Making Tax Digital for Income Tax

What is Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax (often called MTD ITSA or MTD for Income Tax) is HMRC's programme to transform how self-employed people and landlords report their income. Instead of filing one annual Self Assessment tax return, you'll keep digital records throughout the year and send quarterly summaries to HMRC using compatible software.

The goal is to reduce errors, give you a clearer view of your tax position during the year, and make the tax system more efficient. While it means more frequent reporting, it should also mean fewer surprises when your tax bill arrives.

How MTD for Income Tax works at a glance

Under MTD for Income Tax, you'll follow this cycle:

Key differences from Self Assessment today

How MTD for Income Tax differs from MTD for VAT

If you're already using MTD for VAT, some aspects will feel familiar: digital record-keeping, using compatible software, and regular submissions to HMRC. However, there are key differences:

• Income sources — MTD for Income Tax covers self-employment and property income, not VAT-taxable turnover
• Period structure — Updates follow tax-year quarters (April to April), not VAT periods
• Year-end process — You'll submit End of Period Statements and a Final Declaration, which has no equivalent in MTD for VAT
• Threshold basis — Based on gross income, not taxable turnover

Who must use MTD for Income Tax

MTD for Income Tax applies to individuals with income from self-employment and/or property letting that exceeds certain thresholds. Here's who needs to prepare.

Qualifying income and MTD for Income Tax thresholds

Qualifying income means your combined gross income from:

• Self-employment (all sole trader businesses)
• UK property letting
• Overseas property letting

It does not include employment income, pensions, dividends, savings interest, or capital gains.

How to calculate the threshold with multiple trades or properties

Add together the gross income (before expenses) from all your sole trades and property businesses. For example:

What if your income fluctuates around the threshold

HMRC will look at your qualifying income from the previous tax year to determine whether you're mandated. If your income:

• Rises above the threshold — You'll need to join MTD from the following April
• Falls below — You can apply to leave MTD, though you may choose to continue voluntarily
• Is close to the threshold — Consider signing up voluntarily to avoid last-minute scrambles

Who is excluded or exempt

You're not required to use MTD for Income Tax if:

• Your qualifying income is below the current threshold
• You're a trustee or personal representative of a deceased's estate
• You're a partner in a general partnership (partnerships will be brought in later)
• You have a formal exemption from HMRC

How to apply for an exemption

You may be able to claim an exemption if you:

• Cannot use digital tools due to age, disability, or location (digital exclusion)
• Have religious beliefs that prevent computer use
• Are subject to insolvency proceedings

Apply through HMRC, providing evidence to support your case. Allow several weeks for a decision.

Landlords with jointly owned property

If you own property jointly with someone else, each person tests the threshold based on their share of the gross rental income. Each owner must keep their own digital records and submit their own quarterly updates.

Non-UK or complex cases

Special rules may apply for:

• Non-resident landlords under the Non-Resident Landlord Scheme
• Income from overseas property
• Lloyd's underwriters and other niche categories

If you fall into these categories, seek professional advice to clarify your position.

When MTD for Income Tax starts

MTD for Income Tax is being rolled out in phases, starting with higher earners.

MTD for Income Tax 2026–2027 timeline

Quarterly update periods and deadlines

The tax year is divided into quarters, with each update due within one month of the quarter ending:

You can elect to use calendar quarters instead (ending 31 March, 30 June, 30 September, 31 December) if that suits your business better.

Year-end finalization deadlines

• End of Period Statement (EOPS) — Submit for each trade/property source after the tax year ends
• Final Declaration — Must be submitted by 31 January following the tax year (e.g., 31 January 2028 for 2026/27)

The Final Declaration replaces your Self Assessment tax return and confirms your final tax position for the year.

What you need to do under MTD for Income Tax

Here are your ongoing obligations once MTD applies to you.

Keep digital records

You must maintain digital records of all business transactions, including:

• Date of transaction
• Amount
• Category (income type or expense type)

Records should be kept in compatible software, not just spreadsheets (unless using bridging software). Use bank feeds and digital receipt capture where possible to create an audit trail.

Send quarterly updates

Each quarterly update is a summary of income and expenses — you're not sending every individual transaction. Updates can be corrected in subsequent quarters, so don't worry about absolute precision. These updates do not create a tax bill; they're informational.

Submit End of Period Statements (EOPS) and the Final Declaration

At year-end, you'll submit:

• EOPS for each income source (each trade, UK property, overseas property) — declaring final figures with any adjustments
• Final Declaration — confirming your complete tax position, including other income (employment, dividends, etc.) and claiming any reliefs

Pay your tax and National Insurance

Payment deadlines remain unchanged:

• 31 January — Balancing payment for the previous year + first payment on account
• 31 July — Second payment on account

The benefit of quarterly updates is visibility — you'll have a clearer picture of your likely tax bill throughout the year, making it easier to plan cash flow.

Software for MTD for Income Tax

You'll need software that can connect to HMRC's systems to send quarterly updates and declarations.

HMRC-recognized and compatible software

"Compatible software" means software that:

• Can store digital records
• Connects to HMRC to submit updates and declarations
• Maintains digital links (no manual retyping of figures)

HMRC maintains a list of compatible software on GOV.UK. When choosing, ensure the software supports all MTD ITSA functions: quarterly updates, EOPS, and Final Declaration.

Using spreadsheets with bridging software

If you prefer spreadsheets for record-keeping, you can continue using them — but you'll need bridging software to submit data to HMRC. The data must flow digitally from your spreadsheet to the bridging tool without manual retyping.

