It's the biggest overhaul to income tax compliance in more than 30 years – and yet recent research suggests that only around 30% of those affected are aware of the reforms. This guide sets out what's changing, who's affected, and – most importantly – what you need to do to prepare.
What Is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax requires self-employed people and landlords to keep digital records of their business income and expenses and submit summaries to HMRC every quarter using compatible software. After the year ends, you file a Final Declaration that replaces the old SA100 tax return.
The underlying goal is straightforward: HMRC wants near-real-time visibility of taxpayers' income, and believes that more frequent digital reporting will reduce errors. Currently, mistakes on Self Assessment returns contribute significantly to the UK tax gap, and the government argues that quarterly updates – compiled from records kept throughout the year – will cut that figure.
For sole traders, the practical shift means moving from a single annual return to a rhythm of four quarterly updates, year-end adjustments, and a Final Declaration – all submitted through HMRC-recognised software.
Key changes compared with traditional Self Assessment
The core differences fall into five areas:
Quarterly updates – You must submit a summary of income and expenses for each income source (e.g., each trade, each property business) every quarter, rather than once a year.
Digital records – Paper ledgers and manual spreadsheets that aren't linked to compliant software no longer meet HMRC's requirements. Records must be kept digitally from the outset.
End of Period Statement (EOPS) – After the fourth quarterly update, you finalise each business's figures by making year-end adjustments such as capital allowances and accruals.
Final Declaration – This replaces the SA100 return. It brings together all income sources (including employment, dividends, and interest) and confirms reliefs and allowances for the year.
New penalty framework – The old fixed-penalty regime for late filing gives way to a points-based system (more on this below).
Who Must Comply – and When
MTD for Income Tax is being phased in by income threshold. The table below summarises the rollout:
| Phase | Qualifying income threshold | Start date | Based on return for |
|---|---|---|---|
| 1 | Over £50,000 | 6 April 2026 | 2024/25 tax year |
| 2 | Over £30,000 | 6 April 2027 | 2025/26 tax year |
| 3 | Over £20,000 | 6 April 2028 (planned) | 2026/27 tax year |
Partnerships will be brought in at a later date – no timeline has been confirmed.
How to work out your qualifying income
"Qualifying income" means your gross turnover (not profit) from self-employment plus any UK property income. If you run multiple trades or have both trading and rental income, you add them together.
For example, if you earn £37,000 from a sole trade and £16,000 in rental income, your qualifying income is £53,000 – and you'd be in scope from April 2026, even though neither source alone crosses £50,000.
Income from employment, dividends, savings interest, and pensions does not count towards the threshold. However, those amounts must still be reported in the Final Declaration at year end.
⚠️ Important: HMRC will check your Self Assessment return from two years prior to determine whether you must join. For the April 2026 start date, they'll look at your 2024/25 return (due 31 January 2026). If your qualifying income exceeds £50,000 in that year, expect a letter – but it's your responsibility to check even if no letter arrives.
Special cases
Multiple trades – Each separate trade counts as its own income source and needs its own quarterly updates. A sole trader who also has a rental property would submit eight quarterly updates per year (four per source).
Self-employed and also a landlord – Both income streams count towards the qualifying threshold, and each requires separate quarterly submissions.
Partnerships – Currently excluded from MTD for Income Tax. HMRC intends to bring them in later, but no date has been announced.
Non-residents – If you live abroad but have UK self-employment or property income, you must comply with MTD for those UK sources once your qualifying income crosses the relevant threshold. However, a temporary measure means those completing the SA109 section may not be required to join before April 2027.
Exemptions
You may apply for an exemption if any of the following applies:
- It's not reasonably practicable for you to use digital tools due to age, disability, remoteness of location, or lack of internet access.
- Your business is run by practising members of a religious society whose beliefs are incompatible with electronic record-keeping.
- You are subject to an insolvency procedure.
Exemptions are not automatic – you must apply to HMRC and receive approval. If you already hold an exemption from MTD for VAT, it should carry across.
What You'll Need to Do Under MTD
Keep digital records of income and expenses
Every business transaction – sales invoices, expense payments, mileage, materials – must be recorded digitally in compliant software or in a spreadsheet that feeds into bridging software. "Digital" means no manual re-keying between systems: if data moves from a spreadsheet into submission software, that transfer must be automated (a "digital link").
Common HMRC expense categories include cost of goods sold, office costs, travel, vehicle expenses, premises running costs, professional fees, advertising, and finance charges. Photographing receipts and attaching them to transactions is good practice, and many apps can do this from your phone.
You don't need to record every transaction in real time – monthly posting is fine – but the records themselves must be kept digitally from the point they're created.
Submit quarterly updates
For each income source, you must submit a summary of income and expenses every quarter. The updates are cumulative over the tax year, which means errors in an earlier quarter can be corrected in the next submission.
