What is Making Tax Digital?

Making Tax Digital (MTD) is a government initiative designed to modernise the tax system, improve efficiency, reduce errors, and help taxpayers manage their obligations more effectively.

MTD for VAT has already been implemented, and the next phase, MTD for Income Tax Self-Assessment (ITSA), will become mandatory from April 2026. This marks a significant shift in how self-employed individuals and landlords report their income to HM Revenue & Customs (HMRC).

While this transition may seem daunting, preparing early can help businesses and individuals adapt smoothly to digital tax reporting, avoiding last-minute complications and potential penalties.

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Who is affected by MTD for ITSA?

From April 2026, if you have an income of over £50,000 annually, from self-employment or property rental, you’ll need to use MTD compatible software, like Xero, to keep digital records, submit quarterly income and expense data and finalise your business income at the end of the tax year.

From 6 April 2027, the threshold will lower to £30,000 (from 2025/26 tax year), bringing more self-employed individuals and landlords into the scope of MTD.

From 6 April 2028, the threshold will lower again to £20,000 from self employment or property income in 2026/27 tax year.

Individuals earning below these thresholds are currently not required to comply, but HMRC may expand the scheme in the future. Partnerships and their individual members are also not yet required to join, though this is expected to change in later phases of the rollout.

For now, members in partnerships and LLPs won’t need to follow MTD for their partnership income, but they may need to comply with MTD if they have other sources of qualifying income (self-employment or property income outside the partnership).

How is the threshold calculated? 

When calculating your threshold for MTD ITSA, both self-employed turnover and rental income are added together.

For example, if you earn £27,000 from self-employment and £25,000 from rental income, your total qualifying income would be £52,000.

A few key things to note:

  • This calculation is based on gross income (turnover) before expenses are deducted.

  • Other sources of income, such as employment income (PAYE), partnership income, or dividends, do not count toward the MTD ITSA threshold.

  • HMRC will assess your qualifying income based on your previous year’s Self Assessment tax return.

Specifically:

  • For the April 2026 start date (£50,000 threshold): HMRC will use the 2024/25 tax return, due by 31 January 2026.

  • For the April 2027 start date (£30,000 threshold): HMRC will use the 2025/26 tax return, due by 31 January 2027.

If you have a new source of income during the tax year, HMRC will adjust the reported figure proportionally to compare 12 months’ worth of income against the MTD ITSA threshold.

What about income covered by allowances and reliefs? 

Income that is fully covered by certain allowances or reliefs, like the £1,000 trading or property allowance, or Rent a Room relief, will not count toward the MTD threshold.

However, if your total gross income from self-employment and/or property exceeds the threshold, you must still comply with MTD. This means reporting all income, even if part of it is covered by an allowance or relief.

For example:

  • You earn £40,000 from self-employment and £15,000 in rental income.

  • Even if part of your rental income is covered by Rent a Room relief or the property allowance, your combined gross income is £55,000, which exceeds the £50,000 threshold (from April 2026).

  • As a result, you must comply with MTD and report all income digitally.

Who is exempt from MTD? 

Some taxpayers may be eligible for an exemption. Exemptions may be granted if:

  • You have digital exclusion due to age, disability, or lack of access to the internet
  • You have religious objections to using electronic record-keeping
  • You do not have a National Insurance number. This only applies for a tax year where you do not have a National Insurance number on 31 January before the start of that tax year. You are automatically exempt, so you will not need to apply for an exemption.

If you believe you qualify for an exemption, you will need to apply to HMRC directly.

What are the main changes under MTD for Income Tax?

Quarterly Digital Submissions 

Instead of filing a single tax return at the end of the year, you will need to submit income and expense summaries every three months via MTD-compliant software.

Find out more

End-of-Period Statement (EOPS)

After the quarterly updates, you must submit an EOPS to finalise your tax position. This is where you finalise your business income for the period, make any final adjustments to your accounts, claim reliefs, and confirm the accuracy of your information

Find out more

How will MTD impact my business? 

For many, Making Tax Digital means an unavoidable increase in administrative work. The need to submit quarterly updates, rather than a single annual return, places an extra compliance burden on business owners who are already stretched.

It also means additional software costs, potential training needs, and the risk of fines for late submissions.

But there are also a number of benefits.

Our forward-thinking clients are taking advantage of the call for quarterly submissions by receiving management accounts from us on a quarterly basis.

Having regular understanding and analysis of your financial data in real time will allow you make key decisions and unlock the potential for growth in your business:

Take advantage of Making Tax Digital by:

  • Being better informed all year round, putting you in the driving seat of your business
  • Seeing the early warning signs of cash-flow problems
  • Making long term strategic decisions based on real time performance
  • Putting yourself in a more appealing position to potential lenders
  • Automating and streamlining repetitive tasks and offers insights into business performance
  • Accessing enhanced data security with two-factor authentication
  • Improving collaboration between you and your accountant

What do I need to do to prepare for MTD for Income Tax?

Businesses and landlords should start preparing now to avoid any last-minute stress. Here are some practical steps you can take:

1. If you haven’t already, move to digital record keeping

MTD requires all affected taxpayers to maintain digital records of their income and expenses. You need to be using HMRC-approved accounting software such as QuickBooks, Xero, FreeAgent, or Sage.

2. Maintain digital records

As is currently the case for Self Assessment, you might need to keep records relating to savings, investments and pensions too, as well as details of certain kinds of grants. You will need to keep all these records digitally for at least 5 years after the 31 January final declaration date for each tax year.

