A summary of penalties as the digital framework evolves
The UK tax system is gradually moving towards a more digital framework through Making Tax Digital (MTD). As part of this transition, the government has introduced several new penalty regimes aimed at improving compliance with digital record-keeping and submission requirements. These changes affect both late submissions and failures to maintain proper records, particularly for individuals who will be mandated into MTD for Income Tax from April 2026.
A key reform introduced by the Finance Act 2021 is the points-based late filing penalty regime, which replaced the previous late submission penalties for VAT from January 2023. This framework will also apply to taxpayers who are required to submit returns under MTD for Income Tax.
Under the new system, taxpayers receive a penalty point each time they miss a submission deadline. Once a certain threshold of points is reached, a £200 financial penalty is charged. The threshold depends on how often the taxpayer is required to submit returns.
Annual filers reach the threshold at two points, quarterly filers at four points, and monthly filers at five points. After the threshold is reached and a penalty issued, any further late submission will trigger an additional £200 penalty.
Points are tracked separately for each tax obligation. For example, a taxpayer who submits both VAT returns and Income Tax returns will have separate points totals for each regime. This means that late submissions in one tax area will not affect compliance in another.
Points do not remain on a taxpayer’s record indefinitely. If the taxpayer remains below the penalty threshold, individual points will expire after 24 months. However, once the threshold has been reached, all points will only reset after the taxpayer completes a period of full compliance and submits all outstanding returns from the previous 24 months. The compliance period depends on submission frequency: 24 months for annual submissions, 12 months for quarterly submissions and six months for monthly submissions.
In its 2025 Budget, the government introduced a temporary relaxation for individuals joining MTD for Income Tax from April 2026. No penalty points will be issued for the first four quarterly updates in the 2026/27 tax year. However, these updates must still be submitted before the end-of-year tax return can be filed. This easement does not apply to the end-of-year return itself, which will still be due by 31 January 2028.
Alongside the new late submission rules, the government has also introduced a revised system of financial penalties for late payment of tax. These penalties are not points-based and instead depend on how late the payment is made. Late payment penalties apply where tax is not paid in full by the relevant due date, including balancing payments for outstanding tax liabilities and amounts due following amendments or assessments to a tax return. However, they do not apply to payments on account.
The following table shows how late payment penalties will apply, depending on the tax year the payment is for.
|
Penalties for tax year 2026/27 |
Penalties for tax year 2027/28 |
Payment up to 15 days late |
No penalty |
No penalty |
Payment 16 to 30 days late |
3% of the tax owed at day 15, or no penalty if it’s your first year |
4% of the tax owed at day 15, or no penalty if it’s your first year |
Payment 31 days or more late |
3% of the tax owed at day 15, and 3% of the tax owed at day 30 |
4% of the tax owed at day 15, and 3% of the tax owed at day 30 |
Taxpayers who are unable to pay their tax on time are encouraged to contact HMRC as soon as possible to discuss a payment arrangement. If HMRC agrees a Time to Pay arrangement and the taxpayer complies with it, penalties may be paused from the date contact is made. However, penalties may still apply if a payment plan cannot be agreed or if the taxpayer fails to keep to the agreed terms.
In addition to late filing penalties, taxpayers under MTD must also comply with strict digital record-keeping requirements. A separate penalty applies where an individual fails to keep records in the manner prescribed by the MTD rules. This provision was introduced under the Finance (No. 2) Act 2017. If a taxpayer does not maintain the required records using functional compatible software, as set out in the MTD Notices, HMRC may impose a penalty of up to £3,000 for any quarterly period.
Another significant penalty applies where a taxpayer deliberately withholds information. Individuals mandated into MTD for Income Tax will be subject to the rules contained in Schedule 25 of the Finance Act 2021. If a taxpayer fails to submit a return and that failure deliberately prevents HMRC from obtaining information necessary to assess their tax liability, a penalty may be imposed. Unlike the fixed late filing penalties, this penalty is tax-geared, meaning the amount is linked to the tax involved. There is a minimum penalty of £300, but the actual amount will depend on the seriousness of the behaviour, including whether the deliberate withholding of information was concealed.
Taxpayers are not automatically penalised in every case. Penalty points will not be applied where there is a reasonable excuse for missing a filing deadline, and taxpayers have the right to challenge both penalty points and financial penalties through HMRC’s review process or by appealing to the Tribunal.
Overall, the new penalty regimes are intended to encourage consistent compliance with the digital reporting requirements of MTD. While the framework introduces stricter expectations around timely submissions and digital record keeping, it also allows taxpayers opportunities to reset their compliance record by maintaining a period of accurate and timely reporting.
Further resources
Read about penalties for Making Tax Digital for Income Tax at GOV.UK
Read about penalties for Making Tax Digital for Income Tax volunteers at GOV.UK
