The Penalty-Free Period for MTD ITSA
HMRC has introduced a transitional easement for the first year of Making Tax Digital for Income Tax. This page explains what the penalty-free period covers, what it does not cover, and what happens when it ends.
What is the penalty-free period?
For taxpayers joining MTD in April 2026, HMRC will not apply penalty points for late quarterly updates in the 2026-27 tax year.
This means if you miss one or more quarterly update deadlines in your first year under MTD, you will not accumulate penalty points for those missed deadlines.
What the penalty-free period does not cover
The easement is specifically for late quarterly update submissions. It does not cover:
- Late tax payments - payment deadlines and late payment penalties are separate from submission penalties
- Late tax returns - penalty points can still apply if you miss the 31 January tax return deadline
- The obligation itself - you are still legally required to submit quarterly updates on time. The penalty-free period means no financial consequence for lateness, not that the obligation does not exist
How the penalty points system works (after the penalty-free period)
From tax year 2027-28 onwards, the full penalty regime applies to all quarterly updates. Here is how it works:
Late submission penalties
Outside the transitional easement, each missed quarterly-update deadline can earn 1 penalty point.
- The penalty threshold for quarterly filers is 4 points
- When you reach the threshold, you receive a £200 financial penalty
- Each subsequent missed deadline while at the threshold incurs another £200 penalty
How points expire
- If you have not reached the threshold: points expire after 24 months of the point being issued
- If you have reached the threshold: all points are removed after you submit on time for 12 months and send any outstanding quarterly updates or tax returns from the previous 24 months
Multiple businesses with the same deadline
You can receive only one penalty point per deadline. This applies even if quarterly updates for more than one business are late.
Late payment penalties (separate system)
Late payment penalties are different from late submission penalties. The percentage depends on the tax year the payment relates to:
| When payment is made | 2026-27 tax year | 2027-28 tax year |
|---|---|---|
| Up to 15 days late | No penalty | No penalty |
| 16 to 30 days late | 3% of the tax owed at day 15 | 4% of the tax owed at day 15 |
| 31 days or more late | 3% at day 15, another 3% at day 30, plus 10% a year charged daily from day 31 until the tax is paid, or for up to two years | 4% at day 15, another 4% at day 30, plus 10% a year charged daily from day 31 until the tax is paid, or for up to two years |
First year under the new rules: You have 30 days from the payment due date to pay in full or contact HMRC to arrange a payment plan. If you do this, the day-15 penalty does not apply. After your first year, this reduces to 15 days.
HMRC also charges late payment interest from the first day the payment is late. This is separate from the penalties. If HMRC agrees a Time to Pay arrangement and you keep to it, penalties are paused from the date you contacted HMRC.
See GOV.UK’s current MTD penalty guidance for the full rules.
Reasonable excuses
Both late submission and late payment penalties can be appealed if you have a reasonable excuse - for example, bereavement, serious illness, or a natural disaster. HMRC considers each case individually.
If you are an accountant
The penalty-free period gives your clients time to adjust to the new quarterly rhythm. Use this period to:
- Get clients set up with compatible software
- Establish a quarterly submission routine
- Iron out any issues with digital record-keeping
Even though penalties are not applied in year one, it is good practice to submit on time from the start. Clients who build the habit early will be better prepared when full penalties apply.
If you are filing for yourself
The penalty-free period is your safety net while you get used to MTD. Use it wisely:
- Set up your digital records and compatible software as early as possible
- Try to submit your first quarterly update on time, even if the penalty-free period means there is no financial consequence for lateness
- Familiarise yourself with the deadlines (see Quarterly Update Deadlines)
Think of the first year as a practice run with the safety net in place.
FAQ
Does penalty-free mean I can skip quarterly updates?
No. You are still legally required to submit quarterly updates. The easement changes the late-submission penalty treatment for the first year; it does not remove the obligations or their due dates.
What about voluntary participants who signed up before April 2026?
Volunteers do not receive penalties for late quarterly updates while they are volunteering. Penalty points still apply to late tax returns, with a threshold of 2 points.
When does the penalty-free period end?
The penalty-free period covers the 2026-27 tax year. From tax year 2027-28, the full penalty points system applies to quarterly updates.
Are late payment penalties also waived in the first year?
No. Late payment interest still runs from the first day the payment is late. In your first year under the new rules, you can avoid the day-15 penalty by paying in full or contacting HMRC to arrange a payment plan within 30 days.