Making Tax Digital Penalties Explained [+ How to Avoid Them]

Making Tax Digital (MTD) penalties are a points-based system used by HMRC to penalise late submissions and encourage timely, accurate tax reporting under MTD for Income Tax.

The new MTD rules are different from the traditional Self Assessment system, and they can feel confusing at first. The good news is that once you understand the basics, staying compliant is much more straightforward than it seems.

This guide breaks down how MTD penalties work, what triggers them, and most importantly, how to avoid them altogether.

The new point system for Making Tax Digital penalties

Under MTD, HMRC has introduced a new points-based penalty system for late submissions, along with separate penalties for late payments.

Instead of immediately charging a fine for a missed deadline, HMRC now gives you penalty points. Once you reach a certain threshold, a financial penalty is applied.

What are the penalty point thresholds?

The number of points you can accumulate before receiving a penalty depends on how often you submit:

• Annual submissions: 2 points
• Quarterly submissions: 4 points
• Monthly submissions: 5 points

Once you hit the threshold, you receive a £200 fine. After that, each additional missed deadline results in another £200 penalty.

If you’ve had to use MTD for Income Tax since 6 April 2026, HMRC won’t give penalty points for late quarterly updates in the 2026 to 2027 tax year. Late tax returns and late payments are still penalised.

Do penalty points disappear?

Penalty points aren’t permanent, but they don’t disappear immediately either. They can expire after some time, as long as you remain fully compliant.

To reset your points to zero, you must:

• Submit all outstanding returns
• Complete a required period of compliance without any more late submissions

Here’s how long the compliance period is, depending on the type of submission:

• Annual submissions: 24 months
• Quarterly submissions: 12 months
• Monthly submissions: 6 months

So, for example, if you submit quarterly updates (which most MTD for Income Tax users will), you need 12 months of on-time submissions to reset your penalty points.

This system gives you some breathing room if you make occasional mistakes, but repeated late submissions will quickly lead to fines.

What types of MTD penalties are there?

MTD penalties are split into two main categories: late-submission penalties and late-payment penalties. Each works differently and can be applied independently.

1. Late submission penalties

Late submission penalties are governed by the points-based system.

This means that:

• Occasional mistakes may not cost you immediately
• Repeated missed deadlines will quickly become expensive
• Staying compliant over time helps reset your position

This approach is designed to encourage consistent behaviour rather than punish one-off errors.

2. Late payment penalties

Late payment penalties apply when you don’t pay your tax bill on time.

The amount you pay depends on how late the payment is.

Here’s how that works:

These are the rates for the 2026 to 2027 tax year. From 2027 to 2028, the penalties at day 15 and day 30 rise to 4% each. Late payment interest is charged on top, from the day the payment is due.

In practice, this means the longer you wait, the more you’ll have to pay. Even if your submissions are on time, late payments alone can still result in penalties.

What to do if you get MTD penalty points

Receiving penalty points under MTD isn’t the end of the road, because the system is designed to give you an opportunity to correct your behaviour before financial penalties escalate.

If you do receive points, acting quickly can help you avoid further charges and reset your compliance status.

Here are the steps you should take to get rid of your penalty points:

Check your current position

Start by reviewing how many penalty points you have accumulated and which obligations were missed. You can do this through your HMRC account or any official correspondence you have received.

Understanding your current position is key, as it determines how close you are to triggering the £200 fine.

Submit any outstanding returns

If you have missed deadlines, the first step is to bring everything up to date. Submitting overdue returns stops the situation from worsening and is required if you want your points to eventually reset.

Stay compliant moving forward

Once your filings are up to date, the focus should shift to consistency. Meeting all future deadlines is essential if you want your penalty points to expire or reset.

Can I appeal an MTD penalty?

Yes – if you believe a penalty or penalty point has been issued unfairly, you may be able to appeal it. HMRC allows appeals if you have a reasonable excuse, but the process needs to be handled correctly and within the required timeframe.

Here’s how to appeal an MTD penalty:

Check if you have a reasonable excuse

Before submitting an appeal, it’s important to determine whether your situation qualifies.

