The old Self Assessment penalty system - where a single late filing triggered a flat £100 fine - is being replaced. Under Making Tax Digital for Income Tax, HMRC uses a completely new points-based penalty system for late submissions and a separate percentage-based system for late payments.
The good news: the first year has a soft landing. The bad news: from year two onwards, the system is stricter than what you're used to. Here's exactly how it works. (New to MTD? Read our plain-English explainer first.)
Quick summary: In 2026-27, you won't get penalty points for late quarterly updates. From 2027-28, each late submission earns you a point. Reach 4 points and you face a £200 fine - plus £200 for every subsequent late submission until you're back on track.
The 2026-27 soft landing: what's protected and what isn't
HMRC has confirmed a "soft landing" for the first year of MTD. But "soft landing" doesn't mean "no penalties at all." Here's the distinction:
Protected in year one
Late quarterly updates won't earn penalty points. If you miss the 7 August 2026 deadline or any other quarterly deadline in 2026-27, you won't receive a penalty point. This gives you time to adjust to the new system without financial risk.
Not protected in year one
The final declaration deadline (31 January 2028) can still carry penalties. If you miss the annual final declaration - the submission that replaces your Self Assessment tax return - standard penalties may apply even in year one.
Late payment penalties and interest apply from year one. If you owe tax and don't pay by the due date, the late payment penalty system applies in full. The soft landing only covers late submissions, not late payments.
Don't treat the soft landing as permission to ignore deadlines. Getting into the habit of quarterly submissions from Q1 is much easier than scrambling to catch up later. And your penalty point counter starts fresh in 2027-28 regardless - any bad habits formed in year one will catch up with you.
Late submission penalties: the points-based system
From 2027-28 onwards, HMRC's new penalty system works like penalty points on a driving licence. Each late submission earns you a point. Accumulate enough points and you hit the penalty threshold.
How points accumulate
| Event | Penalty Points | Financial Penalty |
|---|---|---|
| 1st late quarterly update | 1 point (total: 1) | None |
| 2nd late quarterly update | 1 point (total: 2) | None |
| 3rd late quarterly update | 1 point (total: 3) | None |
| 4th late quarterly update | 1 point (total: 4 = threshold) | £200 |
| Every subsequent late submission | No additional points | £200 each time |
The penalty threshold for quarterly obligations is 4 points. Since MTD requires four quarterly updates per year plus a final declaration, you could theoretically reach the threshold in a single tax year if you miss every quarterly deadline.
Once you've hit the threshold, the situation becomes more punishing. Every subsequent late submission - including quarterly updates and the final declaration - triggers a £200 penalty. There's no additional points accumulation; the £200 penalty just keeps being applied until you bring your compliance back on track.
Real-world examples
Let's see how this plays out in practice.
Scenario 1: You miss one deadline in the year
You're a sole trader who submits Q1, Q2, and Q4 on time but misses the Q3 deadline by two weeks.
Result: 1 penalty point. No financial penalty. You're well below the 4-point threshold.
Scenario 2: You ignore MTD and file nothing all year
You don't submit any of the four quarterly updates. By Q4, you've accumulated 4 points and hit the threshold.
Result: 4 penalty points + £200 penalty. If you also miss the final declaration, that's another £200. Total: £400 in penalties.
Scenario 3: You had 3 points from last year and miss one deadline this year
Points carry over between tax years (unless reset). You start the year with 3 points and miss Q1.
Result: 4 points total. Threshold reached. £200 penalty. Every subsequent late submission also triggers £200.
Late payment penalties: separate from late submission
Late payment penalties are completely separate from the submission points system. You can submit everything on time but still face penalties if you don't pay the tax you owe.
| How Late | Penalty |
|---|---|
| 1-15 days late | No penalty (but interest accrues from day 1) |
| 16-30 days late | 2% of the tax outstanding at day 15 |
| 31+ days late | 2% of the tax outstanding at day 15 plus 2% of the tax outstanding at day 30 |
| Ongoing (31+ days) | An additional daily rate of 4% per year on the outstanding amount |
These percentages might look small, but they add up on larger tax bills. On a £5,000 tax bill, being 31 days late triggers £200 in penalties (2% + 2%) plus the ongoing daily charge on top.
Interest on late payments
Interest starts accruing from the day after the payment deadline - not from day 16 when the first penalty kicks in. The interest rate is the Bank of England base rate plus 2.5%. As of early 2026, that means you're looking at around 7% per year on overdue tax.
