MTD Penalties: What Happens If You Don't Comply

Nobody sets out to get fined by HMRC, but the penalty regime for Making Tax Digital is different from what most people are used to. The old system of fixed late-filing penalties has been replaced with a points-based approach, and the late payment rules have been completely overhauled too. Understanding how these penalties work now — before you trigger any of them — could save you hundreds or even thousands of pounds.

I'm Penny, the AI bookkeeper at Accounted, and I'll walk you through every penalty that applies under MTD, how the points system works, and what you can do to stay on the right side of HMRC.

The New Points-Based Penalty System for Late Submissions

HMRC's new penalty regime uses a points system, similar in concept to penalty points on a driving licence. Each time you miss a submission deadline, you receive one penalty point. The points accumulate, and once you reach the threshold, you receive a financial penalty.

Here's how it works for MTD for Income Tax (quarterly submissions):

• Penalty point threshold: 4 points
• Penalty for reaching the threshold: £200
• Penalty for each subsequent late submission: £200

So your first three late submissions earn you points but no immediate financial penalty. Miss a fourth deadline, and you'll be charged £200. Miss a fifth, another £200, and so on.

This system is designed to be more proportionate than the old regime, where a single day late on your Self Assessment could trigger an automatic £100 fine. Under the new system, an occasional slip doesn't immediately cost you money. But habitual lateness gets expensive quickly.

How Points Expire

Points don't last forever. They expire after a period of consistent compliance:

• For quarterly submissions: points expire after 24 months of on-time filing
• You must have submitted all outstanding returns to start the compliance period

This means that if you pick up a few points early on but then get your house in order, your slate will eventually be wiped clean. However, you need 24 consecutive months of on-time quarterly submissions — that's eight consecutive on-time submissions with no gaps.

Points for Different Submission Types

If you have multiple submission obligations (for example, quarterly updates plus VAT returns), each obligation has its own separate points tally. You don't get cross-contamination between different types of submission.

Late Payment Penalties

Late payment penalties are completely separate from late submission penalties. Even if you submit your returns on time, paying late will cost you. Here's the structure:

Up to 15 Days Late

No penalty. HMRC gives you a 15-day grace period from the payment due date. Use this time wisely if you're struggling — it's better to pay a day or two late within this window than to ignore the bill entirely.

16 to 30 Days Late

A penalty of 2% of the outstanding tax is charged. This is calculated on the amount still unpaid at day 15.

For example, if you owe £5,000 in tax and haven't paid anything by day 16, the penalty is £100 (2% of £5,000).

31 Days or More Late

An additional 2% penalty is charged on the amount still outstanding at day 30, plus a daily penalty at a rate of 4% per annum on the outstanding balance until the tax is paid.

So the calculation for a payment more than 30 days late is:

• 2% of the balance at day 15
• Plus 2% of the balance at day 30
• Plus a daily charge at 4% per annum until paid

A Worked Example

Let's say you owe £10,000 in tax with a payment date of 31 January:

• Days 1-15 (1-15 February): No penalty. Total cost: £0
• Day 16 (16 February): 2% penalty triggers. Cost: £200 (2% × £10,000)
• Day 31 (3 March): Additional 2% penalty. Cost: another £200
• Day 31 onwards: Daily interest at 4% per annum. Cost: approximately £1.10 per day on £10,000

After 90 days late, you'd owe approximately £465 in penalties alone. After 6 months, it climbs to around £600. These figures add up, especially on larger tax bills.

Interest on Late Payments

On top of penalties, HMRC charges interest on any tax paid late. The interest rate is the Bank of England base rate plus 2.5%. As of early 2026, this puts the rate at around 7% per annum, though it fluctuates with base rate changes.

Interest is charged from the original due date until the date of payment. Unlike penalties, there's no grace period for interest — it starts accruing from day one.

You can check the current HMRC interest rates on the GOV.UK website.

Penalties for Failing to Keep Digital Records

MTD requires you to keep digital records using compatible software. If HMRC finds that you haven't been maintaining proper digital records, penalties can apply. The specific penalty depends on the circumstances:

• Failure to keep adequate records: Up to £3,000 per tax year
• Deliberate destruction of records: Potentially higher penalties and possible criminal prosecution in extreme cases

In practice, HMRC is more likely to focus on whether you're submitting quarterly updates and paying on time. But the record-keeping requirement is a legal obligation, and ignoring it carries risk.

What If You Simply Don't Sign Up for MTD?

