Key Takeaways
- 2026/27 is a grace period — no penalty points for late quarterly submissions in your first year
- Late payment penalties still apply from day one — interest accrues immediately
- Two separate penalty systems: one for late submissions, one for late payments
- Points threshold = £200 fine — you accumulate points before any submission fine hits
- Late payment penalties are percentage-based — 2% at day 16, another 2% at day 31, then annualised 4% ongoing
The New MTD Penalty System
From 6 April 2026, HMRC is introducing a completely new penalty regime for Making Tax Digital for Income Tax (MTD ITSA). This replaces the old Self Assessment penalty system for anyone earning over £50,000 from self-employment or property.
The new system has two separate penalty tracks:
- Late submission penalties — a points-based system (like driving licence points)
- Late payment penalties — percentage-based charges on unpaid tax
These operate independently. You could have a perfect submission record but still face late payment penalties if you don't pay on time, or vice versa.
Late Submission Penalties (Points System)
Under MTD, you must submit quarterly updates to HMRC plus an End of Period Statement (EOPS) and a Final Declaration. That's up to 6 submissions per year.
How the Points System Works
Every time you miss a submission deadline, you receive 1 penalty point. Points accumulate over a 24-month rolling period.
Once you reach the penalty threshold, you're charged a £200 fixed penalty — and every subsequent late submission also triggers a £200 fine until you bring your points back below the threshold.
| Submission Frequency | Penalty Point Threshold |
|---|---|
| Annual (1 submission/year) | 2 points |
| Quarterly (4 submissions/year) | 4 points |
| Monthly (12 submissions/year) | 5 points |
For most sole traders under MTD, the quarterly threshold of 4 points applies. That means you'd need to miss 4 deadlines before any financial penalty kicks in.
How Points Expire
Points don't last forever. They expire after 24 months of compliance — meaning 24 months where you submit everything on time. Once your points drop below the threshold, you stop getting £200 fines for late submissions.
But here's the catch: the 24-month clock resets every time you miss another deadline. So if you're consistently late, those points stick around.
MTD Quarterly Deadlines
| Quarter | Period Covered | Submission Deadline |
|---|---|---|
| Q1 | 6 April – 5 July | 5 August |
| Q2 | 6 July – 5 October | 5 November |
| Q3 | 6 October – 5 January | 5 February |
| Q4 | 6 January – 5 April | 5 May |
You have one month after each quarter ends to submit your update. Miss that deadline = 1 penalty point.
Late Payment Penalties
Late payment penalties are completely separate from late submission points. These apply to any tax you owe but haven't paid by the due date.
How Late Payment Penalties Work
| When | Penalty | What Happens |
|---|---|---|
| Days 1-15 | No penalty | Grace period — but interest still accrues from day 1 |
| Day 16 | 2% of unpaid tax | First late payment penalty charged |
| Day 31 | Additional 2% of unpaid tax | Second late payment penalty charged |
| Day 31 onwards | 4% per annum (annualised) | Ongoing daily charge until paid in full |
Important: Unlike the submission points system, late payment penalties apply from day one of MTD — there is no grace period for late payments, even during 2026/27.
Example: £5,000 Tax Bill Paid Late
Say you owe £5,000 and pay 60 days late:
- Day 16 penalty: 2% × £5,000 = £100
- Day 31 penalty: 2% × £5,000 = £100
- Days 31-60 ongoing: 4% × £5,000 × (30/365) = £16.44
- Interest: Bank of England base rate (4.5%) + 2.5% = 7% × £5,000 × (60/365) = £57.53
- Total extra cost: £273.97
That's nearly 5.5% of your tax bill in penalties and interest for being just two months late.
Interest Charges
On top of penalties, HMRC charges interest on late payments from the very first day the payment is overdue.
The interest rate is the Bank of England base rate + 2.5%. As of February 2026, that's:
- Base rate: 4.5%
- HMRC late payment interest: 7.0%
Interest accrues daily. It compounds. And it applies even during the 15-day "grace period" before late payment penalties kick in.
The 2026/27 Grace Period
HMRC announced (at Autumn Budget 2025) a 12-month penalty grace period for the first year of MTD (tax year 2026/27).
What the Grace Period Covers
- ✅ No penalty points for late quarterly submissions during 2026/27
- ✅ You won't accumulate points towards the £200 fine threshold
- ✅ Applies to all four quarterly updates in your first MTD year
What the Grace Period Does NOT Cover
- ❌ Late payment penalties still apply — you must still pay tax on time
- ❌ Interest still accrues on any unpaid amounts from day 1
- ❌ Does not extend to 2027/28 — points accumulate normally from April 2027
- ❌ Does not cover End of Period Statements or Final Declarations — only quarterly updates
Think of it as HMRC saying: "We'll give you a year to get used to the quarterly submissions, but you still need to pay what you owe on time."
For a deeper dive, read our MTD Penalty Grace Period guide.
Real Examples: What You'd Actually Pay
Scenario 1: Occasional Late Submitter
Situation: You miss 2 quarterly deadlines in 2027/28 (after the grace period ends) but pay all tax on time.
