If you're a sole trader or landlord filing a self assessment tax return each year, the way you report your income to HMRC is about to change significantly. This article explains everything you need to know about Making Tax Digital for Income Tax - what it is, who it affects, how the new rules work, and what you should be doing right now to prepare.
Key Takeaways
From 6 April 2026, sole traders and landlords with combined qualifying income over £50,000 from self employment and UK property must keep digital records and submit quarterly updates to HMRC using compatible software. Making Tax Digital (MTD) is a UK government initiative to modernize the tax system.
The income thresholds then fall to £30,000 in April 2027 and £20,000 in April 2028, meaning more taxpayers will gradually be brought into Making Tax Digital for Income Tax.
Digital record keeping means using software or spreadsheets linked by digital links - manually retyping figures between systems will not meet HMRC's new rules.
There are separate rules and practical issues for jointly owned property, Construction Industry Scheme (CIS) income, multiple businesses, and agents supporting multiple clients.
New late submission penalties and late payment penalty rules will apply under a points based system, so planning ahead for due dates and cash flow is essential.
What is Making Tax Digital for Income Tax?
Making Tax Digital is HMRC's long-running programme - sometimes called making tax digital - to shift the UK tax system away from paper records and annual returns toward ongoing digital reporting. The first phase targeted VAT: all VAT registered businesses have been required to use MTD-compatible software since April 2019, submitting VAT returns through compatible digital tools. MTD for Income Tax (ITSA) is being introduced in phases starting April 6, 2026, applying similar principles to individuals with self employment and property income.
The terms "tax digital" and "digital for income tax" refer to the same fundamental change: HMRC's move from a single annual self assessment return to continuous digital record keeping and regular quarterly updates submitted through software. MTD aims to reduce errors by moving from paper records to digital reporting, and to reduce the tax gap by improving record-keeping across millions of taxpayers.
MTD for Income Tax applies to individuals - specifically self employed individuals and landlords - with relevant income from self employment and UK property. It does not apply to corporation tax (which covers limited companies) or to income dealt with entirely through PAYE. Partnerships and most trusts are currently outside the scope of MTD for Income Tax as at 13 June 2026, though HMRC may extend it to them in future.
Here's a practical example of how the paying tax change works. Under the current system, a typical sole trader files one self assessment tax return a year, due by 31 January. Under MTD for Income Tax, that same trader will make five digital submissions each tax year: four quarterly updates summarising income and expenses, plus a final declaration after the year ends. The annual lump of paperwork gets broken into smaller, more manageable pieces throughout the year.
Who Must Use MTD for Income Tax and From When?
Whether you must use MTD for Income Tax - and when - depends on your qualifying income levels. HMRC determines this based on the latest tax return they have processed for you.
The key mandation dates are:
From 6 April 2026 if combined qualifying income from self employment and UK property is £50,000 or more. Individuals with income over £50,000 must comply from April 2026. MTD for Income Tax starts from April 2026 for £50,000 income.
From 6 April 2027 if qualifying income is between £30,000 and £49,999. Individuals with income over £30,000 must comply with MTD from April 2027.
From 6 April 2028 if qualifying income is between £20,000 and £29,999. This was confirmed following the Spring Statement 2025 and formalised in the Income Tax (Digital Obligations) Regulations 2026.
So what does "qualifying income" actually mean? It is your gross income - total turnover before deducting any expenses - from all relevant self employment trades and UK property businesses combined. It is calculated from the most recent self assessment tax return HMRC has processed. Income covered by this definition does not include salary, pensions, dividends, or investment returns.
Worked example: Suppose a landlord earns UK property income of £27,000 in rental income during 2024/25, and also runs a freelance consultancy earning £26,000 gross (before expenses) in the same tax year. Their combined qualifying income is £53,000. Because this exceeds the Phase 1 threshold, that person will be mandated into MTD from 6 April 2026 - even if their income for 2025/26 drops below £50,000.
Who is not in scope yet?
People whose total qualifying income falls below the lowest current threshold
Individuals with only employment or pension income (no self employment income or property income)
Most partnerships and LLPs
Individuals with gross income below £20,000 may not need MTD under current rules
You can apply for exemption if you are digitally excluded - for example, if using digital tools is not reasonably practicable due to age, disability, or location. Exemptions may apply if compliance is not reasonably practicable, and exemption applications should be submitted urgently to HMRC. HMRC may also grant automatic exemptions in certain circumstances, such as where a Power of Attorney is in place.
Regarding how HMRC will communicate: HMRC plans to send letters based on 2024/25 returns to warn taxpayers who appear likely to be mandated from April 2026. If you receive one of these letters, it is a strong signal that you need to start preparing.
Digital Record Keeping and Digital Links
MTD does not change what records you must keep. The categories of information - turnover, various expense types, details supporting claims - remain broadly the same. What changes fundamentally is how those records are recorded and stored.
