MTD penalty rules are changing from April 2026, introducing a new points-based system for late filing and earlier penalties for late payment. Although temporary easements will apply, taxpayers and advisers need to understand the new framework now to avoid unnecessary costs later.
Although the Budget introduced temporary easements, they only delay the impact. Firms and taxpayers still need to prepare now.
How Late Filing Penalties Will Work
HMRC has replaced automatic fines with a penalty points system, similar to the one already used for VAT. When a taxpayer misses a deadline, HMRC issues a penalty point rather than an immediate charge. Once the taxpayer reaches a set points threshold, HMRC applies a fixed two hundred pound penalty.
The threshold depends on how often the taxpayer must file. Annual filers reach the threshold more quickly than those treated as quarterly filers.
Taxpayers mandated into MTD must submit quarterly updates and an annual MTD tax return. For penalty purposes, HMRC treats them as quarterly filers with a single points threshold covering all submissions. Those outside MTD will only file annually and will therefore sit under the lower threshold.
Taxpayers who join MTD voluntarily or take part in testing do not have a legal duty to file quarterly updates. HMRC will not issue penalty points for late updates in these cases, but points can still arise for the annual MTD tax return.
Where a taxpayer runs more than one trade or property business, they may need to submit multiple quarterly updates. HMRC will still issue no more than one penalty point per quarter, regardless of how many updates fall due.
Clearing Penalty Points
As long as a taxpayer stays below the penalty threshold, individual points expire after two years. Once the threshold is reached, the position changes. HMRC charges a financial penalty immediately and applies further penalties for any additional late filings.
At that stage, points no longer expire automatically. To reset their position, the taxpayer must submit a required number of future returns on time and bring all filings from the previous two years up to date. When both conditions are met, HMRC resets the points total to zero.
The Soft Landing Period
The Budget confirmed that HMRC will not issue penalty points for late quarterly updates during the 2026 to 2027 tax year. This concession recognises the challenges of the first year of MTD income tax.
However, the relief has limits. HMRC can still apply penalty points for late submission of the 2026 to 2027 MTD tax return. Taxpayers who join MTD after that year will not benefit from the soft landing at all.
Importantly, MTD obligations still apply during this period. Taxpayers must keep digital records and submit quarterly updates, including the final update, before they can file their tax return.
Stricter Late Payment Penalties
The changes to late payment penalties will affect cash flow just as much as late filing. Under the new rules, penalties begin earlier than they do now.
HMRC will charge a percentage penalty from day fifteen after the payment deadline, with an additional charge at day thirty. From day thirty one onwards, a daily penalty accrues. Interest applies throughout, increasing the overall cost of paying late.
Paying in full or agreeing a Time to Pay arrangement remains the only way to stop further penalties. Interest continues to run and HMRC treats broken arrangements as if they never existed.
For the first year a taxpayer enters the new regime, HMRC will not apply the day fifteen penalty. From April 2027, however, the percentage rates will increase, making late payment more expensive.
What Firms and Taxpayers Should Do Now
With MTD income tax arriving in 2026 and wider penalty changes following in 2027, these rules demand attention now. The temporary easements may soften the transition, but they do not change the direction of travel.
Earlier penalties, higher interest and a points based system mean timely filing and payment will matter more than ever. Putting the right processes in place now will help avoid unnecessary costs later.
If you are unsure how these changes will impact you or your business, get in touch with our team to discuss the next steps.