The way millions of people in the UK manage and report their income is about to change significantly. HMRC’s Making Tax Digital (MTD) initiative is expanding to include income tax, marking a major shift from traditional annual tax returns to a fully digital system.
Starting from April 2026, many sole traders and landlords will be required to keep digital records and submit regular updates to HMRC. This move is designed to make tax administration more efficient, effective, and easier for taxpayers to get right. This guide will provide an in-depth review of MTD for Income Tax, explaining what it means for you, who is affected, and how to prepare.
Key points
- MTD for income tax introduces mandatory digital record-keeping and quarterly updates to HMRC.
- Thresholds reduce to £30,000 in April 2027 and may drop further in future.
- The rules apply to self-employed individuals and landlords, with specific exemptions for trusts, estates, and those unable to use digital tools.
- Compatible software is essential for submitting digital records and updates – paper records will not comply.
- Final declarations will replace traditional annual tax returns, requiring all income to be reconciled and adjustments to be made by 31 January following the tax year.
- Missed update deadlines can result in penalty points and fines under a new HMRC system.
- Early preparation and switching to digital systems will ease the transition and reduce the risk of non-compliance.
What is Making Tax Digital for income tax?
Making Tax Digital for income tax is a new system that requires self-employed individuals and landlords to use compatible software for their financial records and tax submissions. The core of this change involves moving away from a single annual tax return to a more frequent, digital process.
The new requirements under MTD:
- Digital record-keeping: all business and property income and expenses must be recorded digitally using MTD-compatible software.
- Quarterly updates: a summary of your income and expenses will be sent to HMRC every three months directly from your software.
- Final declaration: after the tax year, you will review and finalise your tax position, make any necessary accounting adjustments, and submit a final declaration to HMRC.
This system aims to provide a real-time view of your tax liability, helping you budget more effectively and reducing the chances of errors.
The phased rollout: who needs to comply and when?
HMRC is introducing MTD for income tax in stages to allow taxpayers time to adapt. The date you must start following the new rules depends on your total gross income from self-employment and property.
- From April 2026: individuals with a total qualifying income over £50,000 will be mandated to join MTD.
- From April 2027: the income threshold will be lowered to include those with an income over £30,000.
- From April 2028: the government has announced its intention to potentially include those earning over £10,000, though this is subject to further review.
The threshold is based on your gross income for a tax year. If your income exceeds the relevant threshold for the first time, you will generally have until the third tax year after that to become compliant. For example, if your income first goes over £50,000 in the 2026/27 tax year, you would need to comply with MTD from April 2028.
Who is exempt from MTD for income tax?
While the scope is broad, certain individuals and income types are exempt from the MTD for Income Tax rules. Exemptions include:
- Trusts and estates
- Trustees of registered pension schemes
- Non-resident companies
- Individuals who are unable to use digital tools due to age, disability, or location (e.g., no internet access). These exemptions are not automatic and must be applied for.
It is important to check your specific circumstances, as HMRC’s rules can be complex.
MTD software and digital records
A fundamental part of MTD is the use of compatible software. Paper records will no longer be sufficient for those mandated to join the scheme. Your chosen software must be able to connect to HMRC’s systems to submit information. It should also be capable of:
- Keeping and maintaining digital records of your income and expenditure.
- Preparing and sending quarterly updates to HMRC.
- Finalising your tax position and submitting the final declaration.
There will be a range of software products available, including free versions for businesses with straightforward tax affairs. However, many businesses may find that dedicated commercial software, or the support of an accountant who uses this software, is a more practical solution.
The new reporting process: quarterly updates and final declaration
The annual tax return is being replaced by a multi-step process. Here’s how it works.
Quarterly updates
You will be required to send a summary of your business or property income and expenses to HMRC every quarter. These updates are not a final tax submission but a way of providing regular information. The standard quarterly periods and deadlines are:
- 6 April – 5 July: due by 7 August
- 6 July – 5 October: due by 7 November
- 6 October – 5 January: due by 7 February
- 6 January – 5 April: due by 7 May
If you have more than one business (e.g., you are a sole trader and also a landlord), you must submit separate quarterly updates for each.
The final declaration
After the end of the tax year, and once all your quarterly updates are submitted, you must complete a final declaration. This is where you will make any final adjustments, claim reliefs and allowances, and declare any other income.
The final declaration confirms your total tax liability for the year and is due by 31 January of the following tax year.
How to prepare for the change
The transition to MTD for income tax is a significant undertaking. The key is to prepare early.
- Assess your income: determine if you will meet the £50,000 threshold for the April 2026 start date.
- Go digital: if you are still using paper records, now is the time to switch to a digital system.
- Research software: start looking at MTD-compatible software options to find one that suits your needs.
- Seek professional advice: an accountant can help you understand your obligations, choose the right software, and manage your new reporting requirements seamlessly.
Frequently asked questions
Who is affected by MTD for income tax?
From April 2026, self-employed individuals and landlords with a gross annual income over £50,000 will be affected. This threshold drops to £30,000 from April 2027.
What if I have both self-employment and property income?
Your total gross income from all self-employment and property sources is combined to determine if you meet the threshold. For example, if you have £30,000 from self-employment and £25,000 from property, your total is £55,000, and you will need to comply from April 2026.
Do I need to buy expensive software?
Not necessarily. HMRC will provide a list of compatible software, including free options for businesses with simple tax affairs. However, paid software often offers more features. Alternatively, our team have the necessary software to manage this for you.
What happens if I miss a quarterly update deadline?
HMRC has announced a new points-based penalty system for late submissions. You will receive a point for each missed deadline, and a financial penalty will be issued once you reach a certain number of points.
Are the quarterly updates my final tax calculation?
No. The quarterly updates provide an estimate of the tax you owe based on the figures you submit. Your final tax liability is only calculated after you submit your final declaration, which includes all necessary adjustments and reliefs.
That if my income drops below the MTD threshold?
You can apply to leave MTD if your qualifying income falls below the relevant threshold for three consecutive years. This is to prevent businesses from moving in and out of the system due to short-term income fluctuations.
