What happens if a client misses an MTD for Income Tax deadline? A penalty guide for practices

Published Thursday 13 August 2026

Table of contents

• How MTD for Income Tax penalties work: the points-based system
• Points thresholds, and how points reset or expire
• What the first-year soft landing means for 202627
• Late payment penalties under MTD for Income Tax
• How to advise a client who missed the first quarterly update
• Appeals and the reasonable excuse process
• Submitting MTD quarterly updates in Xero
• A template client communication you can adapt
• Support clients through MTD for Income Tax with Xero
• FAQs on MTD for Income Tax penalties

Key takeaways

• The new Income Tax late filing penalty regime replaces the old £100 flat late-filing fine with a points-based system: one point per missed submission, and a £200 penalty once a client reaches the threshold plus an additional £200 penalty for each missed submission thereafter.
• For Making Tax Digital (MTD) for Income Tax, the threshold for receiving a £200 penalty is 4 points for mandated clients, or 2 points for volunteers.
• The new regime will apply to all clients reporting under MTD for Income Tax. Autumn Budget 2025 confirmed that the new penalty rules will also apply to all income tax self assessment taxpayers not yet reporting under MTD from April 2027.
• For 2026/27, a first-year soft landing means there will be no penalty points for late quarterly updates. However, all required quarterly updates must still be submitted before the tax return can be filed.
• Late filing penalty points still apply to the tax return.
• Points below the threshold expire after 24 months; at the threshold, clearing them requires 12 months of on-time submissions and every outstanding update filed.
• A client who missed the first update can still catch up penalty-free this year, so confirm the outstanding update is submitted, and set up a reliable quarterly workflow.
• There is also a Income Tax late payment penalty regime which replaces old flat fees with a new tiered, percentage-based structure.

How MTD for Income Tax late filing penalties work: the points-based system

MTD for Income Tax late filing penalties now run on a points model rather than an automatic fine. HMRC replaced the old £100 flat late-filing penalty with a system that gives a client one point each time they miss a submission obligation, and charges a fixed £200 only once they reach a set threshold.

This new point based regime will also be applicable to those clients not in MTD who are still completing their traditional Income Tax Self Assessment return from April 2027 but they will have a different point threshold to those operating under MTD.

The logic is closer to points on a driving licence than a one-off ticket. A single late submission earns a single point, points build up over time, and the financial penalty arrives at the threshold rather than on the first slip. After a client hits the threshold, every further late submission triggers another £200 straight away.

One detail worth flagging to clients early: Income Tax and VAT penalty points are counted on separate tallies. A client already inside MTD for VAT doesn't carry those points across, and vice versa. You can read the current rules on the GOV.UK penalties for Making Tax Digital for Income Tax guidance.

It’s also worth noting that because the old late filing regime remains in place for traditional self assessment until April 2027 you’ll likely be managing the old and the new penalty regimes simultaneously for many clients.

Want something you can send straight to a client? Our guide to MTD for Income Tax penalties for SMBs is written with them in mind.

Points thresholds, and how points reset or expire

Under MTD for Income Tax the penalty point threshold is 4 points for clients who are mandated into the system – they'd have to miss 4 filing deadlines before a £200 penalty is issued. Clients who volunteer into MTD for Income Tax ahead of their mandation date have a lower threshold of 2 points.

Once they reach 4 points a client will receive no further points but will instead receive an additional £200 penalty each and every time they miss a subsequent deadline.

An important point to note is that a client can only pick up a maximum of one point per missed deadline, even when they run more than one business through MTD. So if a client who has two soletrade businesses files both quarter one updates late they would still only receive one penalty point in relation to quarter 1.

Points don't stay on the record indefinitely. Where a client stays below the 4 point threshold, accrued points expire automatically 24 months after the date of the missed deadline to which the points relate.

However, once a client reaches the 4 point threshold, the clock works differently. Resetting the points back to zero takes two things together: 12 months of submitting everything on time, and every outstanding submission from the previous 24 months brought up to date. Paying the £200 clears the charge, not the points, so a client who pays but keeps filing late stays at the threshold and faces a fresh £200 each time. The detail sits in HMRC's penalties for late submission policy paper.

