MTD penalties: how the fines work and how to avoid them

HMRC charges two separate types of penalty under Making Tax Digital for Income Tax: late submission penalties, which run on a points system and trigger a £200 fine once you reach four points, and late payment penalties, which charge a percentage of any tax you have not paid on time. For landlords mandated into MTD from 6 April 2026, a soft landing means no penalty points for late quarterly updates during the 2026/27 tax year, but late payment penalties, interest and the annual tax return deadline all still carry full consequences. This guide explains exactly how each penalty is calculated, verified against HMRC guidance as of August 2026, and sets out the practical steps that keep your record clean.

Who these penalties apply to

MTD penalties apply to anyone mandated into Making Tax Digital for Income Tax, which from 6 April 2026 means sole trader landlords whose combined gross property and self-employment income exceeded £50,000 in the 2024/25 tax year. The threshold falls to £30,000 in April 2027 and £20,000 in April 2028, so most self-managing landlords will be inside the regime within three years. The full timetable of thresholds and quarterly deadlines is on our Making Tax Digital hub.

Making Tax Digital replaced the single annual return with four quarterly updates plus a final tax return submitted through recognised software, and the penalty regime was rebuilt to match. The new framework, established under the Finance Act 2021 and set out in HMRC's late submission penalty guidance, applies to landlords as they become mandated into MTD. If you are still getting to grips with the regime itself, start with how Making Tax Digital works for landlords; this article covers only what happens when deadlines are missed.

How the HMRC penalty points system works

The HMRC penalty points system gives you one point for each missed submission deadline, and a £200 fixed penalty once you accumulate four points as a quarterly filer. It works much like driving licence points: no fine for an occasional slip, escalating consequences for a pattern.

The mechanics that matter:

1. One point per deadline, not per update. If you have both a property business and a self-employment and file both quarterly updates late on the same deadline, you receive one point, not two. Points for Income Tax are also counted separately from any VAT points.

2. Four points triggers £200. Once you reach the threshold, HMRC charges a £200 fixed penalty.

3. Every further late submission at the threshold costs another £200. There is no cap while you remain at four points, so persistent lateness compounds quickly.

4. The annual tax return counts too. Your MTD tax return, due by 31 January after the tax year ends, earns a point if late, feeding the same total as the quarterly updates.

For 2026/27, quarterly updates are due by 7 August 2026, 7 November 2026, 7 February 2027 and 7 May 2027. Each quarter is cumulative from 6 April, so a later submission can correct figures in an earlier one; the deadline is what carries penalty consequences, not perfection in the numbers.

The 2026/27 soft landing: what it covers and what it does not

HMRC will not issue penalty points for late quarterly updates during the 2026/27 tax year, a soft landing confirmed at Autumn Budget 2025 for the first mandated cohort only. The concession recognises that around 900,000 landlords and sole traders are adjusting to quarterly digital reporting at once. Landlords joining at the £30,000 threshold in April 2027 are not expected to receive the same grace.

Three things sit outside the soft landing, and this is where landlords get caught out. First, late payment penalties and interest apply in full from day one. Second, the annual tax return is not covered: file the 2026/27 return after 31 January 2028 and a penalty point applies under the normal rules. Third, the quarterly updates still have to be submitted. HMRC requires all four before you can file the final return, so skipping them merely stacks the work, and the risk, at the year end.

From the working pattern we see across the portfolios managed on August, the landlords who treated the 7 August 2026 first deadline as a real one, rather than leaning on the soft landing, had a far easier July: their records were already categorised, so the first quarterly update took minutes rather than a weekend of reconstructing bank statements.

Late payment penalties: the three tiers

Late payment penalties are charged as a percentage of unpaid tax and escalate at three fixed checkpoints. For tax due in respect of 2026/27:

• Days 1 to 15: no penalty if you pay in full or agree a payment plan with HMRC.

• Day 15: a first penalty of 3% of the tax outstanding at that point.

• Day 30: a further 3% of whatever remains outstanding, taking the maximum first penalty to 6%.

• Day 31 onwards: a second penalty accrues daily at 10% per year on the outstanding balance until it is cleared.