Businesses must keep digital records under Making Tax Digital. Digital record keeping means maintaining your income and expense records within compatible software or a structured spreadsheet that can submit data directly to HMRC - or via bridging software. Digital records must include income and expenses categories that broadly match the existing self assessment boxes, such as turnover, cost of goods sold, motor expenses, premises costs, and so on.
Each business or property business needs its own set of digital records. If you have multiple businesses - say, a plumbing trade and a separate online retail business - each one must be recorded separately. The same applies if you have a UK property business and a separate self employment income source.
Digital links are automated connections between systems where data flows without manual retyping or copy-and-paste. Acceptable digital links include:
API feeds from your bank into accounting software
Spreadsheet formulas or macros that carry data between cells or sheets
CSV or XML imports into recognised software
Bank feeds that pull transactions automatically
Copying figures from a spreadsheet into HMRC's website by hand will not satisfy digital link rules once you are fully within MTD for Income Tax. That kind of manual transfer breaks the digital chain, regardless of how careful you are.
Digital recording reduces manual data entry mistakes and avoids penalties for incorrect returns. Moving away from paper ledgers to integrated software streamlines record organization and tax preparation, making the whole process more efficient over time.
For practical record keeping, consider recording transactions daily or weekly if you have regular sales (for example, a retailer), or at least monthly for less frequent invoicing. Records must be retained for at least 5 years after the 31 January filing deadline for the tax year they relate to. For example, records for the 2026/27 tax year must be kept until at least 31 January 2033.
Compatible Software and Bridging Options
HMRC will not provide its own MTD income tax software. Taxpayers must choose MTD compatible software from commercial or free software providers. "Compatible software" means any product that HMRC has recognised as capable of keeping digital records, submitting quarterly updates, and submitting the final declaration - all while maintaining proper digital links. Being "recognised" is a technical compatibility check, not an endorsement of quality.
There are two main approaches: all-in-one accounting software that handles digital record keeping, bank feeds, categorisation, and the ability to submit updates directly to HMRC; or existing spreadsheets or niche tools combined with bridging software that creates a compliant digital link to HMRC.
Bridging software connects existing systems to HMRC for MTD compliance. Here is how it works in practice: you continue keeping records in your spreadsheet as before, but a bridging tool (installed as an add-on or template) reads the mapped cells in your spreadsheet and submits the data to HMRC via its API. The key requirement is that the bridging software must be recognised by HMRC as MTD-compatible - not all spreadsheet add-ons qualify.
Free software options are available for small businesses under MTD, though these typically have limitations such as no bank feeds, no receipt scanning, or support for only simple income types. Paid or subscription-based software options tend to offer more advanced features: dashboards, multi-business support, CIS integration, and property income management. Most major accounting software is compatible with MTD requirements, including well-known names across the market.
Agents and accountants may use specialist compatible software that allows them to manage many clients' digital record keeping and submissions from a single dashboard, with permissions set for each client. If you use more than one agent, or if multiple agents handle different parts of your tax affairs, the software and access arrangements need to be coordinated carefully.
Before committing to any software, check that it supports the specific obligations you have. For example:
Can it handle quarterly updates and the end-of-year final declaration?
Does it support jointly owned property splits?
Can it manage CIS deductions if you are a subcontractor?
Does it handle multiple businesses or overseas property if relevant?
Some software providers specialise in particular income types (such as property income or construction work), so match the tool to your situation rather than picking the first option you find.
Quarterly Updates and Year-End Final Declaration
MTD for Income Tax replaces a single annual self assessment form with more frequent reporting through software. Quarterly updates are required under MTD for eligible businesses, and automated submissions reduce workload throughout the year by streamlining deadlines and spreading the administrative effort.
From the first mandated tax year (for example 6 April 2026 to 5 April 2027), taxpayers within MTD must: keep digital records throughout the year; submit quarterly updates of income and expenses for each sole trade and property business; and submit an end-of-year "finalisation" (sometimes called the end of period statement and final declaration) after the tax year ends.
Quarterly updates must be submitted every three months. For taxpayers using the standard 6 April to 5 April accounting period, the quarterly update periods and their deadlines are:
Quarter | Period | Quarterly update deadline |
|---|---|---|
Q1 | 6 April – 5 July | 7 August |
Q2 | 6 July – 5 October | 7 November |
Q3 | 6 October – 5 January | 7 February |
Q4 | 6 January – 5 April | 7 May |
Quarterly updates are due by the 7th of the month after each quarter ends. Taxpayers must submit summary updates of income and expenses every quarter through digital software. Businesses must submit quarterly updates using compatible software.