What the first-year soft landing means for 2026/27

Here's the point most clients want to hear: for 2026/27, HMRC won't apply penalty points for late quarterly updates. Quarterly-update points begin from 2027/28.

The reassurance has firm limits, and this is where your advice adds value. The soft landing covers late quarterly updates only. It doesn't remove the obligation to file, and it doesn't touch the other penalties. In practice, that means:

• The outstanding quarterly update still has to be submitted.
• Late payment penalties and interest still apply if tax is paid late.
• The final tax return still has to be filed on time, and a late final tax return can still attract a penalty point.

So a client who missed the first update this year has breathing room on points, but not a free pass on everything. HMRC set this out in its first quarterly update deadline announcement.

Also - don’t forget, this easement is only for 2026/27 so if you have clients joining the second or third wave of MTD for Income Tax in April 2027 or 2028 they will not be afforded the same breathing room as things stand.

Late payment penalties under MTD for Income Tax

As the soft landing doesn't touch late payment, it's worth keeping the two regimes apart when you talk to clients. Like late filing, there's a new late payment regime for MTD for Income Tax and for traditional Self Assessment from April 2027. The new late payment regime replaces old flat fees with a new tiered, percentage-based structure

The structure of the new regime runs in stages:

• Payment up to 15 days late: no penalty charge
• Payment 16 to 30 days late: a charge of 3% of the tax outstanding on day 15
• Payment 31 days or more late: a charge of 3% of the tax outstanding on day 15 plus 3% of the tax outstanding on day 30 plus an additional 10% per year on the outstanding amount, charged daily from day 31 until the tax is paid for up to 2 years

These first-year rates rise from April 2027, when the day 15 and day 30 charges each increase to 4% under HMRC's published penalty rates.

In addition to these late payment penalties late payment interest will also be charged on the outstanding balance as it is today.

There's a first-year cushion. For the first year a client participates in MTD for Income Tax they will get 30 days before late payment penalties are applied or instead of the usual 15. However, be aware that you only get this easement once so if you volunteered in the MTD pilot in 2025/26 that easement will have applied to that tax year and will not be available in 2026/27.

The 30 day easement period can also be used to arrange a Time to Pay plan before a late payment penalty applies. Arranging Time to Pay stops further penalties building from the date they contact HMRC, though interest continues.

How to advise a client who missed the first quarterly update

When a client tells you they've missed the first deadline, the message is simple: it's fixable, and it won't cost them points this year. Your job is to turn that reassurance into action.

1. Confirm exactly which obligation was missed and reassure the client that no penalty point applies for a late quarterly update in 2026/27.
2. Submit the outstanding update as soon as the records are ready. Updates are cumulative, so the year-to-date figures bring the position up to date.
3. Check the payment position separately. A missed update doesn't change what the client owes or when, so confirm the tax is paid or a Time to Pay plan is in place.
4. Set up a repeatable quarterly workflow so the next deadline is handled well ahead of time, not in the final week.

The quarterly cycle itself is predictable, which makes it easy to systematise. Standard periods end on 5 July, 5 October, 5 January, and 5 April, with deadlines of 7 August, 7 November, 7 February, and 7 May. You can confirm the client's exact obligations on the GOV.UK send quarterly updates guidance.

If the outstanding first-quarter update is filed before the next quarter's period ends, HMRC still records it as a late first-quarter submission. If it's filed after that point, submitting the next quarter's update carries the year-to-date totals, and once HMRC accepts it both quarters are treated as satisfied, so there's no need to re-file the first quarter separately.

Appeals and the reasonable excuse process

If a client does receive a penalty and has a genuine reason for missing the deadline, they can appeal. They have 30 days from the date of the penalty to do so, and the route runs through an HMRC review first, then to the First-tier Tribunal if the client wants to take it further.

