MTD ITSA Penalties Explained
A plain-English guide to Making Tax Digital Income Tax penalties. What they are, how they work, and what to do if you’ve been fined.
What is MTD ITSA?
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is HMRC’s requirement for self-employed people and landlords to keep digital records and submit quarterly updates of their income and expenses using approved software.
MTD ITSA replaces the traditional once-a-year Self Assessment return with a system of four quarterly updates plus a final declaration each year. Instead of filing everything in January, you update HMRC four times a year.
When does MTD ITSA start?
- April 2026: Mandatory for income over £50,000 (Phase 1)
- April 2027: Mandatory for income over £30,000 (Phase 2)
- April 2028: Mandatory for income over £20,000 (Phase 3)
The points-based penalty system
MTD ITSA uses a points-based system for missed submissions — similar to driving penalty points. Each time you miss a quarterly update or final declaration deadline, you receive one penalty point. Points accumulate until you reach the threshold, at which point a financial penalty is charged.
| Points | Status | Penalty |
|---|---|---|
| 0–2 | In the clear | None |
| 3 | Warning level | None (yet) |
| 4 | Threshold reached | £200 |
| 5+ | Above threshold | £200 + £200 per extra miss |
Points are separate for MTD ITSA and VAT — if you’re registered for VAT, your VAT penalty points are completely independent of your MTD ITSA points.
Points can carry over between tax years. If you have 3 points at the end of 2026/27 and miss one submission in 2027/28, you immediately hit the threshold and face a £200 fine.
The 2026/27 soft landing — what is and isn't covered
HMRC has announced a “soft landing” for the first year of MTD ITSA (2026/27). During this period, no penalty points will be issued for missed quarterly updates.
Covered by soft landing (2026/27):
- All four quarterly update deadlines in 2026/27
- No penalty points charged for missing quarterly updates
- No £200 financial penalties for quarterly misses
NOT covered by soft landing:
- The final declaration (annual return) — deadline 31 January 2028
- Late payment penalties — these apply in 2026/27 as normal
- Interest on late tax payments — accrues from day 1
The soft landing ends on 5 April 2027. From 2027/28 onwards, penalty points apply to all missed quarterly updates as normal.
Late payment penalties — the full picture
Late payment penalties are separate from penalty points. They apply when you pay your income tax bill late, and they work on a tiered structure based on how late the payment is.
| Days 1–30 | No penalty (30-day grace period) |
| Day 31+ | Penalty A: 3% of amount outstanding at day 15 |
| Day 31+ | Penalty B: 3% of amount outstanding at day 30 |
| Day 31 onwards | Daily charge: 10% per annum (max 2 years) |
| Days 1–15 | No penalty (15-day grace period) |
| Days 16–30 | Penalty A: 4% of amount outstanding at day 15 |
| Day 31+ | Penalty B: 3% of amount outstanding at day 30 |
| Day 31 onwards | Daily charge: 10% per annum (max 2 years) |
Interest is separate from penalties and accrues from day 1, even within the grace period. The current rate is BoE base rate + 4% (8.75% as of May 2025).
Payments on account are not subject to late payment penalties — only interest applies.
Time to Pay: If you contact HMRC to agree a payment plan, late payment penalties stop accruing from the date of contact. Interest continues until the debt is cleared. Contact HMRC as early as possible.
Use the Late Payment Calculator →How to appeal an MTD penalty
You can appeal an MTD penalty if you have a reasonable excuse for the late submission or payment. You must appeal within 30 days of receiving the penalty notice.
What counts as a reasonable excuse?
- Serious illness or bereavement
- Fire, flood, or theft
- HMRC service failure or technical problems
- Postal delays (for paper submissions)
- Unexpected hospitalisation of a close relative
What does NOT count as a reasonable excuse: not knowing about the deadline, relying on someone else who then failed to act, or having insufficient funds to pay (though the latter may be considered in the context of a payment plan).
To appeal, use HMRC’s online service or write to HMRC. Include the penalty reference, the reason for your appeal, and any supporting evidence.
Appeal a tax penalty at gov.uk →How to reset your MTD penalty points
How you reset points depends on how many you have.
Below the threshold (1–3 points):
Each point expires automatically 24 months after the missed deadline that caused it. You don’t need to do anything — just keep submitting on time and the points clear automatically.
At or above the threshold (4+ points):
Automatic expiry stops completely. To reset your points you must satisfy BOTH:
- Submit all outstanding updates and declarations from the previous 24 months
- Submit everything on time for 12 consecutive months
The earliest your points can reset is today + 12 months (assuming you catch up immediately and then comply for 12 months without a single miss).
Frequently asked questions
Do MTD ITSA points and VAT points affect each other?
Can I have more than 4 penalty points?
What if I have multiple businesses?
Does the soft landing apply to late payment?
What software do I need for MTD ITSA?
What is the final declaration deadline?
If I disagree with HMRC, what are my options?
What if I can't afford to pay my tax?
Can I use this calculator to estimate penalties before they happen?
Are MTD ITSA penalties the same as the old SA penalties?
When do my carry-over points reset?
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