Quarterly updates are summaries with fewer detailed tax adjustments. They capture headline income and expense figures for each trade or property business. The year-end final declaration is where you include allowances, capital allowances, reliefs, losses, and any other income not reported quarterly - such as dividends, employment income, or interest. At the end of the year, taxpayers must submit a digital final declaration to finalize their tax liability, effectively replacing the traditional self assessment tax return with an MTD tax return process.
If you have multiple trades or both UK and overseas property businesses, you will need separate quarterly updates for each. Your software should guide you through selecting the correct business for each submission.
Quarterly reporting provides a running view of tax liabilities, allowing better cash flow management. Real-time access to accurate digital data allows proactive tax planning and business advice. However, the self assessment payment deadline remains 31 January following the tax year - that hasn't changed, even though reporting is now spread across the year.
Even though you are submitting data more frequently, you still pay your tax on the same schedule as before. The quarterly updates are about reporting, not paying.
Special Situations: Sole Traders, Jointly Owned Property and CIS
Some taxpayers face extra complexity under MTD due to their business structure or the types of income they receive. Here is how the new rules apply to some common scenarios.
Sole Traders with Multiple Trades
A sole trader with multiple trades - for example, someone who runs a plumbing business and a separate online sales business - will need digital records and quarterly updates for each trade. You cannot lump everything together into a single set of figures.
Expense categories should reflect the main HMRC categories for self employment pages (SA103S or SA103F). Think: cost of goods, vehicle costs, travel, staff costs, premises, advertising, professional fees, and so on. Your software should map these categories to the correct self assessment boxes, making the final tax return process smoother.
Jointly Owned Property
Jointly owned property counted as a single property business for each co-owner means that each co-owner only includes their own share of rental income and expenses in their digital records and quarterly updates. If you own a rental property 50/50 with someone else, you each report half the income and half the allowable expenses.
Co-owners do not need a shared bookkeeping system or digital links between each other - only accurate splitting of figures in their own software. You might agree to share a quarterly spreadsheet of headline figures so that each person can enter consistent numbers, but the digital record keeping obligation sits with each individual separately.
Some co-owners may choose to record headline income quarterly and provide more detailed expense breakdowns at year end if their software allows this approach.
Construction Industry Scheme (CIS) Income
The construction industry scheme has its own reporting obligations. Contractors must continue to submit monthly CIS returns, which are separate from MTD for Income Tax.
For subcontractors, the key point is to record gross CIS income and deductions within your digital records so that your quarterly updates and final declaration reflect tax already withheld. This ensures you receive proper credit for CIS tax deducted when your final tax liability is calculated.
Some compatible software can handle both CIS reporting and MTD submissions, which helps avoid duplication and reduces the risk of errors when reconciling figures at year end.
Other Cases
Overseas property or furnished holiday lets bring additional complexity. Software should allow separate digital record keeping for these categories where relevant. If you receive rent a room income, room relief may simplify things, but you still need to understand whether your total property income tips you over the qualifying income threshold. For further information on niche income types, HMRC guidance and specialist advisers can help clarify what is income covered by MTD and what is not.
Penalties: Late Submission, Late Payment and Poor Records
MTD introduces a structured penalty system for late digital submissions and late tax payments. This sits alongside existing obligations around record keeping and accuracy.
Late Submission Penalties
Late submission penalties use a points based system. Here is how it works:
Each missed quarterly update deadline or final declaration earns one penalty point
Once you reach the threshold - four penalty points for businesses with quarterly reporting obligations - a £200 late submission penalty is charged
Every subsequent late submission while you are at the threshold also triggers a £200 penalty
Points can eventually expire after a sustained period of full compliance (24 months of on-time submissions)
Each late submission earns one penalty point until a threshold is reached. Four penalty points result in a £200 fine for late submissions.
Important for 2026/27: HMRC has confirmed there will be no penalties for late quarterly updates in the 2026-27 tax year. Points will still be recorded, but financial penalties will not be triggered for late quarterly submissions during that first year. This is a policy-level easement - it is not written into the legislation, so do not rely on it extending beyond the first year.
Late Payment Penalties
Interest starts to accrue if tax is not paid on time, typically from 1 February after the tax year end. The late payment penalty structure works as follows:
For the 2026/27 tax year, there is an extended grace period of 30 days before any late payment penalty applies
After the grace period, a 4% annualised penalty rate is charged on the outstanding amount
Further percentage-based penalties and daily interest continue to accrue the longer payment remains overdue
Example: If your 2026/27 tax bill is due on 31 January 2028 and you pay 20 days late, you would fall within the extended grace period for the first year and avoid the initial late payment penalty - but interest still accrues from the original due date.
Record-Keeping Penalties
Separate penalties can apply for inadequate record keeping under existing legislation. Penalties for record-keeping failures can reach up to £3,000. Moving to digital record keeping does not remove the obligation to keep accurate and complete records. Inaccurate quarterly updates that understate income could also attract behaviour-based penalties for carelessness or deliberate errors.