An appeal turns on whether the client had a reasonable excuse. HMRC's published reasonable excuse examples include the death of a close relative shortly before the deadline, an unexpected stay in hospital, a serious illness, a failure of the software or HMRC's own service, and events such as fire, flood, or theft. As the adviser, you can strengthen an appeal by documenting the excuse and the dates clearly and lodging it promptly. The starting point for the process is the GOV.UK appeal a penalty guidance.

Submitting MTD quarterly updates in Xero

The mechanics of submission matter as much as the rules, because a smooth workflow is what keeps clients out of penalty territory in the first place. In Xero's Making Tax Digital tools, a quarterly update can be submitted once the obligation period has ended, and each update carries cumulative year-to-date totals rather than standalone quarters.

That cumulative design is useful for catch-up. If a client missed the first quarter, a later submission that covers the year to date brings both periods up to date once HMRC accepts it. If a client needs to correct a figure, they can resubmit an update, or let a later quarter's year-to-date totals override the earlier one.

Although quarterly updates are designed to just give HMRC an indication of income and expenses and clients won’t be penalised for missing transactions we would still recommend encouraging clients to include every digital record in each update, because good digital record keeping is the basis for stress free compliance with MTD and will make the year end process much easier.

Across a client book, the practice advantage is standardisation: one workflow, clear internal deadlines a week or two ahead of HMRC's, and a single view of who has filed. A missed update shows as overdue in Xero until it's filed, giving you a clear visual prompt to act on. That's how you turn a new compliance obligation into a repeatable service rather than a quarterly scramble.

A template client communication you can adapt

A short, proactive message reassures clients and prompts the records you need. Adapt the wording below to your practice tone:

"We're getting in touch about your Making Tax Digital for Income Tax quarterly updates. If you missed the first deadline, there's no need to worry – this tax year, a late quarterly update won't result in penalty points. We still need to submit the outstanding update on your behalf, so please send over your income and expenses for the period as soon as you can and we'll get your records up to date and file it. Once we've caught up, we'll set a simple reminder schedule so future updates are handled well before each deadline."

Support clients through MTD for Income Tax with Xero

Guiding clients through MTD for Income Tax is easier when the submission workflow, the records, and the deadlines all sit in one place. Xero gives your practice a consistent way to manage quarterly updates across your whole client book, so reassurance turns into a reliable process. If you're building an MTD-ready practice, you can join the partner programme to access practice tools, support, and resources at no extra cost.

FAQs on MTD for Income Tax penalties

Below are the frequently asked questions clients raise about MTD for Income Tax penalties, with short answers you can use directly in conversations.

Are there penalties for missing a quarterly update in 2026/27?

No penalty points apply for a late quarterly update in 2026/27 under the first-year soft landing. The update must still be filed, and late payment penalties and interest can still apply.

How many points does it take to trigger a £200 penalty?

For MTD for Income Tax, the threshold for receiving a £200 penalty is four points for mandated clients, or two points for volunteers. Volunteers only pick up points for late tax returns - not late quarterly updates - for as long as they remain a volunteer.

Do Income Tax and VAT penalty points combine?

No. HMRC tracks Income Tax and VAT penalty points separately, so a client's VAT points don't count towards their Income Tax threshold, and vice versa.

How long do penalty points last?

Points below the threshold expire 24 months after they're issued. Once a client reaches the threshold, they need 12 months of on-time submissions and all outstanding returns filed to reset to zero.

What counts as a reasonable excuse for an appeal?

HMRC accepts excuses such as the death of a close relative, unexpected hospitalisation, serious illness, software or service failure, and events like fire, flood, or theft. Document the circumstances and lodge the appeal within 30 days.

Does a client still need to file a 2025/26 Self Assessment return?

Yes. MTD for Income Tax applies from 2026/27 onwards, so clients must complete their 2025/26 Self Assessment as usual, alongside their new quarterly update obligations. In addition to this it is worth noting that the old late filing and late payment penalty regimes will still apply to those outstanding 2025/26 self assessment tax returns.