- Points accumulated: 2 (below 4-point threshold)
- Financial penalty: £0
- Interest charges: £0 (tax paid on time)
- Total cost: £0 — but you're 2 points towards the threshold
Scenario 2: Persistent Late Submitter
Situation: You miss all 4 quarterly deadlines in 2027/28.
- Points accumulated: 4 (hits threshold on 4th miss)
- Financial penalty: £200 (triggered on the 4th late submission)
- Every subsequent late submission: additional £200 each
- Total cost: £200+ per year, potentially rising each quarter
Scenario 3: Tax Paid Very Late
Situation: You owe £10,000 and pay 90 days late.
- Day 16 penalty: 2% × £10,000 = £200
- Day 31 penalty: 2% × £10,000 = £200
- Days 31-90 ongoing: 4% × £10,000 × (60/365) = £65.75
- Interest (90 days): 7% × £10,000 × (90/365) = £172.60
- Total extra cost: £638.35
Scenario 4: First-Year Sole Trader (2026/27)
Situation: You miss all 4 quarterly deadlines but pay tax on time.
- Points accumulated: 0 (grace period — points not counted)
- Financial penalty: £0
- Interest charges: £0 (tax paid on time)
- Total cost: £0 — the grace period saves you
But don't rely on this. Build good habits in 2026/27 because penalties hit fully from 2027/28 onwards.
How to Avoid Every MTD Penalty
1. Use MTD-Compatible Software
You need HMRC-recognised software to submit quarterly updates. Spreadsheets alone won't work — you need either dedicated MTD software or bridging software that connects your spreadsheets to HMRC.
2. Set Calendar Reminders
Mark these dates in your calendar every year:
- 5 August — Q1 submission deadline
- 5 November — Q2 submission deadline
- 5 February — Q3 submission deadline
- 5 May — Q4 submission deadline
Set reminders 2 weeks before each deadline. Most late submissions happen because people simply forget.
3. Keep Records Up to Date
Don't leave bookkeeping to the last minute. Update your records weekly — even 15 minutes every Friday will keep you on track. When deadline day arrives, submitting is just a click.
4. Pay Tax Promptly
Late payment penalties are the expensive ones. Set aside tax money as you earn it — a good rule of thumb is 25-30% of your income into a separate savings account.
If you can't pay on time, contact HMRC about a Time to Pay arrangement before the deadline. This can prevent late payment penalties.
5. Don't Panic About the First Year
The 2026/27 grace period means you won't get submission penalty points. Use this year to build habits and get comfortable with the quarterly rhythm.
Old Self Assessment Penalties vs New MTD Penalties
| Feature | Old Self Assessment | New MTD System |
|---|---|---|
| Late filing penalty | £100 fixed (immediately) | Points-based (threshold before fine) |
| Fine amount | £100, then £10/day after 3 months | £200 per offence (after threshold) |
| Filing frequency | Annual | Quarterly + EOPS + Final Declaration |
| Late payment (day 31) | 5% of unpaid tax | 2% + 2% = 4% of unpaid tax |
| Late payment (6 months) | Additional 5% | 4% annualised ongoing |
| Interest rate | Base rate + 2.5% | Base rate + 2.5% (same) |
| Grace period | None | 12 months (2026/27) for submissions only |
The new system is actually more forgiving for occasional late submitters (you get warnings before fines) but more demanding overall because you have 4x more submissions to make each year.
How to Appeal MTD Penalties
If you receive a penalty you believe is unfair, you can appeal. Valid grounds include:
- Reasonable excuse: serious illness, bereavement, fire/flood, HMRC system outage
- HMRC error: incorrect penalty calculation or system failure
- Timing dispute: you believe you submitted on time
What is NOT a reasonable excuse:
- You forgot
- You didn't know about MTD
- Your software was difficult to use
- You were too busy
- You relied on someone else who let you down (in most cases)
For a full guide on appealing, read our HMRC Penalty Appeal Guide.
Calculate Your Potential Penalties
Use our free MTD Penalty Calculator to see exactly how much you'd pay in penalties and interest based on your specific situation.
Enter your tax owed, how late your payment is, and the calculator shows you:
- Late payment penalties at each stage
- Interest charges
- Total extra cost
- Comparison with paying on time
Get Ready for MTD
Our MTD Readiness Toolkit includes everything you need: quarterly deadline tracker, software comparison guide, record-keeping templates, and penalty avoidance checklists.
View Products →Frequently Asked Questions
Do MTD penalties apply to me?
If you're a sole trader or landlord with gross income over £50,000, MTD penalties apply from 6 April 2026. If your income is £30,000-£50,000, they apply from 6 April 2027.
Can I still file a Self Assessment tax return?
No. Once you're in the MTD system, your quarterly updates and Final Declaration replace the traditional Self Assessment return. You'll use MTD software instead of the HMRC online portal.
What if I can't afford to pay my tax?
Contact HMRC before the payment deadline to arrange a Time to Pay plan. This can prevent late payment penalties (though interest may still apply).
Do penalty points carry over between tax years?
Yes. Points last for 24 months of compliant behaviour. If you get 2 points in 2027/28 and 2 more in 2028/29, you'll hit the threshold and start getting £200 fines.
What happens if I stop being self-employed?
If you deregister from Self Assessment, your penalty points expire. But you must still file your Final Declaration for the period you were self-employed.