Making Tax Digital for Income Tax: A Business Owner’s Essential Guide
Making Tax Digital for Income Tax (MTD for IT) represents the most significant change to the UK tax reporting system since the introduction of Self Assessment (SA) more than 30 years ago. This new digital regime is designed to modernize how self-employed individuals and landlords manage their tax affairs, moving away from a single annual rush to a system of ongoing digital record keeping and frequent updates.
The government is committed to delivering MTD for IT to reduce the tax gap—the difference between the tax owed and the tax actually paid. By encouraging the use of compatible software, MTD aims to reduce unintentional errors and support greater business productivity.
For business owners, understanding the scope, timing, and requirements of MTD for IT is crucial for ensuring compliance and avoiding potential penalties.
1. Who is Affected and When Do I Start?
MTD for IT applies primarily to sole traders and landlords who receive income from self-employment or property. The timing of mandatory compliance depends on your total gross qualifying income from these sources, measured before expenses.
The mandation will be phased in over three years based on your income threshold:
| Qualifying Income (Annual Total) | Start Date for Compliance |
| £50,000 and above | 6 April 2026 |
| £30,000 and above | April 2027 |
| £20,000 and above | April 2028 |
If your total qualifying income falls below £20,000, you can continue using the traditional Self Assessment returns.
Important Notes on Scope:
- Limited Companies are not required to use MTD for IT.
- Partnerships are not yet in scope, though MTD is expected to be extended to them in the future. However, if a partner also has income from self-employment or property outside the partnership, they must comply if that separate income meets the threshold.
- The income threshold is based on specific turnover/gross income boxes reported on your Self Assessment return. If you have multiple businesses or properties, you must combine all qualifying income to determine your threshold.
2. The Three Pillars of MTD Compliance
For those mandated into MTD for IT, the system fundamentally changes how records are kept and reported. Compliance hinges on three key components:
A. Digital Record Keeping
You are legally required to keep digital records of all self-employment and property income and expenses using functional compatible software.
You must digitally record the amount, category, and date of each item of income and expense. While you do not need to scan and store invoices and receipts digitally, each individual transaction must be recorded digitally (not just summaries).
B. Quarterly Updates
Instead of one annual filing, you must submit a summary of your business income and expenses to HMRC every quarter using your compatible software.
- Submitting: These updates are simple summaries and do not require full tax or accounting adjustments.
- Correction: Quarterly updates are cumulative, meaning if you miss information or find an error in a previous quarter, you can include the correction in your next update.
- Multiple Businesses: You must send a separate quarterly update for each trade or property business you operate. For example, if you are a sole trader and also run a UK property business, you will submit eight quarterly updates per year (four for each).
C. The End-of-Year Submission (MTD Tax Return)
After the fourth quarterly update is finalized, you must complete an annual final declaration (referred to as the MTD tax return).
- This submission will automatically pre-populate with the income and expense totals from your quarterly updates.
- You must then use this opportunity to make necessary accounting and tax adjustments (such as disallowing private use or capital expenditure).
- This is also where you report all your non-business income sources—such as savings interest, dividends, pensions, or partnership income—and claim any relevant tax reliefs (like pension contributions).
- The final declaration is due by the traditional Self Assessment deadline of 31 January following the end of the tax year.
3. MTD Key Deadlines (For those starting April 2026)
If you are mandated to start MTD from 6 April 2026, keeping track of your submission dates is vital.
The default quarterly reporting periods are aligned with the tax year. All quarterly updates must be filed by the 7th of the month following the end of the quarter.
| Period Covered | Submission Deadline |
| Quarter 1: 6 April – 5 July | 7 August |
| Quarter 2: 6 April – 5 October (Cumulative) | 7 November |
| Quarter 3: 6 April – 5 January (Cumulative) | 7 February |
| Quarter 4: 6 April – 5 April (Cumulative) | 7 May |
| Annual Final Declaration (2026/27 Tax Year) | 31 January 2028 |
Alternative Quarter Dates: Businesses can elect to use calendar quarters (e.g., 1 April to 30 June). However, the filing deadlines (7 August, 7 November, 7 February, 7 May) remain unchanged.
4. Choosing the Right Software
The foundation of MTD is the mandatory use of compatible commercial software. You must register for MTD through your chosen software, not directly with HMRC.
HMRC does not provide the software itself, but works closely with software developers, and expects free products to be available for the smallest businesses with the most straightforward affairs.
Types of Compatible Software:
- Software that creates digital records: This ‘all-in-one’ type of product allows you to create records by linking directly to your business bank account, scanning receipts/invoices, or manually entering transactions. Most of these products handle both quarterly updates and the final tax return submission.
- Bridging Software: If you prefer to keep using existing records, such as those held in spreadsheets or other accounting tools, bridging software connects those records and allows you to make your submissions to HMRC.
If you use multiple products (e.g., a spreadsheet for records and bridging software for submissions), you must ensure they work together seamlessly to meet all MTD requirements. Critically, all transfers of data, from record creation through to submission, must be made using digital links—manual retyping or copying and pasting is prohibited.
Key Features Your Software Must Have:
- Support all your relevant MTD income sources (self-employment, UK property, foreign property).
- Allow you to make all necessary submissions to HMRC: quarterly updates and the annual tax return.
- Allow you to report all other income sources (pensions, dividends, etc.) to complete your tax return.
- Work with your chosen accounting period (standard tax year or calendar update periods).
5. Penalties and Exemptions
The late filing penalty system for MTD is changing to a new points-based regime, similar to the rules introduced for MTD for VAT.
Penalties for Non-Compliance
- Late Submission: If you miss a deadline for a quarterly update or the year-end submission, you will receive a penalty point.
- Once you accumulate a threshold of points (4 points for mandated taxpayers), a fixed financial penalty of £200 will be issued.
- If you have multiple businesses, you will still only accrue one penalty point per quarter for late filing of quarterly updates.
- Late Payment: Penalties for late tax payment are based on the number of days the payment is overdue, consisting of separate charges at 30 days and daily accrual thereafter.
- Inadequate Records: A penalty of up to £3,000 may be charged for failing to keep or preserve adequate digital records or for breaks in the required digital links within your software.
Exemptions from MTD
The MTD requirements are mandatory if your income is above the threshold, but you may be exempt if you are deemed to be digitally excluded.
You can apply for an exemption if it is not reasonably practicable for you to use compatible software to keep digital records or submit returns due to reasons such as:
- Age, disability, health condition, or location (e.g., inability to access broadband).
- Religious beliefs that are incompatible with using electronic communications or keeping electronic records.
If you believe you qualify for exemption, you (or your agent) must apply to HMRC. Other groups are automatically exempt, including trustees, foster carers, and non-resident companies.
6. Preparing for MTD for IT
Making the transition early can help you experience the business benefits of digitalization, such as improved accuracy, better tax planning, and more manageable bookkeeping that replaces the annual rush with “bitesize” tasks.
Three key steps to ensure compliance:
- Choose and set up HMRC-recognised software: Select a product that fits your business structure and ensures all digital record keeping and submission requirements can be met. You can use HMRC’s software finder tool to find compatible options.
- Sign up for MTD for IT: You must register through your chosen software, not directly with HMRC. Ensure you have your essential business information (NI number, accounting period, business name) ready.
- Start Early: Begin using digital tools well before your compliance date to become comfortable with the software and reporting requirements. You can voluntarily sign up for the service now to familiarize yourself with the process. HMRC is also running a testing phase that offers support and fewer penalties for late quarterly updates.
