Introduction
Her Majesty's Revenue and Customs (HMRC) is set to reform its approach to penalising late tax returns by introducing a penalty points system, which will target repeat offenders while offering greater leniency for those who occasionally miss deadlines. The transition aims to replace automatic fines with a framework encouraging taxpayers to maintain consistent compliance.
The new system is being piloted among participants in the Making Tax Digital programme and will eventually apply to all individuals required to file self-assessment tax returns. The move coincides with expanded digital reporting requirements for landlords and self-employed individuals throughout the UK.
Introduction of the Penalty Points System
HMRC’s new penalty points system will replace the longstanding practice of issuing automatic fines for missed self-assessment deadlines. Instead of an immediate financial penalty, taxpayers who fail to file on time will receive a penalty point. Accumulating a certain number of points based on how often filings are required will trigger a monetary penalty.
According to HMRC, the change is designed to focus on persistent non-compliance rather than penalising one-off mistakes. The points-based approach is currently being tested with 100 taxpayers as part of a Making Tax Digital pilot scheme.
Key Changes from Previous Fines
Under the previous system, a late tax return resulted in an automatic fine of £100. With the introduction of penalty points, taxpayers now receive a point for each missed deadline. Once they reach the specified threshold, a £200 penalty is imposed.
The threshold for penalties is linked to the taxpayer’s filing frequency. For those submitting annually, two missed deadlines in two years would lead to a £200 fine. Under quarterly reporting, four missed submissions within two years would result in a penalty.
Rollout Timeline and Eligibility
The new system is initially limited to a small group participating in the digital reporting trial. A full rollout is planned, with the first wide-scale implementation affecting landlords and self-employed individuals earning over £50,000 from April.
'By 2028, nearly one million taxpayers with annual earnings of at least £20,000 will transition to this model. For the initial year of Making Tax Digital reporting, HMRC has confirmed that penalties will not apply, giving taxpayers time to adjust to the new process.
New Reporting Requirements
From April, landlords and freelancers subject to Making Tax Digital will be required to submit quarterly updates rather than annual tax returns. This marks a significant shift in reporting expectations.
Individuals remaining under the self-assessment system who earn less than £20,000 annually will continue to file once a year. The digital transition adds new administrative requirements, including familiarity with approved software and more frequent interaction with HMRC systems.
Transition to Making Tax Digital
Making Tax Digital is being introduced in stages. While landlords and higher-earning self-employed individuals must comply from April, those with lower incomes will follow later,
maintaining the traditional self-assessment regime for the time being. The phased approach is intended to smooth the transition, though it means that multiple filing systems will operate concurrently for several years.
Final Summary
The introduction of HMRC's penalty points system represents a major overhaul in how penalties for late tax filing are administered in the UK. The move aims to distinguish between persistent non-compliance and occasional oversight, providing a more proportionate response to late submissions.
The system will be phased in alongside the broader Making Tax Digital initiative, which introduces more frequent reporting for a growing number of taxpayers. While taxpayer advocacy groups have welcomed the more flexible approach, concerns remain about the administrative impact of digital reporting requirements.
HMRC has responded by offering a grace period for first-year filers under the new system. As the reforms are rolled out, UK taxpayers are advised to familiarise themselves with the changes and consider their reporting obligations carefully. For assistance in navigating these changes, the Pie app provides helpful tax tools and reminders.
