HMRC Confirms 12-Month Penalty Grace Period for MTD

The headline: no penalty points for late quarterly updates in year one

HMRC has published updated guidance confirming that sole traders and landlords required to use Making Tax Digital for Income Tax from 6 April 2026 will not receive penalty points for late quarterly updates during the first 12 months.

In plain English: if you're in Wave 1 (gross income over £50,000), you have until April 2027 to get comfortable with the quarterly submission rhythm before HMRC starts counting late filings against you.

This is a significant concession. The new points-based penalty system was one of the biggest sources of anxiety for taxpayers preparing for MTD — and HMRC has effectively given everyone a full year of breathing room.

What exactly does the grace period cover?

Let's be precise about what's protected and what isn't:

✅ Covered by the grace period

• Late quarterly updates — all four quarterly submissions (due 7 August, 7 November, 7 February, and 7 May) are covered. If you miss one during the first 12 months, you won't receive a penalty point.

❌ NOT covered by the grace period

• Late tax returns — your final declaration (which replaces the Self Assessment tax return) is not covered. Late tax return penalties apply from day one.
• Late payment penalties — these are separate from submission penalties. If you owe tax and pay late, the normal late payment charges still apply regardless of the grace period.
• Record-keeping obligations — you still need to keep digital records from 6 April 2026. The grace period is about filing deadlines, not about whether you use the system at all.

Why has HMRC done this?

This isn't entirely surprising. When MTD for VAT launched in 2019, HMRC adopted a similar soft-start approach — recognising that forcing hundreds of thousands of taxpayers onto a new digital system overnight would inevitably cause teething problems.

The 12-month grace period acknowledges reality: not everyone will have their software perfectly set up by 6 April, bank feeds may take time to connect, and the first few quarterly submissions are a learning experience.

It's also a pragmatic move. If HMRC penalised every Wave 1 taxpayer who missed their first quarterly deadline by a few days, the appeals system would be overwhelmed. Better to build in tolerance from the start.

How the penalty system works after the grace period

Once the 12-month grace period ends, the full points-based penalty system kicks in. Here's how it works:

• Each late quarterly update earns you one penalty point
• When you reach 4 points, you receive a £200 fine
• Every subsequent late submission after hitting the threshold also triggers a £200 fine
• Points only reset after 24 months of consecutive on-time submissions and all outstanding returns being filed

Separately, late payment penalties work on a percentage basis:

• Days 1–15 late: no penalty
• Days 16–30 late: 2% of unpaid tax
• Day 31 onwards: 4% of unpaid tax (annualised daily rate)
• Plus HMRC interest at Bank of England base rate + 2.5%

For the full breakdown, see our complete guide to MTD penalties.

What this means for you right now

The grace period is welcome news, but it doesn't change what you need to do. Here's the practical takeaway:

If you're in Wave 1 (income over £50,000)

Still set up your software before 6 April 2026. The grace period is a safety net, not a reason to delay. You still need to keep digital records from day one, and you'll still need all quarterly updates submitted before you can file your tax return.

Use the first year to get comfortable. Submit your Q1 update (due 7 August 2026) even if it takes you a couple of weeks longer than the deadline. That's exactly what the grace period is for.

If you're in Wave 2 (income £30,000–£50,000)

You don't start until April 2027, but it's reasonable to expect HMRC will offer the same grace period for your cohort. Either way, watching Wave 1 go through the process first gives you valuable time to learn from their experience.

If you haven't chosen software yet

The grace period gives you slightly less urgency on the penalty front — but the digital record-keeping requirement still starts on 6 April 2026. You need software in place. If you're still deciding, compare the top MTD-compatible options and pick one that fits how you work.

The bottom line

This is genuinely good news. HMRC is being more reasonable about the transition than many people expected. A 12-month grace period for quarterly submission penalties means you have time to learn the new system without financial consequences for honest mistakes.

But don't confuse a grace period with a free pass. Digital record-keeping is mandatory from April 2026. Your tax return deadlines haven't changed. And once the grace period ends, the penalty system is unforgiving of persistent non-compliance.

The smart move is still the same: get set up early, submit on time from the start, and treat the grace period as insurance you hopefully never need to claim on.