Plan ahead with reminders, calendar alerts, and software notifications. The cost of a missed deadline - even just one penalty point - is easily avoidable with basic diary management.
How to Get Ready for Making Tax Digital
Here is a practical action list to help you prepare, whether your mandatory start date is April 2026, 2027 or 2028.
Step 1: Check Your Qualifying Income
Look at your latest self assessment tax return (for example 2024/25). Add up your gross income from all self employment trades and UK property businesses. If that total is close to or above £50,000, you are likely in scope from April 2026.
Step 2: Confirm Your Start Date
Cross-reference your qualifying income with the mandation thresholds. If you are between £30,000 and £49,999, your start date is April 2027. Between £20,000 and £29,999, it is April 2028 based on current HMRC rules.
Step 3: Review Your Current Record Keeping
Do you currently use paper files, basic spreadsheets, or a simple app? Assess whether your current methods meet digital record keeping requirements. If you are using paper ledgers, the tax change will require you to move to digital tools.
Step 4: Choose Compatible Software
Make a shortlist of software options that handle your specific needs - whether that is sole trade income, jointly owned property, CIS, or multiple businesses. Consider both full accounting software and bridging software options. Free options exist for straightforward affairs, while paid tools suit more complex situations.
Trial at least one solution before your mandation date. Make sure you can import existing data or start fresh records from the beginning of a tax year. Check that the software supports digital links rather than requiring manual copy-and-paste.
Step 5: Build Good Habits Early
Enter income and expenses regularly - daily, weekly, or monthly - instead of leaving everything to year end. Reconcile bank accounts digitally. Keep supporting documents (invoices, receipts, bank statements) in scanned or photographed form where possible.
Step 6: Get Professional Help If Needed
If you have jointly owned property, overseas income, complex reliefs, or are unsure about any aspect of the new rules, speak to a professional tax adviser or accountant who understands MTD for Income Tax. They can help you manage your tax affairs efficiently and avoid costly mistakes.
Step 7: Plan for Cash Flow
Even though reporting becomes quarterly, tax payments remain on the same schedule. Use quarterly reporting as a chance to estimate your year-end liability early, setting aside money regularly rather than facing a single large bill in January.
Starting early, testing software, and getting comfortable with digital record keeping will make the transition smoother when quarterly updates become compulsory.
FAQs
Do I still need to complete a Self Assessment tax return once I’m using MTD for Income Tax?
The traditional paper or online self assessment form will be replaced by an MTD "end of year" process submitted through compatible software. The information required will be similar to a final tax return - income, expenses, allowances, reliefs, and other income sources all need to be declared. The 31 January filing and payment deadline after the end of the tax year still applies, even after you have been submitting quarterly updates throughout the year. Some people with simple tax affairs and no MTD obligations may continue using the existing self assessment online service for a time, through HMRC submit processes they are already familiar with.
Can I change software part way through a tax year?
Switching is allowed, but all digital records for the current tax year must be moved across or recreated in the new system so that quarterly updates and the final declaration use a complete set of data. The best approach is to export data from the old system (for example as CSV files) and import it into the new software using digital links where possible. Gaps or inconsistencies between systems could cause errors in quarterly updates and may attract questions from HMRC, so submit data only once you are confident the records are complete.
What happens if my income falls below the MTD threshold after I’ve joined?
In general, taxpayers may be able to leave MTD if their qualifying income remains below the relevant threshold for three consecutive tax years and HMRC agrees. Until HMRC confirms you can exit, you must continue with digital record keeping and quarterly updates. Keep copies of your tax returns and HMRC correspondence to support any request to leave MTD if your business contracts or you retire.
Does MTD apply to income taxed through PAYE, such as my salary or pension?
Employment income, pensions, and some other sources are usually dealt with through PAYE and are not reported in quarterly MTD updates. However, these sources will still need to be included in the final year-end declaration within MTD software, similar to existing self assessment rules for people with both PAYE and self employment income. Taxpayers with only PAYE income and no self employment or property income will generally not be brought into MTD for Income Tax based solely on that PAYE income. HM Revenue and Customs has confirmed that the qualifying income test looks only at self employment and property income.
How does MTD affect jointly owned property where co-owners have different tax year-ends overseas?
UK property income for MTD is always reported on the UK tax year basis (6 April to 5 April), regardless of any overseas accounting dates used by co-owners. Each UK taxpayer records only their share of income and expenses for the UK tax year within their MTD digital records. Co-owners should agree a consistent way to share figures - for example, quarterly spreadsheets - so everyone can maintain accurate UK digital record keeping and submit updates on time. This is particularly important where small businesses or property ventures involve owners in different jurisdictions with different reporting calendars. Full details of how to handle cross-border situations can be found in HMRC's MTD guidance for property income.