HMRC generally accepts appeals for circumstances that were outside your control, such as:

• Serious illness or hospitalisation
• Bereavement close to the deadline
• Unexpected technical issues with HMRC systems
• Fire, flood, or other major disruptions

However, reasons such as forgetting a deadline, being too busy, or not understanding the rules are unlikely to be accepted.

Submit your appeal on time

Appeals must usually be made within 30 days of the penalty notice. Missing this window can make it much harder to challenge the decision.

You can appeal:

• Online through your HMRC account
• By post, using the details provided in your penalty notice

When submitting your appeal, be clear and specific about what happened.

Provide supporting evidence

The stronger your evidence, the more likely your appeal is to be successful.

Depending on your situation, this could include:

• Medical certificates or hospital records
• Screenshots of technical errors
• Insurance reports or official documents relating to disruptions

Providing clear documentation helps HMRC understand that the issue was genuinely outside your control.

Wait for HMRC’s decision

Once your appeal is submitted, HMRC will review your case and respond with their decision.

If your appeal is successful, the penalty or penalty point may be removed.

However, if you’re rejected, you may still have the option to request an internal review or escalate the case to a tax tribunal.

While appeals can help in certain situations, they aren’t guaranteed to succeed. The most reliable way to avoid penalties is to prevent them in the first place.

How to avoid MTD penalties

Avoiding MTD penalties is less about chasing deadlines and more about putting the right system in place so compliance happens automatically. When your records, submissions, and payments are handled consistently throughout the year, penalties become far less likely.

Here are some effective ways to stay compliant with MTD:

Keep your records up to date

Recording income and expenses regularly means your data is always up to date, and your submissions are ready well before deadlines. When bookkeeping is left until the last minute, mistakes are more likely, and deadlines are easier to miss. 

Stay on top of deadlines

With quarterly updates being a part of MTD for Income Tax, there are more deadlines to manage than under the old system.

While setting reminders can help, relying on memory or manual tracking can quickly become unreliable, especially when you are focused on running your business. 

A more structured approach ensures nothing slips through the cracks – and that’s where MTD software can really make a difference.

Use MTD-compatible software

HMRC requires submissions to be made through compatible software, so choosing the right tool makes all the difference. Good software ensures your records are stored digitally, your figures are accurate, and your submissions are sent correctly.

Track your tax bill in real time

Late payment penalties often happen because taxpayers are unaware of how much they owe until the deadline is around the corner.

Having a clear, real-time view of your tax bill allows you to plan ahead, set money aside, and avoid last-minute stress. The earlier you know your liability, the easier it is to stay in control.

Stay compliant and avoid MTD penalties with ANNA

Avoiding MTD penalties ultimately comes down to consistency. But in reality, keeping records up to date, tracking deadlines, preparing submissions, and managing payments can quickly become overwhelming, especially if you are relying on manual processes or multiple tools.

This is exactly where ANNA can help.

Instead of expecting you to manage everything yourself, ANNA handles your accounting and MTD compliance automatically. There is no setup, no learning curve, and no need to understand complicated bookkeeping rules.

With ANNA, you get:

• Automated bookkeeping: Your income and expenses are recorded and categorised automatically, so your records are always accurate and up to date.
• Real-time tax estimates: Your tax bill is continuously calculated, giving you full visibility and helping you avoid late payment surprises.
• Automatic MTD submissions: Quarterly updates and filings are prepared and submitted directly to HMRC without any manual effort.
• Free 2025/26 Self Assessment submission: ANNA prepares and files your Self Assessment return at no extra cost once you are connected to HMRC. If you have already filed elsewhere, ANNA will even refund that fee when you switch.
• Built-in UK business account: Cash flow and accounting are combined in one place, so everything stays aligned without extra admin.
• Smart reminders and alerts: Deadlines are tracked for you, and you are notified when action is needed.
• 24/7 support: Help is always available if you need it, without the need to rely on an accountant.

If you want to avoid MTD penalties without the admin burden, try ANNA today.