Migrating from paper or non-compliant systems

If you're currently using paper records or software that isn't MTD-compatible:

1. Choose compatible software early
2. Clean up your existing records
3. Import opening balances into the new system
4. Connect bank feeds for automated transaction import
5. Map your expense categories to the new system
6. Run a test period before your MTD start date

Security and data protection

When using cloud software:

• Enable multi-factor authentication (MFA)
• Use appropriate user roles if multiple people access the account
• Ensure regular backups (most cloud software does this automatically)
• Understand how your accountant will access your data
• Review GDPR compliance if handling client data

Signing up for MTD for Income Tax

Prerequisites and IDs you need

Before signing up, ensure you have:

• Government Gateway user ID and password
• Your Unique Taxpayer Reference (UTR)
• Your National Insurance number
• An account with compatible software

Step-by-step sign-up process

Many software providers guide you through sign-up directly within their app.

Agents and accountants

If you use an accountant or tax agent, they can handle sign-up and submissions on your behalf. They'll need:

• An Agent Services Account
• Your authorization to act on your behalf
• Their own compatible software (or access to yours)

Agents managing multiple clients should look for software that supports bulk operations and client management features.

Record keeping rules under MTD for Income Tax

What counts as a digital record

A digital record means transaction data stored electronically in a way that your software can process. For each transaction, you should capture:

• Date
• Amount
• Type (income or expense category)
• Brief description or reference

You can use bank feeds, scan receipts with apps, or enter data directly into software.

Cash basis vs accruals under MTD

You can still choose your accounting basis:

• Cash basis — Record income when received and expenses when paid
• Accruals basis — Record income when earned and expenses when incurred

Most small businesses can use cash basis. The choice affects the timing of your quarterly updates but not the basic MTD process.

Digital links and copy-and-paste rules

Data must flow digitally between systems without manual retyping. For example:

• ✅ Exporting a CSV from one system and importing to another
• ✅ API connections between software
• ❌ Copying figures by hand from one screen to another
• ❌ Retyping totals from a printed report

Corrections and error handling

Made a mistake? You can:

• Correct errors in the next quarterly update
• Make adjustments in your EOPS
• Resubmit a quarterly update if needed (software dependent)

Keep notes explaining any significant corrections for your records.

Penalties, interest, and compliance

HMRC has a new points-based penalty system for MTD.

Late submission penalties (points-based)

Each late submission adds a penalty point to your account. When you reach the threshold (typically 4 points for quarterly obligations), you'll receive a £200 penalty. Every late submission after that incurs another £200.

Points expire after 24 months of compliance.

Late payment interest and penalties

If you pay tax late:

• Interest — Charged from the due date at the Bank of England base rate plus 2.5%
• First penalty — 2% of tax unpaid after 15 days
• Additional penalties — Further charges for continued non-payment

If you're struggling to pay, contact HMRC early about a Time to Pay arrangement.

Reasonable excuse and appeals

You may be able to have a penalty cancelled if you had a reasonable excuse, such as:

• Serious illness
• Death of a close family member
• Fire, flood, or theft affecting your records
• HMRC system issues

Keep evidence and appeal promptly if you believe you have grounds.

Special situations and edge cases

Multiple trades and separate income sources

If you have both self-employment and property income, or multiple trades, each needs:

• Separate digital records
• Its own quarterly updates
• A separate EOPS at year-end

But you'll submit just one Final Declaration covering everything.

Seasonal or no-activity quarters

If you have little or no activity in a quarter, you still need to submit an update — even if it's a "nil return." Your software will make this straightforward.

Changing your accounting period

With basis period reform (from April 2024), most businesses now report on a tax-year basis. If you previously had a different year-end, you may need to align your accounting period. Consider the implications for your first MTD year.

Ceasing, starting, or taking a break mid-year

If you start or stop a business mid-year:

• Submit quarterly updates for the periods you're trading
• Complete a closing EOPS for the ceased business
• Update HMRC about your business status

Joint ventures, partnerships, and LLPs

General partnerships are not yet mandated for MTD for Income Tax. HMRC will announce timing for partnerships in future phases. However, individual partners with qualifying sole trade or property income must still join MTD for that income.

What MTD for Income Tax means for you

Sole traders

If you're a freelancer, contractor, or run your own business:

• More time spent on admin quarterly
• Better visibility of your tax liability
• Need for software subscription (likely)

Landlords

If you rent out property:

• Records must be digital (no more logbooks)
• Separate records for separate properties isn't strictly required, but records must be detailed
• Jointly owned property income shares must be reported individually

Accountants and bookkeepers

They will likely need to:

• Review your quarterly updates before submission
• Handle the complex year-end adjustments
• Ensure you're using compatible software

Benefits and drawbacks of MTD for Income Tax

Potential benefits

• No more lost receipts (if captured digitally)
• Fewer math errors in calculations
• Real-time view of how much tax you owe
• Less stress at the January deadline

Challenges

• Cost of software subscriptions
• Learning curve for new tools
• More frequent deadlines (4x a year)
• Transitioning from paper to digital

How to prepare now for MTD for Income Tax

Readiness checklist

• Check your qualifying income against the £50,000 threshold
• Separate your personal and business bank accounts
• Start researching compatible software
• If you have an accountant, discuss their MTD plans
• Consider signing up voluntarily early to test the system

Glossary of MTD for Income Tax terms

MTD ITSA

Making Tax Digital for Income Tax Self Assessment.

Qualifying Income

Total gross income from self-employment and property used to determine eligibility.

Digital Links

Electronic transfer of data between software programs without manual intervention.

EOPS

End of Period Statement — an annual declaration for each source of income.

Final Declaration

The final submission that replaces the SA100 tax return, confirming total tax liability.

Resources and official guidance

HMRC pages to bookmark

• Making Tax Digital for Income Tax: the collection
• Find software that's compatible with MTD for Income Tax
• Check if you can sign up for MTD for Income Tax

Frequently Asked Questions

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