10 min read
Making Tax Digital for Income Tax Self-Assessment has changed the way self-employed individuals and landlords report income to HMRC. It is no longer a once-a-year task. Under MTD, you are required to keep digital records and submit quarterly updates throughout the year, followed by a final declaration.
The system is more structured, and the penalties that come with it are more rigorous than many people currently appreciate. If you have been wondering what actually happens when you miss a deadline, pay late, or ignore the obligation, this guide covers it all.
A quick refresher: What MTD requires
Under MTD for IT, eligible taxpayers must complete all of the following through HMRC-recognised, MTD-compatible software:
- Keep digital records of all income and expenses
- Submit four quarterly updates to HMRC each year
- File an End of Period Statement
- Submit a Final Declaration
Because HMRC now receives your financial information throughout the year rather than once annually, your compliance is monitored on an ongoing basis. The penalty system has been built around that reality.
The points-based penalty system
MTD for IT introduces a points-based penalty system for late submissions, just like that for MTD for VAT. Rather than receiving an immediate fine the first time you miss a deadline, HMRC assigns penalty points that build up over time. The point at which those accumulate into a financial penalty depends on how often you are required to file:
- Annual filers: 2 points trigger a fine
- Quarterly filers: 4 points trigger a fine
- Monthly filers: 5 points trigger a fine
Once you reach your threshold, HMRC issues a £200 penalty. Every late submission after that results in a further £200 charge, applied automatically.
Here is how it plays out for a quarterly filer:
- First late submission: 1 point
- Second late submission: 2 points
- Third late submission: 3 points
- Fourth late submission: 4 points, triggering a £200 fine
- Fifth late submission: A further £200 penalty
Paying the fine does not clear your points record. The points stay on your account until you meet HMRC’s compliance conditions. Under the old annual model, a missed deadline meant one fine. Under MTD, repeated late submissions bring repeated charges.
Do penalty points ever disappear?
Yes, but paying the fine is not enough on its own. To reset your record, you must:
- Submit all outstanding returns so your filing history is fully up to date
- Stay fully compliant for a continuous period, typically 12 months for quarterly filers
HMRC needs to see a consistent track record of on-time submissions before your points are cleared. Getting the right processes in place early is far easier than trying to recover once points have started to mount.
Late payment penalties: A separate matter
Late submission and late payment penalties are two different things. Submitting your quarterly update on time does not protect you if the associated tax payment at the end of the financial year is delayed. The charges for late payment work as follows:
- Within 15 days of the due date: No penalty
- Between 16 and 30 days late: A 2% penalty on the outstanding amount
- After 30 days: A further 2% added to the unpaid balance
- From day 31 onwards: Daily interest runs until the full balance is paid
These percentages apply to the total unpaid tax, not a fixed amount. For anyone with a sizable tax bill, the charges grow quickly if the balance is left unpaid.
Interest charges on unpaid tax
Interest on unpaid tax runs from the original due date until the full balance is settled. Unlike financial penalties, interest is rarely cancelled, even when a penalty appeal is won. The rate HMRC applies moves in line with the Bank of England base rate. A tax bill that seems manageable today can become considerably larger if it remains unpaid for several months.
What if you have a genuine reason?
HMRC does allow for exceptional circumstances under what it calls a reasonable excuse. The following are generally accepted:
- Serious illness or hospitalisation
- Bereavement of a close family member
- An unexpected technical failure within HMRC’s own systems
- A major unforeseen event such as fire or flooding
Forgetting the deadline or having a busy period at work will not be accepted as grounds for appeal. If you believe your situation qualifies, you must appeal within 30 days of receiving the penalty notice and submit appropriate supporting evidence.
What happens if you ignore it?
Leaving penalties and outstanding tax unpaid gives HMRC the authority to:
- Issue further financial penalties
- Continue charging interest on the unpaid balance
- Begin formal debt recovery procedures
- Escalate to enforcement action
- Review your broader tax affairs more closely
If cash flow is the issue, HMRC may agree to a Time to Pay arrangement, spreading the amount owed across instalments. Interest still applies, but speaking to HMRC early puts you in a much better position than waiting until the matter has been escalated.
Common reasons people fall behind
Most MTD penalties do not come from people deliberately avoiding their obligations. They come from poor habits and outdated processes. The most common causes are:
- Leaving bookkeeping until just before a quarterly deadline
- Using software that is not MTD-compatible
- Not setting money aside for tax throughout the year
- Losing track of upcoming submission dates
How to stay compliant
Good compliance is about building financial habits that work throughout the year, not just at quarter-end:
- Update your records monthly so nothing piles up before a deadline
- Use HMRC-recognised software that submits directly and keeps compliant records
- Set reminders for all four quarterly submission dates well ahead of time
- Keep a separate account for tax and add to it regularly
- Work with an accountant who manages the process for you — the cost is consistently less than accumulated penalties and interest
Conclusion
MTD is a long-term change to the UK tax system, not a temporary adjustment. Real-time reporting gives HMRC a clearer and more current view of tax liabilities throughout the year. The annual filing mindset no longer applies.
Businesses and individuals who build quarterly compliance into their regular financial routine will find it manageable. Those who carry on with old habits will face an increasingly costly reminder that the system has moved on.
Managing MTD obligations alongside running a business is not always simple. At Golding Accountancy, we handle everything from bookkeeping and tax filing to full financial management, so your business stays compliant without the stress. Get in touch with us today and we will take it from there.
Anthony Burrell is the Tax Director at Golding Accountancy, specialising in personal tax, compliance, and tax planning. He works closely with business owners and landlords, helping them navigate complex tax rules and ensure they pay the right amount of tax. Anthony is particularly experienced in advising property investors. Outside the office, he is a dedicated West Ham supporter and has been a Season Ticket holder for over 40 years. Anthony often recommends Dext to clients for simplifying bookkeeping and financial processes.
