MTD Penalties: What Happens If You Don't Comply

Making Tax Digital penalties for late submissions and payments. HMRC's new points-based penalty system, fixed fines, interest charges, and how to appeal if you disagree.

10 min readUpdated 20 January 2026

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Making Tax Digital penalties apply if you miss quarterly submission deadlines or fail to maintain digital records. HMRC's new points-based system gives you some leeway—you won't get a fine for your first late submission—but penalties accumulate quickly once you hit the threshold. Late payments incur separate percentage-based charges plus interest.

This guide explains how MTD penalties work and how to avoid them.

MTD Penalty System Overview

HMRC introduced a new penalty system for MTD that replaces the old fixed-penalty approach:

| Penalty Type | How It Works | |-------------|--------------| | Late submission | Points-based system | | Late payment | Percentage of tax owed | | Interest | Daily charges on unpaid amounts |

Key Differences from Old System

| Old System | New MTD System | |------------|----------------| | £100 fixed penalty immediately | Points accumulate first | | Same penalty regardless of history | Threshold before financial penalty | | Limited escalation | Clear progression and reset mechanism |

Late Submission Penalties

How Points Work

Each time you submit late (quarterly update or final declaration), you receive 1 penalty point.

| Submission Frequency | Point Threshold | |---------------------|-----------------| | Quarterly (MTD ITSA) | 4 points | | Monthly (MTD VAT) | 5 points | | Annual | 2 points |

For MTD for Income Tax with quarterly submissions, 4 points triggers a £200 penalty.

The Penalty Progression

| Point | Result | |-------|--------| | 1st late submission | 1 point (no fine) | | 2nd late submission | 2 points (no fine) | | 3rd late submission | 3 points (no fine) | | 4th late submission | 4 points = £200 penalty | | 5th+ late submission | £200 per late submission |

Removing Points

Points expire after a period of compliance:

| Your Threshold | Compliance Period Needed | |----------------|-------------------------| | 4 points (quarterly) | 24 months without late submission | | 2 points (annual) | 24 months without late submission |

Once points expire, you return to 0 and the cycle restarts.

Staying Below Threshold

| Situation | Points | Financial Penalty | |-----------|--------|-------------------| | 1 late submission in 2 years | 1 | £0 | | 2 late in 2 years, then compliant | 0 (expired) | £0 | | 4 late in 2 years | 4 | £200 | | 5 late in 2 years | 5 | £400 |

Late Payment Penalties

Separate from submission penalties, late payment incurs percentage-based charges:

Payment Penalty Rates

| Days Late | Penalty | |-----------|---------| | 1-15 days | No penalty | | 16-30 days | 2% of tax unpaid at day 15 | | 31+ days | Additional 2% of tax unpaid at day 30 | | Ongoing | 4% per year on outstanding balance |

Example: Late Payment

You owe £3,000, pay nothing until day 45:

| Stage | Calculation | Penalty | |-------|-------------|---------| | Day 15 | £3,000 unpaid | — | | Day 16 | 2% × £3,000 | £60 | | Day 30 | £3,000 still unpaid | — | | Day 31 | 2% × £3,000 | £60 | | Day 45 | 4% per year (prorated) | ~£5 | | Total penalties | | £125 |

Plus interest charges.

Interest on Late Payment

HMRC charges interest on unpaid tax from the due date:

| Interest | Rate | |----------|------| | Current rate | Bank of England base rate + 2.5% | | Applied | Daily on unpaid balance | | From | Original due date |

Interest compounds, so paying earlier always reduces your total bill.

Failure to Keep Digital Records

MTD requires digital record keeping. Failure to comply can result in:

| Failure | Potential Penalty | |---------|-------------------| | No digital records | Up to £3,000 | | Not using MTD-compatible software | Up to £3,000 | | Breaking digital links | Up to £3,000 |

These penalties are at HMRC's discretion and typically apply to deliberate non-compliance rather than genuine mistakes.

