If you are within the scope of Making Tax Digital for Income Tax, or approaching the threshold that will bring you into scope, there is an important change to the penalty regime that you need to understand. The way HMRC charges penalties for late submissions and late payments is changing under MTD for Self Assessment, and the new rules are already in effect for those who joined from April 2026.
This article explains how the new penalty system works, what the key deadlines are, and what to do if you are concerned about your position.
Who does this apply to?
The new MTD ITSA penalty rules apply to individuals who are required to use Making Tax Digital for Income Tax. If you are a sole trader or landlord with gross income above £50,000, you should already be within scope from April 2026. The threshold drops to £30,000 from April 2027 and £20,000 from April 2028, bringing more people into scope every year.
It is worth noting that the new penalties apply to your personal tax return under MTD for Self Assessment. They do not apply to company returns, trust or estate returns submitted by a trustee, or partnership returns submitted by a nominated partner. Those returns continue under the existing penalty rules. There are also no changes to how late payment interest works. This remains the same regardless of whether you are within MTD.
When do the new penalties take effect?
The new penalties apply from the tax year in which you join MTD for Self Assessment. So if you joined from 6 April 2026, the new rules apply to you for the 2026 to 2027 tax year onwards.
One important point to be aware of: the current penalties still apply to previous tax years. If you joined MTD ITSA from April 2026, the existing penalty rules still apply to your 2025 to 2026 tax return, which is due on 31 January 2027.
A note on quarterly updates in 2026 to 2027
For the first year of MTD for Self Assessment (the 2026 to 2027 tax year), there are no penalties for missing a quarterly update deadline. This is a transitional concession to allow businesses and individuals time to adjust to the new reporting rhythm. However, this does not mean quarterly updates can be ignored. You still need to keep digital records and send your quarterly updates before you can submit your tax return. The quarterly update deadlines are 7 August, 7 November, 7 February, and 7 May. From the 2027 to 2028 tax year onwards, missing quarterly update deadlines will attract penalty points under the new system.
How the new late submission penalties work
The new late submission penalty system is points-based, which is a significant departure from the previous flat-penalty approach. Each time you miss a quarterly update deadline (from 2027 to 2028 onwards) or a tax return deadline, you receive one penalty point. The penalty point threshold is four points. If you reach four points, you receive a £200 penalty, and a further £200 penalty each time you miss another submission deadline after that.
Importantly, you can only receive one penalty point per deadline, even if you have more than one business and submit more than one quarterly update late. If you are also registered for VAT, your MTD for Self Assessment penalty points are kept entirely separate from your VAT penalty points.
Points below the four-point threshold are removed automatically 24 months after the missed deadline. However, once you reach the threshold, automatic removal stops. To clear all your penalty points after reaching the threshold, you need to meet two conditions: submit your quarterly updates and tax return on time for 12 consecutive months, and submit any outstanding returns for the previous 24 months.
How the new late payment penalties work
The late payment penalty system has also changed, and it is designed to be more proportionate. The longer you leave a payment outstanding, the higher the penalty.
Late payment penalties apply to balancing payments and amounts due following an amendment or assessment. They do not apply to payments on account.
In your first year under the new rules, HMRC gives you a 30-day grace period from the payment due date. If you pay in full or contact HMRC to set up a payment plan within those 30 days, no penalty applies. After the first year, this grace period reduces to 15 days.
Here is how the penalty structure works for the first two tax years:
For the 2026 to 2027 tax year:
- Payment up to 15 days late: no penalty
- Payment 16 to 30 days late: no penalty if it is your first year; 3% of the tax owed at day 15 otherwise
- Payment 31 or more days late: 3% of the tax owed at day 15, plus 3% of the tax owed at day 30, plus an annual rate of 10% per year on the outstanding amount charged daily from day 31, for up to two years
For the 2027 to 2028 tax year:
- Payment up to 15 days late: no penalty
- Payment 16 to 30 days late: 4% of the tax owed at day 15, unless it is your first year
- Payment 31 or more days late: 4% of the tax owed at day 15, plus 4% of the tax owed at day 30, plus an annual rate of 10% per year on the outstanding amount charged daily from day 31, for up to two years
The key message here is that the penalty escalates the longer you leave it. Acting quickly, either by paying or by contacting HMRC, is always the better course of action.
What to do if you cannot pay on time
If you are going to miss a payment deadline, the most important thing is to contact HMRC as soon as possible. You may be able to set up a payment plan to pay in instalments, and if an agreement is reached, penalties will be paused from the date you made contact. If a payment plan cannot be agreed upon, or you do not follow an agreed-upon plan, penalties may still apply. Proactive communication with HMRC is always preferable to silence.
Appealing a penalty
If you receive a late payment penalty, a penalty point, or a £200 late submission penalty, HMRC will write to you with details. If you disagree with the penalty, you have the right to appeal. The letter you receive will explain how to do this.
What happens if your circumstances change?
If your circumstances change and you become exempt from MTD for Self Assessment during the 2026 to 2027 tax year, you will return to the current penalty rules for Self Assessment.
If you become exempt from the 2027 to 2028 tax year onwards, the position is different. From April 2027, the new penalty rules will apply to everyone submitting a personal Self Assessment tax return, not just those within MTD. In that case, becoming exempt does not take you out of the new penalty regime. However, your penalty point threshold reduces from four points to two. If you already have penalty points when your threshold changes, your points are reduced proportionately so that you are no closer to the new, lower threshold than you were to the old one.
What this means in practice
The shift to a points-based system for submissions and a proportionate penalty structure for late payments represents a meaningful change from the old Self Assessment penalty regime. For most people who engage with their obligations on time, the new system is more forgiving; a single missed deadline no longer results in an immediate financial penalty. But for those who accumulate points or leave payments outstanding for extended periods, the consequences escalate quickly.
The practical implications are straightforward. Under MTD for Self Assessment, staying on top of your quarterly updates and keeping your digital records current throughout the year is the most effective way to protect yourself from a penalty position that becomes progressively harder to recover from.
How HB&O can help
If you are within the scope of MTD for Self Assessment, or approaching one of the income thresholds that will bring you into scope, now is the right time to ensure your records, software, and processes are properly set up.
Our team works with sole traders, landlords, and self-employed individuals to prepare for MTD ITSA, implement the right digital tools, and ensure quarterly reporting is manageable alongside the day-to-day demands of running a business. Getting the foundations right from the outset is far simpler than managing penalty points or late payment charges further down the line.
Get in touch with the HB&O team today to arrange a conversation.
