MAKING TAX DIGITAL GUIDE

MTD penalties: late submission points and late payment.

HMRC now uses the same two-part penalty system for VAT and for Making Tax Digital for Income Tax. Filing late earns points. Paying late costs a percentage of the tax. This guide explains how each part works and how to stay clear of both.

Figures for the 2026/27 tax year · Last reviewed 21/10/2026

Two separate penalties, not one

The old rules mixed filing and paying together. The current rules keep them apart.

Late submission. Each missed filing deadline earns a penalty point. You only pay money once your points reach a set threshold.
Late payment. This is not points based. It applies to each payment that is late, and it grows the longer the tax stays unpaid.

On top of both, HMRC charges late payment interest from the first day a payment is overdue until it is paid.

The system applies to VAT for accounting periods starting on or after 1 January 2023. It applies to Income Tax for people who must use Making Tax Digital, from the tax year they join.

Who is covered

VAT-registered businesses

GOV.UK says all VAT-registered businesses should now be signed up for Making Tax Digital for VAT. So if you are VAT registered, the points system and the late payment rules apply to your VAT returns.

Sole traders and landlords

From 6 April 2026, sole traders and landlords must use Making Tax Digital for Income Tax if their qualifying income was over £50,000 on their 2024 to 2025 tax return. Qualifying income means total turnover from self-employment and property, before expenses.

The threshold then drops. It is over £30,000 from 6 April 2027, based on the 2025 to 2026 return, and over £20,000 from 6 April 2028, based on the 2026 to 2027 return.

If you join from 6 April 2026, earlier years keep the old penalties. For example, your 2025 to 2026 return, due 31 January 2027, is still under the current Self Assessment rules.

How late submission points work

Every time you miss a filing deadline, you get one point. When your points reach the threshold, HMRC charges a £200 penalty. After that, each further late filing brings another £200 while you stay at the threshold.

The points themselves cost nothing. They are a warning. But they are easy to collect if filing is left to the last minute.

VAT thresholds

For VAT, the threshold depends on how often you file:

Annual returns: 2 points
Quarterly returns: 4 points
Monthly returns: 5 points

A VAT return is usually due one calendar month and 7 days after the end of the period, and the payment is due by the same date.

Nil returns and repayment returns count. A late return earns a point even when there is no VAT to pay. The rules do not apply to your first return after registering, your final return after cancelling registration, or one-off returns covering an unusual period.

If you change how often you file, HMRC adjusts your points to fit the new threshold. Moving from quarterly to monthly adds 1 point, for example.

Income Tax thresholds

Under Making Tax Digital for Income Tax, the threshold is 4 points. You can get a point for a missed quarterly update and for a missed tax return deadline. Only one point is given per deadline, even if you have more than one business.

The quarterly update deadlines are 7 August, 7 November, 7 February and 7 May. The tax return and the payment are due by 31 January after the end of the tax year.

The 2026/27 exception. GOV.UK says there are no penalties for missing a quarterly update deadline for the 2026 to 2027 tax year. You still have to keep digital records and send the updates before you submit your return. Late tax returns and late payments are still penalised in that year.

How points are removed

Points do not stay forever, but the way they go depends on whether you have hit the threshold.

Below the threshold

Each point expires on its own after about 24 months. For Income Tax, a point is removed 24 months after the missed deadline. For VAT, it expires on the last day of the month 24 months after the deadline month, or 25 months if the deadline was the last day of a month.

At the threshold

Once you reach the threshold, points stop expiring on their own. To clear them, you must do two things:

A period of compliance. File everything on time for a set length of time. For VAT this is 24 months for annual filers, 12 months for quarterly filers and 6 months for monthly filers. For Income Tax it is 12 months of on-time quarterly updates and returns.
Nothing outstanding. Send any missing returns or updates from the previous 24 months.

When both conditions are met, your points go back to zero. Until then, every late filing costs another £200.

How late payment penalties work

Late payment penalties are worked out from how many days the tax has been overdue. The sooner you pay, the smaller the charge.

VAT

Up to 15 days late: no penalty
16 to 30 days late: 3% of the VAT owed at day 15
31 days or more: 3% of what was owed at day 15, plus 3% of what was still owed at day 30, plus a second penalty charged daily at 10% a year on the balance from day 31 until it is paid

Income Tax under Making Tax Digital

These penalties apply to balancing payments and to amounts due after an amendment or assessment. They do not apply to payments on account.

2026 to 2027: 3% at day 15 and 3% at day 30, then 10% a year charged daily from day 31, for up to 2 years
2027 to 2028: 4% at day 15 and 4% at day 30, then 10% a year charged daily from day 31, for up to 2 years

In your first year under the new rules, you have 30 days from the due date to pay in full or agree a payment plan before any penalty applies. After that first year, the grace period is 15 days. You only get the 30-day period once.

A worked example

This example is made up to show the maths. Imagine a VAT-registered shop that owes £6,000 on a quarterly return and pays all of it 40 days late.

The first penalty is 3% of £6,000 at day 15, which is £180, plus 3% of £6,000 at day 30, which is another £180. That is £360.

The second penalty runs for days 31 to 40, which is 10 days. £6,000 × 10% × 10 ÷ 365 gives £16.44.

Total penalties: £376.44, before late payment interest is added.

Late payment interest

Interest is separate from the penalties. It runs from the first day the payment is late until it is paid in full. HMRC sets the rate at the Bank of England base rate plus 4%. Because it follows the base rate, the actual percentage changes over time, so check HMRC's interest rates page for the current figure.

If you cannot pay on time

Contact HMRC as soon as you know there is a problem. You can ask for a payment plan, sometimes called Time to Pay, and spread the bill over instalments.

For Income Tax under Making Tax Digital, GOV.UK says that if a plan is agreed and you keep up the payments, penalties are paused from the date you contacted HMRC. If you do not keep to the plan, penalties may be charged. For VAT, a plan can mean lower or no penalties. If you break a VAT plan, HMRC may cancel it and charge both late payment penalties as if the plan had never existed.

Filing on time still matters when money is tight. A return sent on time avoids a point, even if the payment follows later under a plan.

Appeals

HMRC writes to you about each late payment penalty, each penalty point and each £200 penalty. If you think one is wrong, the letter explains how to appeal. You cannot appeal the automatic point changes made when you switch VAT filing frequency.

How to stay clear of penalties

Put every filing and payment date in a shared calendar the day the period starts
Keep the books up to date through the quarter, not just in the last week
Send nil and repayment VAT returns on time, because they count
Set money aside for VAT and tax as sales come in
Check your HMRC online account for penalty details and the dates your points will be removed
If a payment will be late, call HMRC before the due date, not after

Most late filings happen for one reason. The records were not ready, so the return could not be done. When bookkeeping is kept current, the quarterly update or VAT return is a quick check, and the deadline stops being a scramble.