Understanding the new MTD ITSA penalty regime

The introduction of Making Tax Digital for Income Tax Self Assessment (MTD ITSA) from April 2026 marks one of the most significant overhauls to the UK tax system in recent years. Alongside digital record‑keeping and quarterly reporting, HMRC is introducing brand‑new penalty regimes for both late filing and late payment.

Penalty Dice

And the new rules won’t only apply to digital filers. As confirmed in the 2025 Budget, these penalty regimes will extend to all self assessment taxpayers from April 2027—regardless of whether they are mandated for MTD or not. With the clock now ticking, understanding how the new system works is essential for individuals, businesses, and their advisers.

Late-Filing Penalties: Points, Thresholds, and £200 Fines

The new late‑filing penalty structure mirrors the system rolled out for VAT in 2023. Rather than receiving an instant fine, taxpayers will instead accumulate penalty points for each late submission. Only when they hit their points threshold will a £200 penalty be issued.

Appeals can still be made on the basis of a reasonable excuse, as under the old regime.

Filing frequency determines the threshold

• Annual filing: 2 points

• Quarterly filing: 4 points

  
  

How this applies to different taxpayers

• Non‑MTD taxpayers (from April 2027):Only one annual submission → 2‑point threshold

• Voluntary MTD joiners or participants in testing: No legal requirement to file quarterly updates → 2‑point threshold

• Mandatory MTD filers: Required to make quarterly updates + an annual MTD return → 4‑point threshold

  
  

Multiple trades or property businesses

A taxpayer filing multiple sets of quarterly updates (e.g., trade + property) still receives only one point per quarter, no matter how many updates are due.

Maximum possible points in a tax year for MTD filers:

• 4 for quarterly updates

• 1 for the annual return

  Total: 5 points

Referee showing red card

How Penalty Points Expire (or Don’t)

If a taxpayer has not reached their threshold, individual points automatically expire after 24 months.

However, once the threshold is reached:

1. A £200 penalty is charged.

   
   

2. All subsequent late filings trigger another £200 penalty, not additional points.

   
   

3. Points no longer expire after two years.

To reset their points, the taxpayer must:

1. Meet a compliance period

   • Quarterly filers: 4 submissions on time

   • Annual filers: 2 submissions on time

     
     

2. File all outstanding returns from the last 24 months

When both conditions are met, points reset to zero.

Soft Landing: 2026/27

To smooth the transition into MTD ITSA, the government confirmed that no penalty points will be issued for late quarterly updates during 2026/27.

However:

• Penalties can still apply for a late 2026/27 annual MTD return.

• Taxpayers joining MTD after 2026/27 will not benefit from a soft landing.

• Quarterly updates remain a legal requirement, meaning digital record‑keeping still applies.

Taxpayers must submit at least their Q4 update before they can file the annual return—so the soft landing does not mean MTD can be ignored until 2027.

Late-Payment Penalties: Earlier, Steeper, and More Expensive

While the late‑filing penalty system is the biggest structural change, the late‑payment regime also shifts significantly—and will likely catch taxpayers out if they’re used to the existing rules.

The most notable change is the earlier trigger point for penalties. Previously, the first late‑payment penalty was charged at day 30. Under the new regime, it moves to day 15 (with a temporary soft landing in year one).

New late‑payment penalty structure

Penalties on late balancing payments, amended liabilities, or assessed amounts are charged as follows:

• Day 15: 3% of the tax outstanding

• Day 30: An additional 3%

• Day 31 onward: A daily penalty charged at 10% per annum of the amount outstanding

On top of this, late‑payment interest continues to run in the background—making delays more expensive than ever.

Tax Alarm Clock

Stopping the penalties clock

There is only one way to halt late‑payment penalties:

👉 Agree a Time to Pay (TTP) arrangement with HMRC.

However:

• Interest continues to accrue.

• If the taxpayer breaks the arrangement, HMRC will treat it as though it never existed, and penalties will be applied retrospectively.

  
  

Soft landing for late-payment penalties

For a taxpayer’s first year in the new regime:

• The day 15 penalty is waived.

• The first penalty applies from day 30, as under the current system.

However, this is offset by an important change:

From April 2027: Penalty rates increase

• Day 15 penalty rises from 3% to 4%

• Day 30 penalty rises from 3% to 4%

This makes late payment substantially more costly and is well worth highlighting to clients early.

Final Thoughts

With MTD ITSA arriving in 2026 and the new penalty systems extending to all self assessment taxpayers by 2027, now is the time for individuals to prepare. The points‑based filing regime and the accelerated late‑payment penalties require changes with increased administrative complexity.