HM Revenue & Customs (HMRC) plans to significantly alter the UK’s late tax return penalty in 2026. It is expected that the new penalty points system, which will replace the current automatic penalty system for late filing, will offer a more flexible and equitable way to enforce compliance given the increased requirements for digital filing under Making Tax Digital (MTD). This thorough and current explanation describes the system, how it operates, who it impacts, and how to avoid paying hefty fines.
What Is the HMRC Penalty Points System?
HMRC now charges penalty points to taxpayers who miss the filing date instead of automatically imposing a fixed penalty, such as the customary £100 fee for late submission of Self Assessment tax returns. A £200 fee is applied when the penalty points reach a specific threshold.
By making a clear distinction between infrequent late submissions and persistent offenders, this new penalty system guarantees that the punishment is appropriate for the infraction.
Why Is HMRC Introducing This Change?
HMRC intends to modernise the penalty system and promote improved tax compliance in light of the UK’s introduction of digital reporting under Making Tax Digital for Income Tax Self Assessment (MTD ITSA). In addition to being easier, more equitable, and less harsh on infrequent mistakes, the new points system will assist taxpayers in submitting digital documents on time.
HMRC intends to replace the automatic penalty system with a cumulative points system in order to target actual non-compliance and prevent needless penalties.
How the System Works
Penalty Points for Missed Deadlines
In the new framework:
- Each missed submission deadline earns one penalty point.
- Points accumulate and are tracked over time.
- Once a taxpayer reaches the point threshold, a £200 fine applies.
Thresholds Based on Filing Frequency
The number of points needed to trigger a fine depends on how often you are required to file returns:
| Annual returns | 2 points (e.g., two late annual submissions in two years) | £200 penalty |
| Quarterly returns (MTD) | 4 points (e.g., four late quarterly updates in two years) | £200 penalty |
This means occasional lateness won’t immediately result in a penalty — only persistent failure to meet deadlines will.
Transition to Making Tax Digital (MTD)
The UK government’s larger initiative to encourage digital tax reporting is linked to the penalty points system:
Implementation Timeline
- Pilot Phase (early 2026): Before a broader rollout, HMRC is testing the system with a small group of about 100 taxpayers to make sure it functions properly.
- Full Rollout (April 2026): Full implementation begins for sole traders and landlords with annual self-employment or property income over £50,000.
- Future Expansion: Income thresholds will gradually decrease over the next few years — to £30,000 in 2027 and £20,000 in 2028 — expanding the number of affected individuals.
Grace Period in First Year
In order to give taxpayers time to adjust to the new digital filing system, HMRC will waive the late quarterly filing penalty points for those who join the MTD ITSA system in April 2026 for the first year (2026–2027).
Penalty points may still be applied throughout this period if the final annual return date is missed.
Who Is Affected?
The new penalty points system applies to:
- Self-employed individuals are required to file digital tax updates.
- Sole traders and landlords above the set income thresholds
- Persons under MTD reporting quarterly income and expenses
- Partnerships and companies, depending on their MTD obligations
More taxpayers, including those with lower yearly incomes, will be exposed to the scheme in subsequent years as thresholds decline.
What Happens to Points Over Time?
Penalty points are not permanently recorded on your record. As per the policy guidelines of HMRC:
- Points expire after 24 months if you maintain a clean compliance record.
- Points for various tax regimes (such as VAT and self-assessment) stay distinct from one another.
- After a taxpayer completes all outstanding filings and maintains compliance for two years, the points are reset.
Once prior tardiness is corrected, this expiration mechanism encourages taxpayers to maintain compliance and avoid further fines.
How to Avoid Penalty Points and Fines
Here are some doable actions to keep on course:
Use Compatible Digital Software
If you have to file quarterly updates under MTD, make sure you use digital accounting software that has been approved by HMRC and can reliably submit returns and deadlines.
Set Calendar Reminders
To prevent unintentionally missing deadlines, mark quarterly and annual submission dates on your schedule well in advance.
Maintain Timely Records
Keeping your business books up to date ensures you’re always prepared to submit accurate returns when deadlines approach.
Seek Professional Help
You can manage digital submissions and determine when new regulations apply to your situation with the assistance of an accountant or tax advisor.
HMRC
The manner in which HMRC, the UK tax authority, enforces tax compliance has significantly changed with the introduction of the penalty points system. With the new system, HMRC has abandoned the automatic penalty system in favour of a more structured and behaviour-related penalty system that will focus penalty points on persistent late filers and treat infrequent late filings more positively.
In order to avoid penalty points in 2026 and beyond, it is imperative that you become more knowledgeable about your filing requirements and familiarise yourself with online reporting systems if you are one of the impacted taxpayers.
