Making Tax Digital for Income Tax (MTD for IT) penalties

Making Tax Digital for Income Tax (MTD for IT) is a government initiative to make managing tax returns easier and more accurate. It also aims to bring record-keeping in line with the digital world through regular updates and digital tax records.

However, not everyone may be ready in time, and non-compliance with Making Tax Digital can result in financial penalties.

Following MTD for IT rules is crucial to avoid penalties. Failing to meet proper record-keeping requirements or missing deadlines for updates can be costly. In this guide, we’re going to look at Making Tax Digital penalties for both Income Tax and VAT, as well as how to avoid them.

MTD penalties – In summary

• Using HMRC-approved MTD-compliant software can help prevent any compliance slip-ups or complications.  

• MTD penalties for non-compliance can result in fines that can continue to rack up. Businesses need to focus on MTD compliance to avoid incurring penalties.

• No Making Tax Digital for Income Tax penalties will be issued for late submissions in the 2026-27 tax year. This grace period is to help people get to grips with MTD for IT without fear of immediate consequences.

What are Making Tax Digital penalties?

Making Tax Digital penalties are a points-based system to encourage compliance with MTD rules — mostly relating to late submissions or inaccurate record keeping. They attempt to motivate businesses and individuals to submit essential information on time and correctly. In turn, this promotes a more efficient and accurate system. 

Penalties are monetary, and charges can quickly mount, so you should try to avoid any MTD penalties in the first place. These MTD penalties can differ slightly, depending on whether you’re not following VAT or Income Tax requirements.

Making Tax Digital for VAT penalties 

Making Tax Digital for VAT (MTD for VAT) was introduced in 2022, mandating that all VAT-registered businesses submit VAT records to HMRC using approved, compatible MTD software, while retaining digital records. This affects any VAT-registered business, regardless of total income.

Listed below are the key penalties you can expect from failing to adhere to MTD for VAT requirements:

MTD for VAT late submission penalties

MTD for VAT return submissions uses a point-based system. For each missed submission deadline, a point is issued. Once the point threshold is reached (4 points for quarterly filers, 5 points for monthly filers, 2 points for annual filers), you’ll get a £200 penalty, and another £200 penalty for each missed deadline.

Points are reduced by sending your quarterly updates and submitting your tax returns on time, depending on your submission frequency, and sending any outstanding tax returns or quarterly updates. If you’re below the 4-point threshold, a point will be removed every 24 months after the missed deadlines. 

MTD for VAT late payment penalties

Late payment penalties are proportionate to the time taken to pay what you owe and apply to payments not paid in full by the due date. This could include a balancing payment for outstanding money owed on your tax bill or amounts due on your tax return after assessment or amendment. They do not apply to payments on account.

Late Payment Penalties do not use a point system and apply to each late payment. They start at 3% on the VAT you owe, plus 3% of what is still outstanding at day 30. The second late payment is calculated at a daily rate of 10% per year on the outstanding amount. This is charged daily until the balance is paid, or just before the end of the 2-year assessment limit.

Failure to keep MTD for VAT digital records

Penalties can also apply for business owners who do not maintain their digital records in line with MTD for VAT rules. This includes a breakdown of each transaction that includes VAT. If you do not keep accurate records digitally, there can be a charge of £5 to £15 a day for every day you do not meet these requirements.

Additionally, if you file your returns without the correct HMRC-approved, MTD-compatible software, you could face a charge of £400 for each return you file. If you do not use digital links to transfer data between software, you could face another £5 to £15 charge for each day you don’t meet this requirement. 

Interest on late MTD for VAT payments

From the first day your payment is registered as late, until the day you pay in full, interest will be charged on overdue VAT, currently at a rate of 7.75%.

Making Tax Digital for Income Tax penalties 

Making Tax Digital for ITSA (MTD for ITSA) is on its way, being phased in from 6 April 2026 for sole traders and landlords with a qualifying income over £50,000, and from 6 April 2027 for those with a qualifying income over £30,000. 

MTD for IT late submission penalties

MTD for ITSA uses a points-based penalty system for late submissions. For each quarterly update or tax return you miss, you’ll receive a penalty point. At 4 penalty points, you’ll get a £200 penalty, plus another £200 for each missed submission deadline. For the first tax year, 2026-27, there will be no penalty points for late filing. Following that, users will be penalised.

