Making Tax Digital didn't just change how you keep records — it replaced the old late-filing penalty with a completely different system. If you're now filing quarterly updates, understanding how HMRC's points-based penalty regime actually works matters, because the rules are stricter — and less forgiving — than the flat fines Self Assessment used to carry. This is a deep dive into the mechanics; if you want the practical deadline checklist instead, see our 7 August countdown guide.
Two Separate Systems — Don't Confuse Them
HMRC now runs two independent penalty regimes under MTD: one for late submission (points-based) and one for late payment (percentage- and interest-based). Being on time with your tax payment does not protect you from a late submission point, and vice versa — a perfectly filed quarterly update doesn't excuse a late balancing payment. Each is tracked separately.
How Submission Points Build Up
Every missed deadline — a quarterly update or your final declaration — earns one penalty point. It doesn't matter how many businesses you run: if you're self-employed and a landlord and you miss both updates for the same quarter, that's still only one point per deadline, not per business.
For quarterly filers, the penalty point threshold is 4. Reach it, and HMRC issues a £200 financial penalty — and then a further £200 every time you miss another deadline after that, for as long as you stay at the threshold.
There's a phase-in detail worth knowing: in your first year under the new penalty rules (2026/27), you get 30 days from the deadline before a missed submission converts into a formal penalty point against you. From the second year (2027/28) onward, that window shortens to 15 days. Don't rely on the grace period as a buffer — it exists to catch genuine one-off slips, not to become your new deadline.
How to Get Your Points Removed
Below the 4-point threshold, points simply expire on their own — 24 months after the deadline they relate to. Once you hit the threshold and take the £200 penalty, though, automatic expiry stops. To reset to zero from there, you need to satisfy both of these over a rolling 12-month period:
- Submit every quarterly update and tax return on time for 12 consecutive months, and
- Clear any outstanding submissions from the previous 24 months
In practice this means one bad patch can follow you for a year or more — the incentive is to never reach the threshold in the first place, not to fix it quickly afterward.
Late Payment Penalties: A Different Animal
Miss a tax payment and the points system doesn't apply — instead you face escalating percentage charges plus interest:
| How late | What happens |
|---|---|
| Within the grace period (30 days in 2026/27, 15 days from 2027/28) | No penalty if paid, or if you agree a Time to Pay arrangement with HMRC |
| First penalty point | 4% of the tax outstanding |
| Still unpaid 15 days later | A further 4% of the tax still outstanding |
| From day 31 onward | An additional penalty accruing daily at an annual rate of 10%, charged until paid or for up to two years |
Late payment interest is charged on top of all of this, from the first day the tax is overdue until it's paid in full. Combined, a payment left unpaid for months can end up costing far more than the £200 flat penalties on the submission side — payment is where the real financial risk sits.
If You Disagree With a Penalty
Every penalty point or financial penalty comes with a written notification, and the letter sets out how to appeal. Reasonable excuses — genuine illness, bereavement, a software or HMRC system failure that wasn't your fault — can succeed, but they need to be raised through the formal appeal process, not just explained after the fact. Full detail is on HMRC's official guidance: Penalties for Making Tax Digital for Income Tax.
The Simplest Way to Avoid All of This
Every rule above only matters if you miss a deadline. Calendar reminders two weeks out, a monthly bookkeeping habit rather than a quarterly scramble, and having someone else check your figures before you submit are the three things that keep clients off HMRC's points system entirely.
How SMD Accountancy Can Help
We handle quarterly MTD submissions for clients so the deadline is never something you're tracking alone. If you've already missed one update, or you'd rather hand the filing over before you do, get in touch — the earlier we're involved, the easier it is to keep your points record at zero.