessary fines.
You can check the date your points will be removed by signing in to your HMRC online services account. In exceptional circumstances, such as insolvency, HMRC may cancel a penalty point, cancel a penalty, or remove all penalty points.
HMRC Appealing a MTD Penalty
HMRC will write to you if you receive a late payment penalty, a late submission penalty point, or a £200 late submission penalty. If you disagree with it, you have the right to appeal. Your letter will explain how.
If You Become Exempt from MTD for Income Tax
If your circumstances change and you become exempt from Making Tax Digital what happens next depends on when the exemption takes effect.
If you become exempt during the 2026/2027 tax year, you return to the current Self Assessment late payment and late submission penalties.
If you become exempt for the 2027/2028 tax year, you will remain under the new penalty regime, as from April 2027, the new penalties apply to everyone submitting a personal Self Assessment return. Your penalty point threshold also drops from four points to two points.
If you already have penalty points when your threshold changes, your points reduce so that you are no closer to your new threshold than you were before. For example, if you have three points and are one away from the four-point threshold, your points drop to one, keeping you one away from the new two-point threshold.
Conclusion
The new penalty regime for Making Tax Digital for Income Tax is designed to be fairer than the existing Self Assessment system. A single missed deadline will not immediately result in a financial penalty. The points-based approach for late submissions means occasional slip-ups are treated differently from persistent non-compliance, and the late payment structure rewards those who pay quickly.
That said, the rules are more detailed than before, and understanding what applies to your situation matters. Knowing your quarterly update deadlines, keeping track of any penalty points, and contacting HMRC early if you are struggling to pay are the straightforward steps that keep you on the right side of the new regime.
If you are unsure whether these rules apply to you, or when your obligations begin, checking your eligibility and start date through HMRC is the right first step.