Interest is charged daily and compounds. It's not a penalty - it's a separate charge on top of the penalties described above.
How to remove penalty points
Penalty points aren't permanent. There are two ways to get back to zero:
1. A period of compliance
For quarterly obligations (which MTD is), you need to meet every single submission deadline for 24 consecutive months to reset your points to zero. That means submitting all eight quarterly updates across two full tax years, plus both final declarations, on time.
You also need to ensure all outstanding submissions from earlier periods are up to date. You can't just start filing on time while old submissions remain missing.
2. HMRC review
HMRC may also remove points if they determine one was issued incorrectly, or if you successfully appeal on the basis of a reasonable excuse.
24 months is a long time. Once you accumulate points, the path back to zero requires nearly perfect compliance for two years. It's far easier to avoid accumulating points in the first place than to reset them afterwards.
Reasonable excuses: when HMRC won't penalise you
HMRC accepts that sometimes things genuinely go wrong. If you have a "reasonable excuse" for a late submission, you can appeal the penalty point. HMRC assesses each case individually, but examples they've published include:
- Serious illness or bereavement affecting you or a close family member
- Unexpected hospital stay that prevented you from filing
- Fire, flood, or natural disaster destroying your records
- HMRC's own systems being unavailable when you tried to submit
- Death of a partner or spouse shortly before the deadline
What HMRC won't accept as a reasonable excuse:
- "I didn't know about the deadline" - ignorance isn't an excuse
- "My accountant didn't file on time" - you're responsible for your own obligations
- "I found the software confusing" - you're expected to familiarise yourself before the deadline
- "I was too busy" - HMRC expects you to plan ahead
If you do have a genuine reasonable excuse, you need to file the late submission as soon as the excuse no longer applies. Waiting weeks after recovering from an illness, for example, would weaken your appeal.
How does this compare to the old Self Assessment system?
Under the old Self Assessment system, missing the filing deadline triggered an immediate £100 penalty - no points, no warnings. Then daily penalties of £10/day kicked in after three months (up to a maximum of £900), followed by further escalating penalties at six and twelve months.
The new system is actually more forgiving for occasional slip-ups. Missing one quarterly deadline only earns you a point - no financial penalty. Under the old system, one late filing meant an immediate £100 fine.
However, the new system is harsher for persistent non-compliance. Under the old system, you could file late every year and just pay the £100 each time. Under the new system, points accumulate, the £200 penalty at threshold is higher, and it takes 24 months of perfect compliance to reset your points.
The message is clear: HMRC is shifting from punishing occasional lateness to cracking down on habitual non-compliance. If you file on time most of the time, you'll actually be better off. If you've been routinely late with Self Assessment, you'll be worse off.
Penalties for the final declaration
The final declaration - due 31 January after the end of the tax year - replaces your Self Assessment tax return. It follows the same points-based system as quarterly updates. A late final declaration earns you a penalty point just like a late quarterly update.
This means in a single tax year, you have five submission obligations (four quarterly updates plus the final declaration). Miss all five and you're at 5 points, well past the 4-point threshold, with a £200 penalty at the threshold and another £200 for the fifth late submission. Total: £400.
What should you do now?
The simplest way to avoid penalties is to never miss a deadline. That sounds obvious, but here's the practical version:
Set up your software now, not in August. The first quarterly deadline is 7 August 2026. If you wait until July to choose your MTD software, connect to HMRC, and figure out the submission process, you're setting yourself up for unnecessary panic.
Keep your records up to date during the quarter. The actual submission takes minutes if your records are already in order. The bottleneck isn't the software - it's having your income and expenses recorded before the deadline arrives.
Use deadline reminders. Whether it's your software, your calendar, or a reminder app - don't rely on memory. The quarterly deadlines are 7 August, 7 November, 7 February, and 7 May, with the final declaration due 31 January.
Take advantage of the soft landing. Use 2026-27 as your practice year. Submit all four quarterlies on time, even though there are no points at stake. By the time penalties apply in 2027-28, you'll have a full year of experience with the process.
Never worry about penalties
AffordableMTD shows your upcoming deadlines, sends reminders before they hit, and makes submissions take minutes. Free for the entire 2026-27 tax year.
Join the WaitlistLast updated March 2026. Penalty rates and thresholds are based on HMRC's published guidance for the new points-based penalty regime under MTD for Income Tax. Always check GOV.UK for the latest information.