HMRC's New 'Penalty Points' System Set for 2026 Rollout: A Shift in Tax Compliance Enforcement
HM Revenue & Customs (HMRC) is moving forward with a significant overhaul of its penalty system for late tax filings, shifting from immediate financial penalties to a 'penalty points' model. The new framework, first proposed in 2024, is designed to target persistent non-compliance while offering more leeway for occasional delays.
The current system imposes an automatic £100 fine for missing the 31 January self-assessment deadline, with daily and additional fixed penalties accruing thereafter. Under the incoming regime, most affected taxpayers—initially sole traders and landlords within the Making Tax Digital (MTD) program—will file quarterly updates. Each late quarterly submission will accrue one penalty point, with a £200 fine triggered upon reaching four points. Similarly, a late annual 'final declaration' will earn one point, with just two points resulting in the same £200 penalty.
A phased rollout begins this year with a pilot involving approximately 100 taxpayers. Full implementation for sole traders and landlords with annual income over £50,000 from self-employment or property is scheduled for April 2026. The income threshold will then be lowered to £30,000 in 2027 and £20,000 in 2028, bringing millions more into the scope of the new rules. Notably, penalty points will not be issued in the scheme's first year to allow for adjustment.
"The new penalty regime is simpler and fairer than the previous system," HMRC stated in a policy paper. "It will penalise those who persistently do not comply... while being more lenient on those who occasionally fail to meet obligations." The change comes as HMRC revealed that 3.3 million people had yet to file their returns just one week before this year's January deadline.
Analysis & Impact: This reform aligns with the broader, decade-long push toward Making Tax Digital, aiming to reduce errors and improve real-time data for the Treasury. Experts suggest the points system may improve compliance by creating a clearer 'strike' system, but critics warn it adds complexity to an already burdensome digital transition for small businesses. The gradual threshold reduction indicates a long-term strategy to encompass virtually all self-employed individuals and landlords within the digital reporting framework.
Voices from the Community:
Michael Chen, Accountant at Finchley & Co.: "For clients who are generally organized, this is a welcome change—a safety net for the odd missed deadline. However, my concern is for those who struggle with digital tools. The quarterly reporting itself is a huge behavioral shift; layering a points system on top could be overwhelming without significant support."
Sarah Wilkinson, Owner of 'Wilkinson's Crafts', a small sole trader: "As a small business owner, I'm drowning in admin. This feels like another hoop to jump through. They call it 'fairer,' but it's just another way to monitor and fine us. The government claims to back small businesses, then rolls out policies that feel punitive and distrustful."
David Okoro, Policy Analyst at The Tax Institute: "Objectively, this is a rational move. The old system was a blunt instrument. A points-based approach distinguishes between habitual offenders and those making rare mistakes, which is a principle of proportionate enforcement. The success will hinge entirely on HMRC's communication and the usability of the MTD software."