If you are a sole trader or landlord affected by MTD for Income Tax, understanding how these penalties work can help you avoid unnecessary costs and stay compliant with your tax obligations.
Key takeaways
- MTD for Income Tax includes separate penalties for late submissions and late payments.
- Late submission penalties use a points-based system. Once you reach the threshold, a £200 penalty applies.
- MTD for Income Tax penalty points are separate from VAT penalty points.
- Taxpayers mandated into MTD for Income Tax from April 2026 benefit from a soft-landing period covering the first four quarterly updates.
- From April 2027, the reformed penalty regime will also apply to most Self Assessment taxpayers who are not yet required to follow MTD for Income Tax.
This article explains when the new penalties apply, how the points-based system works, what the soft landing period covers, and what practical steps you can take to prepare.
Here’s what we’ll cover:
Quick answer: what are MTD for Income Tax penalties?
MTD for Income Tax penalties are HMRC penalties for missing filing deadlines or paying tax late under the Making Tax Digital regime. Late submissions can lead to penalty points and financial penalties, while late payments can result in percentage-based penalties and interest charges.
When do the new MTD penalty systems apply?
The new penalty systems apply from the tax year you start using MTD for Income Tax.
The rollout is happening in phases:
- From April 2026: sole traders and landlords with qualifying income over £50,000.
- From April 2027: sole traders and landlords with qualifying income over £30,000.
- From April 2028: sole traders and landlords with qualifying income over £20,000.
From April 2027, the reformed penalty regime will also apply to most Self Assessment taxpayers who are not already mandated for MTD for Income Tax.
Although these systems were developed alongside Making Tax Digital, they are gradually becoming the standard approach for Income Tax compliance. Many taxpayers are likely to encounter them first through MTD for Income Tax.
Similar penalties have already applied to MTD for VAT since January 2023.
What is the new MTD late submission penalty system?
The MTD late submission penalty system is designed to encourage taxpayers to meet regular filing deadlines. Rather than applying an immediate financial penalty for every missed deadline, HMRC uses a points-based system.
In simple terms, every time you miss a regular submission deadline, you receive a penalty point. Once you reach the relevant threshold, a financial penalty applies.
For MTD for Income Tax, regular submission obligations include:
- Quarterly updates.
- End-of-year declarations.
The system does not generally apply to one-off submissions. Existing penalty rules continue to apply for issues such as inaccurate tax calculations or paying the wrong amount of tax.
How does the new MTD late submission penalty system work?
The system works in a similar way to penalty points on a driving licence. Every missed submission deadline can result in a penalty point. HMRC will normally notify you when a point is added.
A £200 financial penalty is triggered once the points threshold is reached.
Penalty point thresholds
| Submission frequency | Points threshold |
| Monthly | Five points |
| Quarterly | Four points |
| Annual | Two points |
Quarterly updates under MTD for Income Tax fall within the quarterly threshold.
Each tax has its own separate points tally. For example, MTD for Income Tax points do not combine with MTD for VAT points.
Examples
If you have three sole trader businesses and miss all three MTD for Income Tax quarterly update deadlines in the same period, this would generally result in one penalty point because HMRC treats them as the same submission obligation.
However, if you miss two different types of submission obligation during the same period, separate points may be applied. his would attract two points. This is because these are not the same kind of submissions.
Do MTD penalty points expire?
Yes, penalty points can expire, but the rules depend on whether you have reached the threshold.
If you are below the threshold
Points expire after two years, counted from the month after the month in which you received the point.
If you are at the threshold
Points do not automatically expire. To reset your position, you must:
- Meet all submission deadlines during a defined period.
- Submit everything that was due during the previous 24 months.
The required compliance period is:
- Annual submissions: 24 months.
- Quarterly submissions: 12 months.
- Monthly submissions: six months.
What are the new Making Tax Digital late payment penalties?
Alongside the late submission points regime, HMRC has introduced a separate late payment penalty system.
