---
title: What Are the Making Tax Digital Penalties? 2026/27 Guide
description: "From 6 April 2026, sole traders and landlords with qualifying gross income exceeding £50,000 must comply with Making Tax Digital for Income Tax Self Assessment (MTD for ITSA).  If you are advising clients on this transition, a central question is: what…"
url: "https://www.accountingfirms.co.uk/knowledge-bank/what-are-the-making-tax-digital-penalties/"
updated: "2026-08-11"
category: Self Assessment basics
---

# What Are the Making Tax Digital Penalties? 2026/27 Guide

From 6 April 2026, sole traders and landlords with qualifying gross income exceeding £50,000 must comply with Making Tax Digital for Income Tax Self Assessment (MTD for ITSA).  If you are advising clients on this transition, a central question is: what are the Making Tax Digital penalties?

The traditional fixed-penalty regime has been entirely overhauled. HMRC now separates compliance into three distinct penalty tracks: late submission (a points-based system), late payment (percentage-based charges), and failure to maintain digital records.

## Late Submission Penalties (The Points Regime)

When a taxpayer misses a digital submission deadline under MTD, they incur a penalty point rather than an immediate financial fine.  HMRC only issues a fixed £200 penalty once the taxpayer reaches a specific points threshold.

The points threshold depends on the taxpayer’s required filing frequency:

- **Annual obligations:** 2 points.
- **Quarterly obligations (MTD updates):** 4 points.
- **Monthly obligations:** 5 points.

If a taxpayer misses four quarterly submission deadlines, they breach the threshold and incur a £200 penalty.  Any subsequent missed deadlines while at the threshold trigger further £200 penalties.

**The 2026/27 Transitional Concession:** HMRC has introduced a "soft landing" for the first year of [MTD for ITSA](https://www.accountingfirms.co.uk/blog/mtd-for-income-tax-what-small-businesses-need-to-know/). During the [2026/27 tax year](https://www.accountingfirms.co.uk/knowledge-bank/registering-for-self-assessment-uk/), HMRC will not apply penalty points for late quarterly updates.  However, penalty points strictly remain in force for late final declarations (the annual [tax return](https://www.accountingfirms.co.uk/blog/role-of-accountants-in-mergers-and-acquisitions/)).  Taxpayers must still submit their quarterly updates before they can file their final return.

**Resetting Points and Cancellations:** Taxpayers can reset their penalty points to zero by meeting two strict conditions. First, they must submit all returns on time for a specific compliance period (12 months for quarterly filers; 24 months for annual filers).  Second, they must have submitted all outstanding returns that were due in the preceding 24 months.

Additionally, the Finance Act 2026 grants HMRC the statutory power to cancel individual penalty points.  If HMRC cancels a point, any £200 penalty assessment reliant on that specific point ceases to have effect.  HMRC must notify the taxpayer of the cancellation, stating the failure and providing sufficient information to identify the group of returns involved.

## Late Payment Penalties

Unlike the old default surcharge, the MTD late payment penalty regime ties financial sanctions directly to the amount of tax owed and the length of time it remains outstanding.

The late payment penalty consists of two distinct charges:

- **First Charge (Day 15 and Day 30):** If tax remains unpaid after day 15 following the payment due date, HMRC charges a penalty of 2% of the outstanding tax.  If any tax remains unpaid after day 30, HMRC charges an additional 2% penalty (bringing the total to 4%) on the balance still outstanding.
- **Second Charge (Day 31 onwards):** From day 31, a second penalty accrues daily at an annual rate of 4% on the remaining outstanding balance.

**Application to the facts:** If a taxpayer owes £10,000 at the deadline and makes no payments:

1. *Day 15:* HMRC assesses a 2% penalty on £10,000 = £200.
2. *Day 30:* HMRC assesses a further 2% penalty on £10,000 = £200 (Total first charge = £400).
3. *Day 31:* A daily penalty begins accruing on the £10,000 balance at 4% per annum (£1.09 per day).

**Mitigation via Time to Pay:** [Taxpayers](https://www.accountingfirms.co.uk/blog/reaching-agreement-with-hmrc/) can prevent these late payment penalties entirely if they agree to a Time to Pay arrangement with HMRC within 15 days of the payment due date.

## Record-Keeping Penalties

MTD legally requires taxpayers to maintain digital records. If a taxpayer fails to keep or preserve adequate records, HMRC can charge a penalty of up to £3,000 per return.

However, HMRC policy dictates a pragmatic approach. On the first occasion a non-deliberate failure to keep adequate digital records comes to light, HMRC will issue a written warning to the taxpayer (and copy their agent) rather than seeking the [financial penalty](https://www.accountingfirms.co.uk/blog/when-is-the-tax-deadline-for-expats/).  Financial penalties are reserved for serious cases, such as deliberate destruction of records or a sustained history of record-keeping failures.

## Defending Penalties: The "Reasonable Excuse" Test

A taxpayer is not liable for a late submission point, late submission penalty, or late payment penalty if they establish a "reasonable excuse" for the failure, provided they remedy the failure without unreasonable delay after the excuse ends.

The First-tier Tribunal applies an objective standard. As set out by the [Upper Tribunal](https://www.accountingfirms.co.uk/blog/good-timing-can-save-a-lot-of-tax/) in *Perrin v HMRC*:

> "was what the taxpayer did a reasonable thing for a responsible trader conscious of and intending to comply with his obligations regarding tax, but having the experience and other relevant attributes of the taxpayer and placed in the situation that the taxpayer found himself at the relevant time, a reasonable thing to do?"

Statute dictates that an insufficiency of funds does not constitute a reasonable excuse unless attributable to events outside the taxpayer’s control.  Similarly, relying on a third party (such as an accountant) is not a reasonable excuse unless the taxpayer took reasonable care to avoid the failure.

**Software Failures:** When dealing with MTD digital submissions, blaming unfamiliar software is rarely sufficient. In *Capricorn Film Productions Ltd*, the Tribunal ruled that relying on an unfamiliar software package without actively checking for evidence of despatch or receipt (such as a submission receipt or screenshot) falls below the standard of a reasonable business, meaning no reasonable excuse exists.

## Summary of MTD Penalties

| Penalty Type | Trigger Event | 2026/27 Penalty Outcome | Mitigation / Relief |
| --- | --- | --- | --- |
| **Late Submission (Updates)** | Missing quarterly MTD update | No points applied in 26/27 transitional year. | Points system begins fully in 2027/28. |
| **Late Submission (Return)** | Missing final declaration | 1 penalty point. £200 fine hits at 4 points. | Reasonable excuse; points expire after 12-24 month compliance period. |
| **Late Payment (First Charge)** | Tax unpaid at Day 15 & Day 30 | 2% at Day 15; further 2% at Day 30. | Agree a Time to Pay arrangement within 15 days. |
| **Late Payment (Second Charge)** | Tax unpaid at Day 31 | Accrues daily at 4% per annum. | Pay outstanding balance to stop daily accrual. |
| **Digital Record Keeping** | Failure to maintain digital records | Up to £3,000 maximum penalty per return. | First non-deliberate offence usually results in a written warning. |

*Next steps for research: Review the updated HMRC guidance on compatible software providers to ensure clients avoid "unfamiliar software" reasonable excuse failures under the Capricorn precedent, and verify the legislative mechanisms for appealing the new daily late payment interest charges.*