Higher Penalties for Taxpayers Under Making Tax Digital: What You Need to Know

This update is for taxpayers who are filing under Making Tax Digital (MTD) and want to understand why penalties can be higher than under the previous system, especially where mtd accounting processes are not correctly followed. Understanding making tax digital penalties is particularly important where taxpayers have recurring submission obligations and therefore more than one deadline to manage.

HMRC has introduced a new points-based penalty system for MTD submissions, which changes how late filing penalties are triggered and applied under modern making tax digital accountants compliance frameworks.

Understanding how making tax digital penalties work is important because repeated late submissions can affect taxpayers differently from a single missed deadline under the previous filing system.

How Penalties Worked Before MTD

Under the previous rules, late filing penalties were usually charged as fixed amounts once a deadline was missed. For many taxpayers, this meant a single penalty applied each time a return was late, including those using an MTD Service in London.

While penalties could still add up over time, they were generally linked to individual late submissions rather than a rolling compliance record, and did not fully reflect ongoing making tax digital for accountants monitoring systems now in place.

Deadlines for Joining Making Tax Digital for Income Tax

Making Tax Digital for Income Tax will become mandatory in phases from April 2026. If you are self-employed or a landlord earning over £50,000 you need to start preparing to submit quarterly updates, maintain digital VAT return records where applicable, and adapt to a new penalty system, something many taxpayers are already addressing through making tax digital services in London.

For a full breakdown of how MTD for Income Tax is being rolled out, what each phase requires, and how the rules apply to different income levels, read our complete MTD for Income Tax 2025/26 guide.

Initially, MTD for IT will apply to businesses, self-employed individuals, and landlords with an annual income exceeding £50,000. From 6 April 2027, the rules will extend to those with an income between £30,000 and £50,000, aligning with broader making tax digital deadlines. A new system of penalties for late filing and late payment of tax will also be introduced.

For taxpayers entering the regime, understanding MTD ITSA penalties is therefore part of preparing for the new reporting requirements and their recurring submission deadlines.

From April 2028, sole traders and landlords with income over £20,000 will need to follow MTD rules, with stronger reliance on structured mtd accounting systems. The government is also exploring ways to bring those earning under £20,000 within the MTD framework at a future date.

To help ensure taxpayers pay on time, HMRC increased the late payment penalties with effect from 1 April 2025. This applies to VAT-registered businesses as well as early adopters of making tax digital VAT.

The updated penalty rates are as follows:

• 15 days late: increased from 2% to 3%
• 30 days late: increased from 2% to 3%
• From day 31 onwards: a 10% annual penalty now applies, up from 4%, with daily interest added from this point

Taxpayers that remain with self-assessment face a separate set of penalty rules linked to traditional reporting expectations and non-digital processes where applicable, rather than full making tax digital compliance.

The MTD Points-Based Penalty System

Under MTD, HMRC now uses a points-based system for late submissions. Each time a required update or return is filed late, a penalty point may be added to your record, particularly where making tax digital accountants systems are not properly managing deadlines.

Once you reach a set number of points, a financial penalty is charged. Points do not automatically reset after a penalty is issued, which means ongoing late submissions can lead to repeated penalties, especially for those not using structured mtd accounting processes. This means MTD penalties for late filing need to be considered across the taxpayer’s ongoing submission record rather than only in relation to one isolated missed deadline.

Making tax digital penalties are therefore closely linked to a taxpayer’s ongoing filing behaviour. Once the relevant points threshold is reached, further late submissions while the taxpayer remains at that threshold can result in additional financial penalties.

Keeping track of every quarterly submission deadline is therefore essential under this system, as even a single missed update moves you closer to a financial penalty. Read our guide to Making Tax Digital important deadline dates to ensure you have every key date in your calendar before obligations become enforceable.

Why Penalties Can Be Higher Under MTD

Because points can accumulate over time, taxpayers who repeatedly miss deadlines may find that penalties arise more frequently than under the old system.

This cumulative approach is one reason making tax digital penalties require careful deadline management, particularly for taxpayers with recurring submission obligations throughout the year

Even where individual delays seem minor, consistent late filing can quickly push a taxpayer over the penalty threshold, resulting in higher overall charges for those not following making tax digital deadlines or structured digital reporting practices.

The most effective way to avoid accumulating penalty points is to have the right systems and processes in place before deadlines become enforceable. Read our guide on preparing for Making Tax Digital compliance for a step-by-step walkthrough of what businesses and individuals need to do to transition smoothly.

Who Needs to Pay Particular Attention

The MTD penalty rules apply to taxpayers within the scope of MTD, including those submitting mtd vat return updates for VAT and, in future, Income Tax.

Anyone required to submit regular updates should be aware that missed deadlines can have longer-lasting consequences under the points-based system, especially where proper mtd compliance processes are not in place or supported by effective making tax digital services.

The potential penalty of MTD non-compliance therefore depends on the applicable submission obligations and whether the taxpayer has reached the relevant points threshold. A making tax digital penalty should not be viewed in isolation where repeated late submissions can affect the taxpayer’s wider compliance record.

HMRC Guidance on MTD Penalties

HMRC explains how the MTD points-based penalty system works, including how points are accrued and cleared, in its official guidance on
GOV.UK. Understanding these rules can help taxpayers distinguish between individual MTD penalties and the circumstances in which accumulated points result in a financial charge.

Making Tax Digital Penalties Case Study: How Repeated Late Filing Can Lead to Penalties

Sarah, a self-employed consultant, visited our Wimbledonoffice while preparing for Making Tax Digital for Income Tax. She had always filed her annual Self Assessment return on time, but she was concerned that having more recurring submission deadlines under MTD would make it easier to fall behind.

Her main question was whether being a few days late with an MTD submission would simply result in a one-off fine. We explained that Making Tax Digital penalties operate differently under the points-based late submission system.

Instead of looking at every late submission entirely in isolation, HMRC can add a penalty point when a required submission is missed. Once the applicable points threshold is reached, a financial penalty can arise. Further late submissions while the taxpayer remains at the threshold can result in additional penalties.

We used a simple example to make the distinction clearer. If Sarah repeatedly missed required quarterly deadlines, those failures could build towards the relevant threshold rather than each delay simply disappearing once the outstanding information was submitted.

We also discussed late payment separately. Sarah understood that filing information late and paying tax late are different compliance failures and can therefore have different penalty consequences.

The discussion changed how she viewed MTD penalties for late filing. Rather than treating each deadline as an isolated administrative task, she decided to maintain digital records throughout the year and build recurring submission checks into her bookkeeping routine.