Penalties make people nervous. They shouldn't, because MTD's penalty regime is deliberately forgiving for one-off slip-ups and firm on persistent non-compliance. This guide walks through exactly how it works so you know where you stand.
The two kinds of penalty
- Late submission penalties, for missing a deadline to file something (quarterly update or final declaration).
- Late payment penalties, for not paying the tax you owe by the due date.
They're separate. You can be late on one and on time for the other. Each has its own rules.
Late submission penalties: the points system
MTD uses a points-based system. Each late submission earns a point. A financial penalty is only charged when you reach the threshold.
Key numbers
For mandated MTD customers (which is most people once their income is above the threshold):
- Threshold: 4 points.
- Penalty when you hit the threshold: £200.
- Each subsequent late submission after that: another £200.
- Points expiry: points below the threshold clear automatically 24 months after the month in which the failure occurred, as long as you stay compliant.
- Points apply to: quarterly updates and the final declaration. One pooled balance of points, not separate trackers.
What that means in practice
If you miss your first quarterly update: 1 point, no financial penalty. HMRC sends you a letter saying "you've got a point". You still have to file that update; the deadline has gone, but submitting late stops further escalation.
If you miss a second update: 2 points, no financial penalty yet.
If you miss four: 4 points, £200 penalty, and from that point, each additional late submission is another £200.
If you're above the threshold, you clear your points only by:
- Submitting all outstanding returns, and
- Staying compliant for a "period of compliance" (12 months for annual submissions; shorter for quarterly).
Below the threshold, individual points drop off automatically after 24 months.
The 2026-27 easement
This easement exists precisely because HMRC expect teething issues in year one and don't want to punish people who are honestly trying. It doesn't mean "don't bother filing", you still have to file; it just means a late filing doesn't accumulate a point.
Voluntary pilot customers
If you joined MTD voluntarily before being mandated, you're under slightly different rules:
- Quarterly updates are not penalty-bearing (HMRC wants to encourage pilot participation).
- The final declaration has a lower points threshold of 2 points, so £200 is charged on the second missed annual deadline rather than the fourth.
If you're thinking about volunteering, weigh this up: the quarterly safety net is generous, but the final declaration is stricter. See Signing up.
Late payment penalties
If you don't pay on time, a different regime kicks in. HMRC updated the rates for the new regime from 1 April 2025, and they are higher than they used to be. Plan for them.
The rates (from 1 April 2025)
| Days after due date | Penalty |
|---|---|
| 0 – 15 days | No penalty. Interest only. |
| 15 days (one-off) | 3% of the outstanding tax, charged on day 15. |
| 30 days (one-off) | Another 3% of the outstanding tax, charged on day 30. |
| Day 31 onwards | 10% per annum, accruing daily on anything still outstanding. |
Interest runs from day one alongside the penalty.
First-year easement for late payment
Good news: for the 2026-27 tax year (due 31 January 2028), customers coming into MTD get 30 days instead of 15 before penalties start. This is a one-off transition measure. You still accrue interest, but the first 3% penalty doesn't land until day 30 and the second doesn't land until day 45 (approximately). That's meaningful breathing room.
From 2027-28 onwards, the standard 15-day grace period applies.
Time to Pay stops penalties
If you can't pay, contacting HMRC to set up a Time to Pay arrangement stops late-payment penalties accruing from the day you contact them (as long as you stick to the plan). It doesn't stop interest, interest runs until the debt is cleared, but it prevents the penalty side of things from getting worse.
Time to Pay can be set up online for smaller balances through your HMRC account, or by phone for larger amounts. See Paying your tax.
Reasonable excuses
A "reasonable excuse" cancels a penalty. HMRC accepts things like:
- Serious illness or an unexpected hospital stay.
- Bereavement of a close family member.
- Computer or software failure while preparing your submission.
- HMRC's own systems being unavailable.
- Fire, flood, or theft preventing you from working.
- Postal or courier delays outside your control.
If you have a reasonable excuse, contact HMRC as soon as you can, explain, and put things right. A good-faith excuse, raised promptly, is usually accepted.
Appeals
If you get a penalty you think is wrong:
- Internal review: ask HMRC to look at the decision again. This is free and often enough to resolve a clearly wrong penalty.
- Tribunal: if internal review doesn't resolve it, you can appeal to the First-tier Tribunal (Tax). This is also free for the taxpayer.
Time limits are important. You generally have 30 days to appeal after the penalty is issued. Don't sit on it.
The penalty regime exists to deter repeated non-compliance, not to punish someone who had a rough month.