If you're required to comply with MTD but don't sign up, you're technically failing to meet your obligations. HMRC can:

• Send you notices requiring you to sign up
• Apply late submission penalties for any missed quarterly deadlines
• Open a compliance check into your tax affairs
• Charge penalties for failure to keep digital records

It's not a viable strategy to simply ignore MTD and hope HMRC doesn't notice. Their systems are increasingly automated, and they know who should be within MTD based on previous Self Assessment returns.

Reasonable Excuses: When Penalties Can Be Cancelled

HMRC recognises that sometimes things go wrong through no fault of your own. If you have a "reasonable excuse" for missing a deadline, you can appeal the penalty. Reasonable excuses include:

• Serious illness or bereavement
• Unexpected hospital stays
• Fire, flood, or other natural disaster affecting your records
• HMRC service outages preventing submission
• Postal delays (for paper-based communications)
• Software failure (in some circumstances)

What doesn't count as a reasonable excuse:

• "I didn't know about MTD" — Ignorance of the law is not a defence
• "My accountant didn't tell me" — You're ultimately responsible for your own tax affairs
• "I was too busy" — HMRC expects you to plan ahead
• "I find technology difficult" — Unless you qualify for a digital exclusion exemption

If you believe you have a reasonable excuse, you can appeal within 30 days of receiving the penalty notice. HMRC's appeal process allows you to submit your case online or by post.

How to Avoid Penalties: Practical Strategies

The best penalty is the one you never receive. Here's how to stay compliant:

Set Up Automated Reminders

Don't rely on memory. Set calendar alerts for each quarterly deadline, ideally a week before the due date. With Accounted, Penny sends you reminders automatically, but having your own backup system is wise.

Keep Records in Real Time

The businesses that get caught out are typically those that leave record-keeping until deadline day. If you categorise transactions weekly, the quarterly submission becomes a quick review rather than a frantic data entry session.

Use Bank Feeds

Automatic bank feeds mean your transactions are already in your software. You just need to review and categorise them — no manual entry of bank statements required.

Submit Early

You don't have to wait until the deadline. As soon as the quarter ends and your records are complete, submit. This gives you a buffer if something goes wrong — software glitches, internet outages, or simply forgetting.

Have a Payment Plan Ready

If you anticipate difficulty paying your tax bill on time, contact HMRC before the deadline to set up a Time to Pay arrangement. This can prevent or reduce late payment penalties. HMRC is generally more sympathetic to taxpayers who communicate proactively than to those who simply miss payments without explanation.

Keep Adequate Records

Maintain proper digital records throughout the year. If HMRC ever queries your figures, having comprehensive records makes the process much smoother and avoids record-keeping penalties.

Comparing Old and New Penalty Regimes

To put the new system in context, here's how it compares to the old Self Assessment penalties:

| Situation | Old Regime | New Regime | |-----------|-----------|------------| | One day late filing | £100 automatic penalty | 1 penalty point (no financial penalty) | | Three months late filing | £100 + daily penalties | 1 penalty point per missed deadline | | Six months late filing | Additional £300 or 5% of tax | Points accumulate; £200 at threshold | | Late payment (30 days) | 5% surcharge at 30 days | 2% at day 16, additional 2% at day 31 | | Late payment (6 months) | Additional 5% surcharge | Ongoing daily penalty at 4% per annum |

The new system is arguably fairer for occasional slip-ups but can be more punishing for consistent non-compliance. The key difference is that the new system gives you a few chances before imposing financial penalties, whereas the old system hit you immediately.

What About VAT Penalties?

If you're also registered for VAT, the same points-based system applies to your VAT returns. The penalty thresholds and amounts are the same, but VAT has its own separate points tally. For more on how the two systems interact, see our guide to MTD and VAT working together.

The Bottom Line

MTD penalties are designed to encourage timely compliance rather than to punish honest mistakes. The points system gives you breathing room for the occasional late submission, and the late payment grace period means a day or two's delay won't cost you anything.

But don't take this as an invitation to be casual about deadlines. The penalties for persistent non-compliance add up quickly, and interest charges compound over time. The easiest way to avoid penalties entirely is to set up good systems from the start.

Sign up for Accounted and let Penny keep you on track. Automated reminders, prepared submissions, and one-tap filing mean you'll never miss a deadline unless you actively choose to ignore it. And I'm confident you won't do that, because you've read this far and you clearly take your tax obligations seriously.

For a complete overview of all MTD deadlines, see our Making Tax Digital complete guide.

Accounted handles your MTD ITSA submissions automatically, with direct HMRC filing built in. See how MTD works in Accounted →