Introduction
HM Revenue and Customs (HMRC) has confirmed a significant change to the way late tax returns will be penalised. The agency is replacing automatic fines with an incremental penalty points system, initially aimed at reducing the impact on individuals making occasional mistakes while increasing accountability for repeat offenders.
This update, which forms part of HMRC's broader digital transformation, is being tested with a pilot group before an anticipated wider roll-out. The change affects millions of self-employed workers, landlords and small business owners across the United Kingdom, and is designed to create a more proportionate approach to tax compliance.
Key changes to HMRC’s penalty structure
Existing rules require individuals who miss tax return deadlines to pay an automatic £100 penalty. Under the revised system, penalty points will be issued each time a deadline is missed, but only regular non-compliance will trigger financial sanctions.
HMRC is piloting this system from January with a group of 100 taxpayers, aiming to address concerns that the current regime penalises occasional errors too harshly. Over time, HMRC plans to extend the measure to a larger number of taxpayers.
Introduction of Making Tax Digital and quarterly reporting
The new penalty approach is closely connected to the rollout of Making Tax Digital (MTD), HMRC’s long-established digitisation strategy. MTD requires certain taxpayers to maintain and submit digital records, and for some, to report income on a quarterly basis instead of annually.
From April, sole traders and landlords whose combined income from self-employment and property exceeds £50,000 will join the MTD reporting framework. By 2028, the scope is expected to widen to include additional landlords and freelancers earning at least £20,000 a year, affecting up to one million further individuals.
How the new penalty points system works
The points system assesses lateness according to filing frequency. For instance, self-assessment taxpayers filing annually will receive one penalty point for each missed yearly deadline. Participants required to submit four quarterly returns each year under MTD will accrue one point for each missed submission.
If four points are accumulated within two years, a £200 financial penalty is triggered. Points expire after two years, provided compliance is maintained. This system intends to discourage persistent non-compliance and fosters regular engagement with tax requirements.
Impacts on self-employed and landlords
The updated rules particularly affect those with complex or multiple sources of income. Self-employed individuals and landlords with income above the specified thresholds must familiarise themselves with increased submission frequencies, or risk accruing penalty points more quickly. HMRC has published clear criteria on who needs to file a self-assessment tax return.
These include self-employed workers with income above £1,000, those with multiple income sources, landlords, investors, higher earners, and individuals claiming certain benefits, among others. The move seeks to clarify obligations and reduce unintended penalties.
Expert and official perspectives on the new regime
Tax professionals suggest the changes are likely to provide greater fairness. Liam Coulter, tax director at Wilson Nesbitt, said: “HMRC’s move to a points-based system appears to be a fairer alternative to the automatic fines administered previously, with the new system designed to penalise persistent offenders rather than those who have made honest mistakes.”
A spokesperson for HMRC explained, “We’re committed to helping customers get their tax right to avoid fines altogether. Our fairer penalty points system for late returns will mean that only Making Tax Digital customers who persistently miss deadlines will incur a financial penalty.”
Final Summary
HMRC’s revised approach to late tax filing penalties marks a significant shift in its compliance strategy. By focusing financial sanctions on repeat offenders rather than isolated mistakes, the agency intends to foster a climate of ongoing tax compliance and fairness. While digital transformation and quarterly reporting may present initial challenges for the self-employed and landlords,
the system is structured to provide ample opportunity to avoid financial penalties through regular, timely submissions. The full implications will be observed as the scheme expands to more taxpayers in future years. For users seeking support in managing tax obligations and deadlines, information management tools such as the Pie app offer useful reminders and organisation features.