3. Understand quarterly reporting

Rather than filing a single tax return at the end of the year, you will need to submit quarterly updates to HMRC. These quarterly updates will summarise income and expenses and must be filed using compatible software (as mentioned above)

The MTD tax year quarters can follow either:

Calendar year quartersTax year quartersSubmission deadline
1 April to 30 June6 April to 5 July7th August
1 July to 30 September6 July to 5 October7th November
1 October to 31 December6 October to 5 January7th February
1 January to 31 March6 January to 5 April7th May

4. Get Professional Advice

We can help you transition smoothly and ensure compliance with the new requirements. Email enquiries@a4g-llp.co.uk, or complete the form on this page to book a free 45 minute consultation.

5. Sign up

You are not automatically registered for Making Tax Digital for Income Tax Self-Assessment (MTD ITSA), even if you meet the income thresholds or if you are already registered for MTD VAT.

You will need to sign up similar to how you currently register for Self-Assessment.

The sign-up facility for is expected to open well in advance of the April 2026 start date to allow sufficient time for registrations.

To sign up, you (or your agent) will need specific information, including the National Insurance number, business start date, accounting method, and chosen tax year for starting MTD ITSA.

We can do this for you, just get in touch with your Client Manager.

Watch our short video

We’ve recorded a brief video explaining the practical side of MTD preparation, including how quarterly submissions will work, when the rules apply depending on turnover, what reporting dates will look like, why digital record keeping is required, and how we’re helping clients approach this in a practical, cost-effective way.

Making Tax Digital Frequently Asked Questions

What software do I need for Making Tax Digital?

You need MTD-compatible software (e.g., QuickBooks, Xero, Sage, FreeAgent, Hammock) to record transactions and submit returns to HMRC.

Some software options vary in price and suitability:

  • QuickBooks – good for sole traders or small enterprises who want high levels of support from the software.

  • Xero – often best for businesses with multiple income sources or expected growth. The £16/month starting plan is generally recommended over the £7 “simple” plan, which may be too limited.

  • Hammock – popular with landlords and may cover multiple property incomes efficiently.

It’s important to consider how many income sources you have, the size of your business, and the level of support you need when choosing software.

What happens if I don’t comply with MTD?

Non-compliance may result in penalties from HMRC.

The penalty system works like this:

  • Taxpayers receive one point for each missed deadline. Points accumulate until a threshold is reached.

  • When the threshold is reached, a £200 penalty is issued.

  • After reaching the threshold, any further late submissions result in an immediate £200 penalty.

  • To reset the penalty period, the taxpayer will need a set period of compliance (4 quarterly updates, or 2 end-of-year returns) and must have submitted all returns required for the previous 24 months.

  • Penalties for VAT and Income Tax are treated separately.

Can I still use spreadsheets for tax records?

Yes, you can, but only if they are linked to bridging software that enables digital submissions to HMRC. Using dedicated MTD software is generally simpler and reduces the risk of errors.

When will MTD for Corporation Tax be introduced?

MTD for Corporation Tax is expected after 2026, but details are still being finalised. Given the history of MTD delays, further adjustments or deferrals are possible. Businesses should plan based on the current timeline rather than waiting for changes.

Does MTD apply to landlords?

Yes. Landlords earning over £50,000 annually must comply with MTD for Income Tax (ITSA) from April 2026. Those earning £30,000–£50,000 must comply from April 2027.

How will quarterly update periods work under MTD ITSA?

There are two types of update periods:

  • Standard update periods – align with the tax year (6 April to 5 April). Use this if your accounting period matches the tax year.

  • Calendar update periods – end on the last day of the month. Use this if your accounting period does not match the tax year (e.g., 1 April–31 March). This can make record-keeping simpler.

Quarterly updates should be submitted by the 5th of the month following the period.

How should property income be reported in MTD ITSA?

For jointly owned properties, landlords have some flexibility:

  • You can report either your share of the property income and expenses, or just the income in the quarterly updates.

  • If you choose not to include expenses in the quarterly updates, you must report them at the end of the tax year before finalising your tax return.

Note: Most landlords can access full income figures, so submitting net income from managing agents is only accepted in limited cases. Keeping clear digital records by property and ownership type will help avoid confusion.

Do I need to submit separate quarterly updates for each business I operate?

Yes. Each sole trade and property business must submit its own quarterly updates.

Examples:

  • Two sole trades – eight quarterly updates per year (four per trade).

  • Property businesses – each property business must be reported separately. If properties are owned under different structures (solely, jointly, partnership), they may be treated as separate businesses.

Will MTD increase my tax bill?

No, MTD is a reporting change, not a tax rate change. Better record-keeping may actually help you claim all eligible expenses and avoid errors.

How do I sign up for MTD?

You can register for MTD for Income Tax via HMRC’s website. Sign up before your first MTD deadline and make sure your software is linked to HMRC.

What records do I need to keep digitally under MTD?

  • Business income and expense records

  • VAT records (if applicable)

  • Digital copies of receipts/invoices (recommended)

Can I deregister from MTD ITSA if my income drops below a certain threshold?

Yes, but only if your turnover falls below £30,000 for three consecutive years. After that, you can apply to become exempt.

Example:

  • 2024/25: £52,000 – join MTD ITSA

  • 2025/26: £35,000 – still in

  • 2026/27: £25,000 – first year below threshold, still in

  • 2027/28: £15,000 – second year below threshold

  • 2028/29: £5,000 – third year below threshold → become exempt

Monitor your turnover closely and maintain accurate records.

Book your FREE 45 Minute Consultation

With careful planning and the right support, Making Tax Digital doesn’t have to be a burden. The sooner you start preparing, the easier the transition will be. Click the button to request your free consultation and we’ll be in contact soon to arrange this.

If you’re a current client, get in touch with your Principal Adviser to start planning.

Book my free consultation

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