If you remain below the 4-point penalty threshold, HMRC will remove each point 24 months after the missed deadline. If you’re over the 4-point threshold, HMRC will not remove points until you achieve a period of compliance and send any outstanding quarterly updates or tax returns for the last 24 months.

MTD for IT late payment penalties

For MTD for ITSA, there is a two-charge penalty system for late payments that comes into effect immediately. It consists of an initial charge for lateness and a second charge that accumulates while the payment is outstanding. 3% of the tax outstanding, rising to 4% in April 2027, is owed in days 16-30. Then, this continues at 3% of the tax outstanding, plus an additional penalty of 10% per annum accruing daily. In the first 15 days, it is just the interest owed. 

There is a first-year allowance for taxpayers in the system from 2026-27, whereby the initial penalty is waived. This results in a 30-day interest-only period, rather than 15 at 7.75% currently. After day 31, the 10% per annum penalty still applies, alongside the initial penalty of 3%.

Failure to keep MTD for IT digital records

HMRC can impose a penalty of up to £3,000 per quarterly period if records aren’t maintained using HMRC-recognised MTD for IT-compatible software. You can consider this a “record-keeping” penalty. 

How to avoid Making Tax Digital for Income Tax penalties 

There’s a lot to keep in mind about MTD for IT penalties, but they can be easily avoided if you stick to HMRC guidance. Here’s a list of the key things to remember to avoid penalties where possible.

• Use HMRC recognised MTD compatible software: Using HMRC-recognised MTD-compatible software is an important part of maintaining digital records and sending the right information to HMRC. 

• Keep accurate digital records: Keeping up-to-date and complete digital records of all your qualifying income and expenses is vital for avoiding MTD penalties. MTD-compatible software can help with this. 

• Understand your deadlines: Understand and familiarise yourself with updated deadlines and the final declaration deadline. That’s four quarterly updates and one final year-end declaration. Again, MTD-compatible systems can help with this, but you should also set a reminder. 

• Submit on time: Don’t delay — always submit the required information on time from your software to HMRC. You can still be penalised for incomplete or incorrect information, so it pays to not leave it until the last minute.

• Pay on time: Users should ensure any Income Tax or VAT that is owed is paid by the given deadline. Missed payments incur charges almost immediately and quickly rack up. 

• Seek professional advice: Feeling overwhelmed by the world of MTD rules, penalties, and deadlines? Consult an accountant or tax advisor if you have any uncertainties. Non-compliance can result in a lot of fees stacking up quickly. 

Remember, even as an HMRC-recognised, MTD-compliant system, QuickBooks helps with compliance, but it doesn't ensure it. You still need to carry out submissions yourself, so it’s important that you understand the key deadlines and criteria for record-keeping – or consult a professional if you feel uncertain.

It’s also worth noting if you qualify for any exemptions or other circumstances that could help you.

Making Tax Digital penalties FAQs

What are the penalties for late MTD submissions?

Late submissions for both Income Tax and VAT are subject to a points-based penalty system. For each missed quarterly update, a penalty point is assigned. At 4 points, a £200 fine is triggered, plus an additional £200 for each late submission. For the tax year 2026-27, there is a grace period for MTD for IT. For the first year, there is no penalty for late quarterly updates.

What happens if I pay my income tax late under MTD?

According to MTD guidance, individuals or businesses must pay a penalty fine based on how long the payment is overdue, in addition to a daily interest charge. The longer you avoid paying the tax, the higher the cost you’ll incur. At 1-15 days, only interest is charged. At 16-30 days, 3% of the tax outstanding at 15 days is charged. At 31+ days late, 3% of the amount unpaid by day 30 is charged, plus interest, plus the initial penalty. From there, a 10% annual rate is charged daily on the outstanding balance for 24 months.

Can I appeal an MTD penalty?

Yes, you can appeal a Making Tax Digital penalty if you believe you have a reasonable excuse or disagree with the penalty. Appeals can be made within 30 days, following the instructions from your penalty letter. If you miss the deadlines, you’ll need to provide a valid reason. Learn more about appealing an MTD penalty on the HMRC website.

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