What is the new points‑based penalty system under MTD?
As the UK tax system becomes more digital, so too do the penalties. In line with Making Tax Digital (MTD), HMRC has introduced a brand new points-based penalty system for late submissions and late payments — aimed at encouraging compliance while offering a fairer approach than traditional automatic fines.
This new system is already in place for VAT returns and will roll out to Income Tax Self-Assessment (ITSA) from April 2026, starting with landlords and the self-employed earning over £50,000 per year. If you’re not already affected, chances are you will be soon.
So what is this new penalty regime, how does it work, and what does it mean for your business or personal tax affairs?
Why HMRC Changed the Penalty System
Under the old penalty system, even a one-off mistake could lead to automatic fines — regardless of a taxpayer’s overall compliance record.
This created frustration, especially for sole traders, landlords and small businesses juggling multiple reporting obligations. The system was seen as disproportionately harsh and not reflective of actual taxpayer behaviour.
The new points-based system, introduced as part of MTD reforms, aims to change that. It’s designed to:
- Penalise persistent non-compliance, not one-off errors
- Provide a clear structure for how penalties accumulate
- Offer taxpayers more time to correct mistakes
- Align penalty rules across VAT, Income Tax, and eventually Corporation Tax
Who Does This Apply To?
Already live:
- All VAT-registered businesses, for VAT periods starting on or after 1 January 2023
From April 2026:
- Self-employed individuals and landlords with income over £50,000 must join MTD for Income Tax, and will be subject to the new points-based penalties.
From April 2027:
- Those with income over £30,000 will follow.
More categories will be brought in over time, and a similar system is expected to apply to Corporation Tax once MTD is fully rolled out.
Key Part 1: Late Submission Penalties
Under the new rules, every missed submission deadline earns you one penalty point.
This includes:
- Quarterly MTD submissions for income tax or VAT
- Annual VAT returns
- Other scheduled digital submissions under MTD
Once a taxpayer reaches the penalty threshold, a £200 financial penalty is triggered.
Thresholds vary based on the submission frequency:
| Submission Frequency | Penalty Threshold |
|---|---|
| Annual | 2 points |
| Quarterly | 4 points |
| Monthly | 5 points |
Each type of submission is tracked separately. For example, if you have two businesses submitting quarterly returns, HMRC tracks points for each business independently.
How to Remove Points
Points expire after 24 months, but only if:
-
You’ve brought all outstanding returns up to date
-
You complete a compliance period without further infractions:
-
- 24 months for annual submissions
- 12 months for quarterly
- 6 months for monthly
This encourages consistent, on-time filing.
Key Part 2: Late Payment Penalties
The new late payment penalties are time-sensitive and based on how quickly you settle your tax bill after the due date.
Here’s how it works:
| Days After Due Date | Penalty |
|---|---|
| 0–15 days | No penalty if paid or Time to Pay agreed |
| 16–30 days | 2% of outstanding tax |
| 31+ days | Additional 2% (totalling 4%) |
| After 31 days | Daily penalties: 4% per annum on outstanding amount |
Example:
- You owe £1,000 in VAT
- You miss the payment deadline
- You pay on day 20 → Penalty = £20 (2%)
- You don’t pay until day 45 → Penalty = £40 (4%) + interest + daily charges
This system is more proportional than the old surcharge model and gives taxpayers early warning to act.
Special Note: First-Year Grace Period
HMRC has acknowledged the adjustment period and introduced a soft landing:
During the first year of MTD for a specific tax, HMRC will:
- Allow up to 30 days for payment or a Time to Pay agreement before charging the first 2% penalty
This applies to first-time MTD VAT filers (already in place) and will also apply to MTD for ITSA when it begins in April 2026.
What Counts as a Submission?
Common MTD submissions include:
- Quarterly Income Tax updates (from April 2026 for ITSA)
- Quarterly or monthly VAT returns
- Annual final declarations for income tax (End of Period Statement – EOPS)
- Monthly PAYE RTI submissions (not under MTD but relevant for record-keeping)
Each missed deadline contributes one penalty point — so businesses with multiple obligations should be especially careful.
Common Scenarios to Watch Out For
1. Landlords with Multiple Properties
Landlords must submit quarterly updates for each property business (UK and overseas income are treated separately). Missing one update triggers a point.
Tip: Use MTD-compatible software to automate data collection and deadline reminders.
2. Freelancers and Sole Traders
You may need to submit both quarterly updates and a final declaration (EOPS). That’s five submissions per tax year — with five opportunities to earn points if you’re late.
Tip: Work with an accountant who can manage the submission process end-to-end.
3. VAT-Registered Businesses on Annual Returns
If you submit VAT annually, you only need two points to be fined. That means missing just two returns in two years = £200 penalty.
Tip: Check your accounting software is MTD-ready, and file early if possible.
How to Avoid Points and Penalties
Submit returns on time
Pay VAT or tax within 15 days of due date
Arrange a Time to Pay agreement if needed — within the 15-day window
Keep digital records as required by MTD
Regularly check your penalty point total on your HMRC online account
What If You Disagree with a Penalty?
You can appeal penalty points or financial penalties by:
- Logging into your HMRC online account
- Submitting a written appeal explaining the reasonable excuse
- Providing supporting evidence (e.g., illness, software failure, HMRC delays)
Note: HMRC will not cancel penalties for routine forgetfulness or cash flow problems unless supported by clear, mitigating evidence.
Is This Good or Bad for Businesses?
The new system has been praised for being:
- Fairer – targets repeat offenders, not one-time mistakes
- Transparent – penalty points system is clear and trackable
- Flexible – allows time to pay and offers automatic point expiry with good compliance
However, it also requires greater diligence and more frequent submissions — particularly for those joining MTD for the first time.
How Merranti Accounting Can Help
At Merranti, we don’t just handle your submissions — we proactively manage your deadlines, help you select the right MTD-compatible software, and ensure that no points or penalties sneak up on you.
Whether you’re a:
- Landlord navigating MTD for the first time
- Freelancer with multiple income streams
- Business already dealing with VAT under MTD
- Partnership worried about what MTD means for you
… we’ve got you covered.
We’ll guide you through:
- Initial setup
- Deadline monitoring
- Record-keeping
- Digital compliance
- Appeals and penalty mitigation
Get Ahead of the Curve
The MTD penalty reform isn’t just about more penalties — it’s about changing the culture of tax compliance. Being organised, digital, and proactive is now essential.
📞 Speak to the Merranti team today on 01342 836 557
📧 Or email: contactus@merrantiaccounting.com
Let us help you stay compliant — and ahead of the penalties. Find more about MTD ITSA here
