Industry watchdog Ofwat said a probe into the company found “serious failures” over how it operated and maintained its sewage network.
Ofwat said this resulted in excessive spills from storm overflows.
The regulator said Yorkshire Water has admitted to its failings and agreed to the enforcement package as a result.
The water company said the £40 million package, which has been reduced from the £47 million proposed penalty announced by the regulator in August last year, will not be paid for by customers, but by Yorkshire Water and its shareholders.
It will pay out £36.6 million over the next five years to prioritise work on particularly problematic storm overflows in environmentally-sensitive areas.
The firm, which supplies more than five million customers, will also hand £3.4 million of funding to the Great Yorkshire Rivers Partnership.
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