Failure to Use MTD Software

What HMRC Expects

| Requirement | Consequence of Non-Compliance | |-------------|------------------------------| | Use recognised software | Cannot submit quarterly updates | | Maintain digital links | Breaks compliance chain | | Submit via API | HMRC may reject submission |

If you try to file your annual Self Assessment without having submitted MTD quarterly updates (when required), HMRC will know you haven't complied.

Quarterly Submission Deadlines

Missing these triggers penalty points:

| Quarter | Period | Deadline | |---------|--------|----------| | Q1 | 6 Apr – 5 Jul | 7 August | | Q2 | 6 Jul – 5 Oct | 7 November | | Q3 | 6 Oct – 5 Jan | 7 February | | Q4 | 6 Jan – 5 Apr | 7 May | | Final declaration | Full year | 31 January |

Learn more: MTD Quarterly Submission Deadlines

Final Declaration Penalties

The final declaration (replacing the Self Assessment tax return) is due 31 January:

| Late Filing | Points/Penalty | |-------------|----------------| | 1 day late | 1 point added | | At threshold | £200 penalty |

The final declaration counts toward your penalty points total.

Payment Due with Final Declaration

| What's Due | Deadline | |------------|----------| | Remaining tax for year | 31 January | | First payment on account | 31 January | | Second payment on account | 31 July |

First Year: Soft Landing Period

HMRC has indicated a "soft landing" approach for the first year of MTD:

| Aspect | Expected Treatment | |--------|-------------------| | First-time errors | Guidance rather than penalty | | Genuine confusion | Support offered first | | Deliberate non-compliance | Normal penalties apply |

This doesn't mean no penalties—it means HMRC may be more lenient for genuine mistakes as taxpayers adjust.

Caution: Don't rely on the soft landing. Establish good habits from the start.

Reasonable Excuse

What Qualifies

HMRC may cancel penalties if you have a "reasonable excuse":

| Likely Accepted | Unlikely Accepted | |-----------------|-------------------| | Serious illness | Being too busy | | Death of close family member | Not knowing the deadline | | HMRC system failure | Finding it confusing | | Fire, flood, theft of records | Relying on someone else | | Unexpected hospital stay | Cash flow problems | | Partner or accountant seriously ill | Forgot |

Reasonable Excuse Requirements

To succeed:

  1. The excuse must have caused the failure
  2. You must have acted as soon as reasonably possible once the excuse ended
  3. You must have a reasonable excuse for the full period of delay

Example: Successful Excuse

Scenario: You were hospitalised for emergency surgery during the quarterly deadline. You submitted 10 days after leaving hospital.

HMRC likely response: Reasonable excuse—penalty cancelled.

Example: Unsuccessful Excuse

Scenario: You were very busy with work and forgot the deadline. You submitted 2 weeks late.

HMRC likely response: Not a reasonable excuse—penalty stands.

How to Appeal a Penalty

Step 1: Check the Deadline

Appeal within 30 days of the penalty notice.

Step 2: Gather Evidence

| Excuse | Evidence Needed | |--------|-----------------| | Illness | Medical records, hospital letters | | Bereavement | Death certificate, relationship proof | | Technical failure | Screenshots, error messages | | Theft/fire | Police report, insurance claim |

Step 3: Submit Appeal

Online: Through your Government Gateway account

By post: Write to the address on the penalty notice

What to Include

| Element | Details | |---------|---------| | Penalty reference | From the notice | | Tax period | Which submission was late | | Your excuse | What happened | | Evidence | Attached documents | | When you could comply | When excuse ended | | What you did | Actions taken once able |

Avoiding MTD Penalties

1. Set Up Before Go-Live

Don't wait until MTD is mandatory:

| Action | When | |--------|------| | Choose MTD software | 6 months before | | Connect bank | 4 months before | | Test quarterly process | 2 months before |

Learn more: MTD Preparation Checklist

2. Use Deadline Reminders

| Method | Timing | |--------|--------| | Calendar alerts | 1 week before each deadline | | Software notifications | Built-in reminders | | Accountant reminders | If using professional help |

