MTD Penalties Explained: The Simple Guide to the New Points System
- Jul 24
- 5 min read
Starting in April 2026, the way HMRC handles late tax filings is getting a major overhaul. For years, small business owners have lived in fear of the "automatic fine": that dreaded letter through the door because a deadline was missed by a single day.
The good news? HMRC is moving toward a fairer, more lenient system for Making Tax Digital (MTD). Instead of an immediate financial slap on the wrist, they are introducing a points-based penalty system. Think of it like penalty points on a driving license: you only get "fined" once you’ve reached a certain threshold of mistakes.
However, "fairer" doesn't mean "ignore it." If you aren't careful, those points can stack up fast, leading to costly penalties and a reset process that requires a year of perfect behavior to clear.
In this guide, we’ll break down exactly how the new points system works, how much a mistake will cost you, and how you can take advantage of the initial "soft landing" period.
How the Points System Works
The logic behind the new system is simple: HMRC wants to punish persistent offenders while giving a bit of grace to businesses that make an occasional honest mistake.
Under the new MTD rules, every time you miss a filing deadline: whether it’s a quarterly update or your annual "Final Declaration": you will receive one penalty point. You will be notified of this point, but you won’t be charged any money yet.
The Thresholds: When the Fines Start
You only have to pay a fine once you hit a specific number of points. This "threshold" depends on how often you are required to file. For most SMEs and sole traders moving into MTD for Income Tax, the threshold is 4 points.
Annual Filers: Threshold is 2 points.
Quarterly Filers (Most SMEs): Threshold is 4 points.
Monthly Filers: Threshold is 5 points.
Once you reach your threshold (e.g., your 4th point), you will be charged a fixed penalty of £200.
But here is the kicker: once you are at that threshold, every subsequent late filing results in another £200 fine, even if you don't earn any more "points." You stay in the "penalty zone" until you successfully reset your points to zero.
How Points Expire (And How to Reset)
If you have one or two points but haven't reached the threshold, those points will eventually expire. Each point has a lifetime of 24 months. If you stay below the threshold for two years from the date you received a point, that point will vanish from your record.
The "Clean Slate" Reset
If you are unfortunate enough to hit the 4-point threshold and pay the £200 fine, the points don’t just go away after two years. To get back to zero, you have to complete a "period of compliance."
For quarterly filers, this means:
12 Months of On-Time Filing: You must submit all your required updates and declarations on time for a full year.
Catching Up: You must ensure all outstanding filings from the previous 24 months have been submitted.
Only when you have done both will HMRC wipe your points and move you back to zero. This is why it is so important to find an accountant early to ensure your systems are automated and your deadlines are never missed.
The 2026/27 "Soft Landing"
HMRC knows that moving to MTD is a big step for many sole traders and landlords. To help with the transition, they have introduced a "soft landing" for the first year of MTD for Income Tax (the 2026/27 tax year). If you are still working out what software you need, read MTD 2026: What Happens If You Don't Have Bridging Software by the Deadline.
During this first year, HMRC will not apply penalty points for late quarterly updates.
Important Warning: The soft landing does not apply to the Final Declaration (the annual wrap-up that replaces the old Self Assessment). If you are late with your Final Declaration even in the first year, you will still receive a penalty point.
Think of the soft landing as a practice run for your quarterly updates. You should still aim to file them on time to get into the habit, but the "points" pressure is off until April 2027.
Late Payment Penalties: A Different Beast
It is vital to understand that the points system is only for filing late. If you actually owe tax and you pay that tax late, a completely separate penalty system kicks in. This system is much more aggressive because it is based on percentages of what you owe.
The late payment rules work on a timeline:
Up to 15 days late: No penalty if you pay in full or agree to a "Time to Pay" arrangement.
16 to 30 days late: You receive a penalty of 2% of the tax you owed on day 15.
Over 30 days late: The penalty increases to 2% of what was owed on day 15, plus another 2% of what was still owed on day 30 (totaling 4%).
Daily Penalties: From day 31 onwards, you will also be charged a daily penalty at an annual rate of 4% on whatever balance is still outstanding.
In short: Paying late is significantly more expensive than filing late. If you realize you cannot afford your tax bill, the best move is to contact HMRC immediately to set up a payment plan. Doing this before the 15-day mark can save you hundreds, if not thousands, in penalties. For a closer look at how the filing penalty rules work, see The £200 Penalty Trap: Understanding HMRC's New Points-Based System.
A Simple Example: Sarah’s Stationery
Let's look at how this might play out for a typical SME owner, Sarah, who runs an online stationery shop.
Year 1 (Soft Landing 2026/27):
Sarah is busy in Quarter 1 and forgets to file her update. Result: No point (Soft Landing).
Sarah misses her Final Declaration deadline in January. Result: 1 Point.
Year 2 (2027/28):
Sarah misses her Quarter 1 update. Result: 1 Point (Total: 2).
Sarah misses her Quarter 3 update. Result: 1 Point (Total: 3).
Sarah misses her Final Declaration. Result: 1 Point (Total: 4). Fine: £200.
At this stage, Sarah is "at the threshold." If she misses her next quarterly update, she doesn't get a 5th point; she simply gets another £200 fine. To stop the fines, Sarah needs to file everything on time for the next 12 months to reset her score to zero.
How to Stay "Point-Free"
The move to MTD doesn't have to be stressful. The key is moving away from manual spreadsheets and onto MTD-compliant software that tracks these deadlines for you.
Automate your bookkeeping: Use software that connects to your bank account so your quarterly updates are almost ready to send at the click of a button.
Set aside tax money monthly: Avoid the late payment penalties by using a separate savings account for your tax obligations.
Work with a professional: An accountant doesn't just "do your taxes"; they act as a safeguard against these points. They know the deadlines, they understand the "good compliance" rules, and they can negotiate with HMRC on your behalf if things go wrong.
At Accountant Search, we specialize in matching SMEs with local experts who are well-versed in the MTD transition. Whether you are looking for accountants in London or specialized VAT advice, we can help you find the right partner to keep your points at zero.
Conclusion
The new points-based system is a welcome change for the "occasionally forgetful" business owner, but it is a trap for the disorganized one. By understanding the 4-point threshold and the difference between late filing and late payment, you can navigate the 2026 changes with confidence.
Don't wait until you have 3 points on your record to take action. Start preparing for MTD today by ensuring your accounting processes are robust, digital, and supported by a pro. If you are also reviewing your wider finance support, our Accounting Services UK: The Complete Guide to Finding the Right Accountant for Your Business can help you choose the best fit.
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