MTD Penalty Points Explained: How the Late Submission System Works

Making Tax Digital for Income Tax (MTD ITSA) uses a points-based penalty system rather than automatic fines for every missed deadline. Understanding how it works matters because the penalties are fundamentally different from the old Self Assessment late filing charges. This article explains how points accumulate, when a financial penalty is triggered, how to clear your record, and what the late payment penalties look like.

How the Points-Based System Works

Under MTD ITSA, each time you miss a quarterly update deadline you receive one penalty point. There is no financial penalty attached to individual points. The system is designed so that a single missed deadline does not immediately result in a fine.

The penalty points threshold for quarterly filers is 4 points. Once you reach that threshold, HMRC issues a £200 fixed financial penalty. You will then receive a further £200 penalty for each additional missed deadline while your points balance remains at the threshold.

Points for MTD ITSA Income Tax are kept entirely separate from any VAT penalty points you may hold. They do not interact.

What Triggers a Penalty Point

A penalty point is issued when you miss the submission deadline for a quarterly update. The four quarterly deadlines for the 2026-27 tax year are:

• 7 August 2026 (Q1)
• 7 November 2026 (Q2)
• 7 February 2027 (Q3)
• 7 May 2027 (Q4)

Missing your final declaration (due 31 January following the end of the tax year) also attracts a penalty point under the same system. The threshold for final declarations is lower: 2 points triggers a £200 penalty, rather than 4.

The 12-Month Grace Period for 2026 Starters

HMRC has confirmed that penalty points will not apply for late quarterly updates during the first 12 months of mandatory compliance. For those required to join from 6 April 2026 (qualifying income over £50,000 in 2024-25), this means the 2026-27 tax year is effectively a grace period for quarterly update penalties.

The grace period does not apply to:

• Late final declarations (the 31 January 2028 deadline)
• Late payment of tax owed

You must still submit all four quarterly updates before you can file your final declaration, so missing them has a practical consequence regardless of the penalty position.

How to Clear Penalty Points

If you have accumulated points but have not yet reached the threshold, individual points are automatically removed after 24 months.

If you have reached the 4-point threshold and received a £200 penalty, you must complete a period of compliance to reset your points to zero. For quarterly filers, this means submitting all four quarterly updates and your final declaration on time for 12 consecutive months (one full tax year). Once that period of compliance is complete, HMRC resets your points balance to zero.

The period of compliance does not start until you are back below the threshold. In practice, you need to complete a full clean year after the penalty is issued.

Late Payment Penalties

Late payment penalties are separate from the points-based late submission penalties. They apply to any Income Tax Self Assessment payment not made in full by the due date, including balancing payments. They do not apply to payments on account.

For the 2025-26 tax year onwards (balancing payment due 31 January 2027)

For context, the 2024-25 balancing payment (due 31 January 2026) used a slightly lower rate: 2% rather than 3% for the first and second penalties, and 4% per year rather than 10% for the annual rate. From 2025-26 onwards the higher rates apply.

Late payment interest is also charged from the first day a payment is late, on top of any penalties.

What This Means for You

If you cannot pay on time, contact HMRC as soon as possible. A Time to Pay arrangement, agreed in advance, can prevent late payment penalties from escalating. HMRC will not accept "I didn't know" as grounds for reducing penalties once they are issued.

Appealing a Penalty

HMRC will send you a penalty decision letter if you receive a penalty point, reach the threshold, or are issued a late payment penalty. The appeal process for MTD ITSA penalties follows the same route as standard Self Assessment appeals. You have 30 days from the date of the penalty notice to appeal, and you must have a reasonable excuse.

Reasonable excuse does not include unfamiliarity with the software, a small number of transactions, or the cost of compliance.

What This Means for You

The points system is more forgiving than the old fixed Self Assessment penalties for early, infrequent mistakes. However, the cumulative structure means persistent late submission becomes expensive quickly. Four missed deadlines across two tax years would put you at the threshold and trigger a £200 fine.

The safest approach is to treat each quarterly deadline as a firm commitment. Set calendar reminders, ensure your digital records are up to date before each deadline, and use your software's built-in submission prompts.

For a full overview of how MTD ITSA works and what you need to do to prepare, read our complete MTD for Income Tax guide.

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DigiTaxHub.co.uk is an independent information resource and is not affiliated with or endorsed by HMRC. This article is for information purposes only and does not constitute tax or financial advice. Always verify current rules at GOV.UK and speak to a qualified accountant if you are unsure.