Standard (tax-year) quarters:
| Quarter | Period covered | 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 |
Alternatively, you can elect for calendar quarters (1 Apr–30 Jun, 1 Jul–30 Sep, 1 Oct–31 Dec, 1 Jan–31 Mar), with the same one-month filing window after each period ends. The deadlines fall on the last day of the following month.
Quarterly updates contain only income and expense figures – there's no need to make tax adjustments or capital allowance claims at this stage.
File the EOPS and Final Declaration
After the fourth quarterly update, you finalise each business's figures through the End of Period Statement, which is where you claim capital allowances, adjust for accruals or prepayments, and apply any reliefs.
The Final Declaration then brings everything together: all income sources (including non-MTD income like employment and dividends), personal allowances, Gift Aid, pension contributions, and student loan details. It replaces the SA100 tax return entirely.
The Final Declaration deadline is 31 January following the end of the tax year – exactly the same date as the current Self Assessment deadline. So for the 2026/27 tax year, it would be due by 31 January 2028.
Penalties and Interest
Late filing: the points-based system
MTD introduces a points-based penalty regime that replaces the old fixed fines. Each time you miss a submission deadline, you receive one penalty point. Once you hit the threshold, HMRC charges a £200 penalty – and a further £200 for every subsequent late submission while you remain at the threshold.
| Submission frequency | Points threshold |
|---|---|
| Quarterly (4 per year) | 4 points |
| Annual (Final Declaration) | 2 points |
Points can be reset to zero if you complete a period of sustained compliance: 12 months of on-time quarterly filings, or 24 months for annual obligations, provided all overdue submissions have also been received.
⚠️ Year-one grace period: The government confirmed in the 2025 Autumn Budget that no late-submission penalties will apply to quarterly updates during the 2026/27 tax year for those mandated from April 2026. This grace period does not extend to the Final Declaration or to payment deadlines, and it is understood that it will not apply to the second cohort joining from April 2027.
Late payment penalties and interest
Late payment penalties are separate from filing penalties and apply when tax remains unpaid beyond the due date:
- Days 1–15: No penalty (but interest accrues from day 1).
- Day 16–30: A penalty of 3% on the amount outstanding at day 15.
- Day 31 onwards: An additional 3% on the amount outstanding at day 30, plus a daily penalty at 10% per annum until the debt is cleared.
Setting up a Time to Pay arrangement with HMRC can halt further penalties from accruing, though interest continues to run.
Key Dates at a Glance
For the 2026/27 tax year (the first mandatory year for the £50k+ cohort):
| Date | What's due |
|---|---|
| 6 April 2026 | MTD obligations begin; start keeping digital records |
| 7 August 2026 | Q1 update (6 Apr – 5 Jul 2026) |
| 7 November 2026 | Q2 update (6 Jul – 5 Oct 2026) |
| 31 January 2027 | Balancing payment for 2025/26 + first payment on account for 2026/27 |
| 7 February 2027 | Q3 update (6 Oct 2026 – 5 Jan 2027) |
| 7 May 2027 | Q4 update (6 Jan – 5 Apr 2027) |
| 31 July 2027 | Second payment on account for 2026/27 |
| 31 January 2028 | Final Declaration for 2026/27 + balancing payment |
Payments on account (31 January and 31 July) are unchanged. MTD does not alter when you pay your tax – only how and how often you report.
Tax year basis
Since April 2024, all unincorporated businesses must report profits on a tax-year basis (ending 5 April or 31 March). If your accounting year-end already aligns, nothing changes. If it doesn't, the transition should already have been handled in your 2023/24 return. Under MTD, aligning to the tax year is essential – quarterly updates follow the standard tax-year calendar.
Choosing MTD-Compatible Software
What "compatible" means
HMRC-recognised software must be able to store digital records, maintain digital links between data sources and submissions, generate quarterly updates, and submit the Final Declaration to HMRC via its API. HMRC publishes a searchable list of recognised software on GOV.UK.
Bridging software vs full accounting packages
If you're comfortable with spreadsheets, you can continue using them – but you'll need bridging software to transmit data to HMRC without manual re-keying. This keeps costs low but adds a step.
Full cloud accounting packages (such as FreeAgent, Xero, QuickBooks, Sage, or Coconut) handle record-keeping, bank feeds, categorisation, and MTD submissions in one place. They tend to be more expensive (typically £12–£35 per month) but reduce the margin for error. Starling Bank has also announced a free MTD tool built into its sole trader account.
When choosing software, consider whether it handles all your income sources (some products focus on property; others on trading income), whether your accountant can access it, and whether it supports both quarterly updates and the Final Declaration – not all products do both.
Migrating from paper or basic spreadsheets
If you're moving from paper records, a sensible approach is to pick a software start date (ideally 6 April 2026), enter opening balances, connect a bank feed, and run a test quarter before the first live submission. Clean up your categories in advance: the transition is much smoother if your expense codes already match HMRC's expected categories.
How to Sign Up
Before you register
You'll need your Unique Taxpayer Reference (UTR), National Insurance number, a Government Gateway user ID and password, and your chosen compatible software installed and ready.
