Making Tax Digital penalties: what you need to know

No business wants to receive a penalty for a tax error. But as Making Tax Digital (MTD) changes how you report and record tax, it’s important to understand the risks of getting it wrong. This guide explains each type of penalty and shows you how to avoid them, so you can feel confident using the new system for income tax returns.

Key takeaways

• MTD requires sole traders and landlords to keep digital records, with penalties for missed deadlines, non-compliance and late payments

• HMRC uses a points-based system for late filing 

• Using compatible software and keeping records up to date helps businesses avoid penalties

Understanding MTD penalties

Making Tax Digital for income tax is a new way to report income and expenses. It requires sole traders or landlords with earnings over a certain threshold to keep digital records and use software that sends updates directly to HMRC. It also introduces a new penalty system that focuses on timeliness and accurate digital record-keeping.

The system aims to encourage businesses to be consistent, rather than punish one-off mistakes. HMRC applies penalties when a business:

• Fails to follow MTD requirements

• Misses a submission deadline

• Pays tax late

You need to understand how each penalty works to avoid fines.

MTD penalties for non-compliance

HMRC can charge a maximum penalty of up to £3,000 per quarter if a business or landlord doesn’t follow MTD requirements, such as:

• Not keeping digital records

• Not using compatible software

• Not sending quarterly updates to HMRC through compatible software

HMRC can also apply a penalty if a business tries to submit figures manually or uses records that are not kept in a digital format.

MTD penalties for late filing

MTD uses a points-based system for late filing. One penalty point is given for each missed deadline – whether that’s a quarterly update or the final declaration at the end of the tax year. Missing a deadline does not trigger an immediate fine, though.

For most businesses that report quarterly, the penalty threshold is four points. When a business reaches this threshold, HMRC charges a fixed £200 penalty. Every additional late submission while the business stays at the threshold triggers another £200 penalty.

Points do not reset automatically. To return to zero, a business must meet every submission deadline for 12 months.

MTD penalties for late payment

HMRC charges late payment penalties based on how long a business takes to pay what it owes. Put simply, the sooner you pay it, the smaller the fine.

A business does not receive a penalty on the due date. Instead, penalties build up in stages (although interest applies from the day the payment becomes overdue).

Here is how the late payment penalty structure works:

How to avoid penalties

It might sound scary, but you can avoid most MTD penalties by staying organised and keeping your digital records up to date. Consider following these six simple steps to keep you on the right side of HMRC:

1. Use compatible software

Software that links directly to HMRC makes it easier to record income and expenses, and send updates on time. If you prefer to use a spreadsheet, you need to link it to HMRC via bridging software.

2. Update records regularly

Recording information as you go reduces mistakes and means you’re ready to submit each quarterly update when the time comes.

3. Set reminders for deadlines

Most software includes alerts, but adding a personal reminder gives you extra protection against missing a submission date.

4. Check each update before you send it

A quick sense check helps catch small errors that may cause problems later.

5. Pay attention to payment dates

Knowing when your tax payment is due reduces the chance of a late payment penalty.

6. Contact HMRC early if you can’t pay on time

The sooner you get in touch, the more options you have. Support is available through HMRC at:

• https://www.gov.uk/difficulties-paying-hmrc

• https://www.gov.uk/difficulties-paying-hmrc/help-and-advice

MTD for VAT penalties

MTD for VAT penalties follow the same structure as MTD for income tax. A business must keep digital records and use compatible software to send VAT returns to HMRC.

HMRC can charge penalties when a business does not meet these rules or submits VAT returns outside the MTD requirements.

You can read the full guidance on MTD for VAT from HMRC here.

Appealing against penalties: what can you do?

You can appeal a penalty if you believe HMRC has made a mistake or if you have a reasonable excuse for missing a deadline. To appeal, you must explain what happened and why you couldn’t meet the specific requirement you’re being penalised for.

Reasonable excuses may include: 

• Serious illness

• A technical issue outside your business’s control

• Another event that made it impossible to file or pay on time, such as a fire or flood that resulted in a loss of records

HMRC expects you to put things right as soon as you can.

You can appeal through your HMRC online account or by contacting HMRC directly. If HMRC does not agree with the appeal, you can ask for an independent review or take the case to a tribunal.

Upcoming changes from 2026

Key dates

• From 6 April 2026 – Sole traders and landlords with combined self-employment and property income over £50,000 in the 2024/25 tax year must use MTD for income tax

• From 6 April 2027 – The threshold drops to £30,000 for the 2025/26 tax year

• From 6 April 2028 – The threshold looks set to drop to £20,000 for the 2026/27 tax year, but this hasn’t been finalised 

Once you’re in the scope of MTD, you must send quarterly updates of income and expenditure. The standard deadlines are:

• 6 April – 5 July – Submit by 7 August

• 6 July – 5 October – Submit by 7 November

• 6 October – 5 January – Submit by 7 February

• 6 January – 5 April – Submit by 7 May

You then submit a final declaration — your annual return — by 31 January following the end of the tax year, with payments made as normal on 31 January (and 31 July if you make payments on account).

Next steps

• Review whether your income has exceeded or will exceed the threshold for 2026, 2027 or 2028

• Choose and set up MTD-compatible software well in advance

• Schedule your quarterly update deadlines in your calendar

• Make sure your digital records are ready to go before your start date