The MTD Notebook · Penalties · 10 August 2026

MTD penalties: how the points-based system actually works

Almost every explainer you will read says the same thing — “miss a Making Tax Digital deadline and you get a point, four points is a £200 fine.” That is roughly right for one group of people and wrong for another, and it quietly skips the penalty that can actually cost you money in the first year. The word “penalty” is doing two completely different jobs here: one for filing late, one for paying late. This is how both work, which one matters when, and the numbers that most write-ups get muddled — every figure checked against GOV.UK and dated.

1. Two different things both called “a penalty”

Under Making Tax Digital for Income Tax there are two separate penalty systems, and confusing them is where most of the fear comes from:

• Late submission penalties — for sending a quarterly update or your tax return in late. These are points-based. You collect points, and only when you cross a threshold does money change hands (£200).
• Late payment penalties — for paying the tax itself late. These are not points-based. They are a percentage of the tax you owe, and they scale with how many days late you are.

They are governed by different rules, they trigger on different dates, and in 2026/27 only one of them can actually cost you anything. Keep them apart in your head and the whole regime becomes far less frightening than the headlines suggest.

2. Quarterly updates are penalty-free in 2026/27

The most reassuring fact, and the one worth saying first, is set out in black and white on GOV.UK:

You still have to keep digital records and send the four updates before you can file your return, but if one goes in late during this first year there is no point and no fine. Points on quarterly updates only start to apply for tax years after 2026/27 — that is, from 2027/28 onward. Until then, the only submission that carries a late-filing penalty is the tax return itself.

3. Late submission: points and the £200

When late-submission penalties do apply, they work like penalty points on a driving licence:

• Each late submission — a quarterly update (from 2027/28) or a tax return — earns you one penalty point.
• You keep collecting points until you hit the threshold. Reaching it triggers a £200 penalty, and then a further £200 for every later deadline you miss while you remain at the threshold.
• You can only get one point per deadline. If you run more than one business and send more than one quarterly update late for the same period, that is still a single point.
• Your MTD for Income Tax points are separate from any VAT penalty points. They do not add together.

So a single late return is a point, not a fine. The £200 only appears once you are a repeat offender — which is exactly why the threshold number matters so much, and why so many write-ups get it wrong.

4. The number the explainers get wrong: 4, not 2

You will see “the threshold is two points” stated confidently all over the place. For the people MTD was actually made mandatory for, that is wrong. There are two different thresholds, and which one is yours depends on whether you were required to join or volunteered early:

The “two points” figure comes from the volunteers’ guidance. If you are in the first mandated wave — over £50,000 of qualifying income, in MTD because you had to be — your threshold is 4 points, so it takes four separate late submissions before any money is due. GOV.UK also spells out the switch-over: someone who volunteers on the 2-point threshold and is then required to use MTD moves to the 4-point threshold, and any point they already hold is adjusted so they stay the same distance from the new line.

None of this is a reason to be casual — a point is still a point, and four of them is a real £200 — but it does mean the mandated majority have more headroom than the “two strikes” version implies.

5. Late payment: the one that can bite this year

Here is the penalty the quarterly-update panic tends to bury. Because filing a 2026/27 update late costs nothing, the only MTD penalty most people can actually incur in the first year is for paying their tax late — and that one is a percentage of the bill, not a flat £200.

Late payment penalties apply to tax you have not paid in full by the due date — the balancing payment on your Self Assessment bill, or extra owed after an amendment. They do not apply to payments on account. In your first year under the new penalties you get a 30-day grace period from the due date to pay or to set up a payment plan; after your first year that shrinks to 15 days. This is how it scales:

* The 16–30-day charge is waived only in your first year of the new penalties. If you volunteered earlier, 2026/27 may not be your first year, in which case 3% applies from day 16.

Two things compound on top of the percentages. First, ordinary late-payment interest runs from the very first day the payment is late, separately from these penalties — there is no grace period on interest. Second, the sooner you pay, the smaller it all is, because each layer is pegged to what was still outstanding at day 15 and day 30. The practical takeaway for 2026/27: filing late is free, but a tax bill you cannot cover by 31 January 2028 is where the cost actually lands. If you might struggle, GOV.UK is explicit that contacting HMRC to set up a payment plan pauses the penalties from the date you get in touch.

6. How penalty points come off again

Points do not sit on your record forever, but how you clear them changes completely once you reach the threshold:

• Below the threshold (fewer than 4 points, for the mandated), each point is removed automatically 24 months after the deadline you missed. Do nothing and it expires.
• At the threshold, points stop expiring one by one. To clear the lot you must meet two conditions together: submit everything on time for 12 months (quarterly updates and your tax return), and file any outstanding updates and returns for the previous 24 months. Only then does the whole balance reset.

The design is deliberate: the occasional slip clears itself, but once you have shown a pattern HMRC makes you demonstrate a clean run before wiping the slate. You can see the exact removal date for any point in your HMRC online account.

7. What to actually do about it

The honest summary for someone in the first mandated wave:

• Send the quarterly updates, but do not panic about their deadlines this year — a late 2026/27 update is penalty-free. Get them in mainly because you cannot file your return until you have.
• Protect the return and the payment. The late-submission points and the late-payment percentages both hang off the 31 January date. One on-time return keeps you off the points ladder entirely; one covered payment keeps you clear of the percentages.
• Know the number early. Late-payment penalties only exist because the bill arrives as a surprise. Work out roughly what you will owe as the year goes, and set it aside, and the whole of section 5 becomes irrelevant.