Two softenings apply. In your first year in the new regime, you have 30 days rather than 15 before the first penalty is charged. And a Time to Pay arrangement stops penalties accruing from the day you contact HMRC, provided you keep to it. Both rates are set to rise from 3% to 4% for tax years from 2027/28.

Interest is separate and unavoidable. HMRC charges late payment interest from the first day a payment is overdue, at the Bank of England base rate plus 4 percentage points, which stood at 7.75% in early 2026; check HMRC's interest rates page for the current figure. Interest runs even during a Time to Pay arrangement. Note that payment dates have not changed under MTD: the balancing payment and first payment on account remain due on 31 January, the second on 31 July. Quarterly updates create no payment obligation.

How long penalty points last and how they reset

Individual penalty points expire automatically 24 months after the missed deadline, provided you stay below the four-point threshold. Miss one quarter, file everything else on time, and the point simply falls away two years later.

Once you hit the threshold, expiry stops and a stricter reset applies. To return to zero you must meet two conditions together: submit everything on time for a continuous 12-month period, and bring every submission from the preceding 24 months up to date, even where late. Until both are met, every further missed deadline is another £200.

Can you appeal an MTD penalty?

You can appeal both penalty points and financial penalties if you have a reasonable excuse, normally within 30 days of the penalty notice, through your HMRC online account or in writing. Reasonable excuses HMRC accepts include serious illness, bereavement, and software or HMRC system failures at the point of submission; relying on insufficient funds or on a third party who failed to file generally does not qualify. Keep evidence of any software outage or error message, because a screenshot at the time is far more persuasive than a recollection six months later.

The older Self Assessment penalty regime, with its automatic £100 late filing fine, still governs tax years before you joined MTD, so a late 2025/26 return filed in January 2027 is penalised under the old rules, not the points system.

How to avoid MTD penalties

Every MTD penalty is avoidable, because each one requires a missed deadline that software, reminders and clean records can prevent. The sequence that works:

1. Confirm you are signed up. HMRC does not enrol you automatically, and you must be registered with HMRCbefore you can submit anything.

2. Keep records digitally as you go. The quarterly deadlines are only painful when three months of transactions need categorising at once. August tracks rental income and expenses in HMRC-aligned categories automatically through Open Banking, so each quarterly update is a review rather than a rebuild.

3. Use recognised software and test it early. You cannot file through HMRC's own portal, and a submission through a non-compliant route does not count. Our guide to the best MTD software for landlords compares the options.

4. Diary all five deadlines. Four quarterly dates plus 31 January. The 7th of the month catches people who assume month-end.

5. Know your liability before it falls due. Late payment penalties bite hardest when the bill is a surprise, so estimate it early with our rental income tax calculator and set aside as you go.

6. If you cannot pay, contact HMRC before day 15. A Time to Pay arrangement agreed early prevents every percentage penalty; silence guarantees them.

Landlords using August consistently tell us the quarterly rhythm turned out to be the easy part once rent and expenses were flowing in automatically; the hard part was the one-off effort of moving off a spreadsheet. Do that once, well before your next deadline, and the penalty regime becomes background noise. For everything beyond penalties, our complete MTD guide for landlords walks through registration, software and the quarterly workflow.

Frequently asked questions

How many penalty points before HMRC fines you under MTD?

Four points for quarterly filers, which covers all mandated MTD landlords. Each missed submission deadline earns one point, and the fourth triggers a £200 fixed penalty, with a further £200 for every late submission after that while you remain at the threshold.

Does the soft landing mean I can skip quarterly updates in 2026/27?

No. You avoid penalty points for lateness, but all four quarterly updates must still be filed before HMRC will accept your final tax return for the year. Skipping quarters simply concentrates the work at 31 January, where the tax return and the payment both carry full penalties.

I have rental income and a self-employment. Do I get double points?

No. Points are issued per deadline, not per update, so two late updates due on the same day earn one point. VAT obligations are tracked separately, so a landlord who is also VAT registered has two independent points totals.

Do MTD penalties apply to limited company landlords?

Not under this regime. Property held in a limited company falls under Corporation Tax, which sits outside MTD for Income Tax. Personally held property above the qualifying income threshold is what brings you into scope, and the simplest way to stay penalty-free is to keep digital records from day one; you can start with August for free and be MTD-ready before your next quarterly deadline.