Unlike late submission penalties, late payment penalties are not points-based. They depend on how late the payment is and how much tax remains outstanding.
Penalties for the 2026/27 tax year
| Timing | Penalty |
| Up to 15 days late | No penalty |
| Day 15 | 3% of the outstanding amount |
| Day 30 | Additional 3% charge |
| Day 31 onwards | 10% annualised penalty charged daily |
Changes from April 2027
The government has announced that the day 15 and day 30 rates will increase from 3% to 4%. The 10% annual charge remains unchanged.
First-year easement
In your first year under the new late payment penalty regime, the day 15 penalty does not apply. You effectively have until day 30 before a late payment penalty can be charged.
Interest charges
Late payment interest is charged separately from penalties. Interest can continue to accrue even if penalties stop increasing.
Time to Pay arrangements
If you cannot pay on time, arranging a Time to Pay agreement with HMRC can help stop additional late payment penalties from accruing, although interest may continue to apply.
What is the soft landing period for MTD for Income Tax?
HMRC has confirmed a soft landing period for taxpayers mandated into MTD for Income Tax from April 2026.
During this period, missing the first four quarterly update deadlines does not attract penalty points, provided the relevant conditions are met.
The soft landing applies to quarterly updates due on:
However, the soft landing does not apply to the end-of-year tax return for 2026/27, which remains due by 31 January 2028. Penalties can still apply if that deadline is missed.
The soft landing should not be treated as extra preparation time. It is intended to help taxpayers adjust to quarterly reporting while still making a genuine effort to comply.
Can I appeal against points or penalties for MTD?
Yes. HMRC allows taxpayers to appeal penalty points and penalties where appropriate.
You may wish to appeal if:
- You believe a point or penalty was applied incorrectly.
- You had a reasonable excuse for missing the deadline.
- Special circumstances apply.
The process normally begins with an HMRC review. If you remain dissatisfied, you can appeal to the First-tier Tax Tribunal.
What this means for your business
If you are affected by MTD for Income Tax, avoiding penalties is likely to depend on having reliable processes in place rather than reacting at the last minute.
Consider:
- Keeping digital records throughout the year.
- Using compatible accounting software.
- Setting reminders for quarterly update deadlines.
- Factoring tax payments into your cash flow planning.
- Seeking professional advice if your circumstances are complicated.
The new regime is designed to encourage good compliance habits. Businesses that stay organised should find it easier to avoid points, penalties, and unnecessary interest charges.
Final thoughts
Other than understanding the rules, the most important preparation is ensuring your systems and processes are ready to support MTD for Income Tax reporting requirements.
The soft landing period is helpful, but it should be viewed as an opportunity to establish good filing habits rather than as an extension to the deadlines themselves.
MTD penalties: FAQs
Missing a regular submission deadline, such as a quarterly update or annual declaration, can result in a penalty point. Reaching the relevant threshold triggers a £200 financial penalty.
No. HMRC keeps separate points tallies for each tax. MTD for Income Tax points do not combine with VAT points.
Pay your tax on time or contact HMRC as soon as possible to discuss a Time to Pay arrangement if you cannot pay in full.
Yes, if you are below the threshold. Different rules apply after reaching the threshold because a good compliance history must be demonstrated before points are removed.
The soft landing removes penalty points for the first four quarterly updates for taxpayers joining MTD for Income Tax from April 2026, provided the relevant conditions are met. It does not apply to the end-of-year tax return.
No. Late submissions are subject to the points-based system. Late payments are subject to percentage-based penalties and interest charges.
HMRC confirmed in its July 2025 Transformation Roadmap that it does not intend to introduce Making Tax Digital for Corporation Tax. Companies will continue to file annual Company Tax Returns, known as CT600, as they do currently.
For more information about how Sage can help sole traders manage their tax obligations, explore Sage Sole Trader. To learn more about the hidden admin burden on small businesses, visit our digital newsroom. If you have questions, please contact us.
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