The sign-up process
HMRC provides an online sign-up service on GOV.UK. The steps are broadly: confirm your identity via Government Gateway, authorise your software to connect to HMRC, and (if you use an accountant) authorise your agent. Once signed up, your software will be able to send quarterly updates and receive HMRC acknowledgements.
If you believe you shouldn't be in scope – for example, because HMRC has overestimated your qualifying income – you can contact HMRC to challenge the determination, providing evidence such as amended accounts or corrected returns.
Costs, Benefits, and Practical Preparation
Costs
Software subscriptions range from free (basic bridging tools, Starling's built-in product) to around £12–£35 per month for a full cloud accounting package. If you're already paying for accounting software, the incremental cost may be zero. If you use an accountant or bookkeeper, their fees may rise modestly to reflect the additional quarterly submissions, though this varies widely. Some accountants are absorbing the extra work within existing fees; others charge a quarterly processing fee.
Benefits beyond compliance
More frequent reporting means you'll have a clearer, more up-to-date picture of your profit throughout the year. That makes it easier to set aside the right amount for tax (rather than facing a surprise bill in January), to spot cash flow problems early, and to make more informed decisions about spending, pricing, and investment. For many sole traders, the discipline of regular bookkeeping will be an improvement.
Preparation checklist
Before April 2026, aim to have the following in place:
- Check your qualifying income for 2024/25 to confirm whether you're in scope from April 2026.
- Choose HMRC-recognised software and set it up with your bank feed.
- Clean up your expense categories so they map to HMRC's reporting requirements.
- Set calendar reminders for each quarterly deadline.
- Run a test quarter – enter a month's transactions, categorise them, and check that the submission process works.
- Talk to your accountant about how responsibilities will be shared under MTD.
- Sign up on GOV.UK before your first quarterly deadline.
Special Cases and Common Pitfalls
Fluctuating income around the thresholds
If your qualifying income crosses a threshold one year but dips below it the next, you won't automatically exit MTD. HMRC requires your income to fall below the relevant threshold for three consecutive tax years before you can opt out. This prevents constant joining and leaving.
CIS subcontractors
If you're a self-employed subcontractor in the Construction Industry Scheme, CIS deductions taken from your payments must still be accounted for. Your quarterly updates report gross income and expenses; CIS deductions are reflected in the EOPS and Final Declaration, where they reduce your tax liability as usual.
VAT-registered sole traders
If you're already submitting quarterly VAT returns, you'll now have two sets of quarterly obligations running in parallel. The good news is that many accounting packages handle both MTD for VAT and MTD for Income Tax from a single data set. Aligning your processes – recording income and expenses once and letting the software split the data into VAT and income tax submissions – is the most efficient approach.
Common mistakes to avoid
Some pitfalls crop up repeatedly in early testing. Reporting profit rather than gross turnover when assessing whether you're above the threshold is a frequent error – the threshold is based on income, not what's left after expenses. Others include failing to submit separate updates for each income source, using software that only handles quarterly updates but not the Final Declaration, and neglecting digital link requirements when copying figures between spreadsheets and submission software.
Getting Help
Working with an accountant
Under MTD, your accountant can be authorised to submit quarterly updates and the Final Declaration on your behalf. Many practices are restructuring their services around the quarterly rhythm – offering monthly or quarterly bookkeeping reviews alongside the submission itself. If you've previously handed over a shoebox of receipts in January, that approach will no longer work.
Official resources
HMRC provides step-by-step guidance at GOV.UK, a software finder tool, and webinars covering both registration and ongoing compliance. The dedicated MTD campaign page at makingtaxdigital.campaign.gov.uk offers a quick-start overview.
If you cannot use a computer due to disability, lack of internet access, or religious grounds, contact HMRC to discuss accessibility options and apply for a formal exemption.
Frequently Asked Questions
Can I keep using cash basis accounting?
Yes. MTD doesn't change your choice of accounting basis. Cash basis remains the default for most sole traders, and many will find it simpler for quarterly updates. Accruals basis may be preferable if you hold significant stock, have large debtors or creditors, or want to claim full finance costs.
How do I correct an error after submitting a quarterly update?
Because updates are cumulative, corrections to earlier quarters are picked up automatically in the next submission. If the error is in the Final Declaration, you can amend it within 12 months of the filing deadline.
What happens if I stop trading partway through the year?
You'd submit quarterly updates up to the date of cessation and then file the EOPS and Final Declaration for the shortened period. Notify HMRC of the cessation as you would under Self Assessment.
Can my accountant and I both access the same MTD software?
Yes – most cloud accounting packages support multi-user access, with different permission levels for the business owner and their agent.
Is there a pilot I can join early?
HMRC runs a private beta programme. You can volunteer through GOV.UK or via an accountant participating in the scheme. Early adopters benefit from a penalty-free testing environment for quarterly updates, though late-payment penalties still apply.