3. Submit Early

| Approach | Benefit | |----------|---------| | Submit mid-month | Buffer for problems | | Review before deadline week | Time to fix errors | | Never submit on deadline day | No last-minute failures |

4. Categorise Regularly

Don't leave all categorisation until deadline:

| Frequency | Task | |-----------|------| | Weekly | Review new transactions | | Monthly | Reconcile and clean up | | Quarterly | Final review and submit |

5. Have a Backup Plan

| Issue | Backup | |-------|--------| | Main computer fails | Access software on phone/tablet | | Internet down | Mobile data or nearby WiFi | | Software issue | Contact support immediately |

Penalty Comparison: MTD vs Old Self Assessment

| Aspect | Old Self Assessment | MTD | |--------|--------------------|----| | First late filing | £100 immediately | 1 point (no fine) | | 4th late in 2 years | £100 + potential daily penalties | £200 (threshold reached) | | Late payment | 5% at 30 days | 2% at 15 days + 2% at 30 days | | Record keeping | Rarely enforced | Active requirement |

The new system is more forgiving initially but has clearer consequences for repeat offenders.

Multiple Income Sources

If you have both self-employment and property income:

| Scenario | Submissions Required | |----------|---------------------| | One self-employment | 4 quarterly + 1 final | | One rental property | 4 quarterly + 1 final | | Both | 8 quarterly + 1 final (combined) |

Note: HMRC may allow combined quarterly submissions. Check current guidance.

Each late submission adds to your single points total—you don't get separate thresholds for each income source.

What If You Can't Pay?

If you owe tax but can't pay immediately:

Time to Pay Arrangement

Contact HMRC before the deadline:

| Option | Details | |--------|---------| | Online time to pay | For bills up to £30,000 | | Phone arrangement | For larger amounts | | Payment plan | Spread over months |

A time to pay arrangement doesn't prevent late payment penalties entirely, but demonstrates good faith.

Priority

| Priority | Action | |----------|--------| | 1st | Submit on time (avoid points) | | 2nd | Pay what you can | | 3rd | Contact HMRC about remainder |

Summary: MTD Penalty Quick Reference

Late Submission (Points System)

| Points | Penalty | |--------|---------| | 1-3 | None | | 4 (threshold) | £200 | | 5+ | £200 per late submission |

Late Payment

| Days Late | Penalty Rate | |-----------|-------------| | 1-15 | 0% | | 16-30 | 2% | | 31+ | Additional 2% + 4% per year |

Deadlines

| Submission | Deadline | |------------|----------| | Q1 (Apr-Jul) | 7 August | | Q2 (Jul-Oct) | 7 November | | Q3 (Oct-Jan) | 7 February | | Q4 (Jan-Apr) | 7 May | | Final declaration | 31 January |

Avoid Penalties with TaxFolio

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  • Deadline reminders — notifications before each quarterly deadline
  • Progress tracking — see what's categorised and what's pending
  • One-click submission — submit quarterly updates easily
  • Bank connection — transactions imported automatically
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Frequently Asked Questions

What are the penalties for missing MTD deadlines?
MTD uses a points-based system. Each late quarterly submission adds 1 point. At the threshold (4 points for quarterly filers), you receive a £200 penalty. Further late submissions trigger additional £200 penalties until you achieve compliance.
What happens if I don't sign up for MTD?
If MTD applies to you and you don't comply, you cannot file your tax return correctly. You'll face late filing penalties (£100 initial, then escalating) plus any MTD-specific penalties for missed quarterly submissions.
How does the new MTD penalty system work?
HMRC's new penalty system awards points for late submissions. Quarterly filers reach the penalty threshold at 4 points. Points expire after 24 months of compliance. Late payment penalties are separate: 2% at 15 days, 2% more at 30 days, then 4% annually.
Can I appeal an MTD penalty?
Yes. Appeal within 30 days if you have a reasonable excuse (serious illness, bereavement, HMRC system failure). 'Didn't know' or 'too busy' aren't accepted. Appeal online or in writing explaining your circumstances.

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