At a Glance
- Making Tax Digital (MTD) is HMRC’s programme to move tax online
- MTD for VAT is already mandatory for all VAT-registered businesses
- MTD for Income Tax (ITSA) starts April 2026 for those with qualifying income over £50,000
- You must keep digital records and submit quarterly updates using compatible software
- You also file an End of Period Statement and Final Declaration to confirm your figures
- Penalties are based on a points system for late submissions
What Is Making Tax Digital?
Making Tax Digital (MTD) is HMRC’s long-term plan to digitise the UK tax system. The goal is to reduce errors, make tax more efficient, and give taxpayers a clearer picture of their tax position throughout the year.
In practical terms, MTD means:
- You keep your business records digitally (in software, not on paper)
- Your software submits information to HMRC directly through an API
- You send updates more frequently than once a year
MTD is being introduced in stages. VAT was first. Income Tax Self Assessment (ITSA) is next. Corporation Tax will follow later.
MTD is not optional once it applies to you. If your business falls within the scope, you must comply or face penalties.
The Timeline: What Happens When
MTD is being rolled out in phases. Here is what applies and when:
| Date | What Changes |
|---|---|
| April 2022 | MTD for VAT became mandatory for all VAT-registered businesses |
| April 2026 | MTD for Income Tax: sole traders and landlords with qualifying income over £50,000 |
| April 2027 | MTD for Income Tax extended to those with qualifying income over £30,000 |
| April 2028 | MTD for Income Tax extended to those with qualifying income over £20,000 (subject to review) |
| TBC | MTD for Corporation Tax — date not yet confirmed, expected 2026 at earliest |
What Counts as “Qualifying Income”?
For MTD for Income Tax, ‘qualifying income’ means the total of your self-employment income and property income. Employment income (PAYE) does not count towards the threshold.
Example 1: You earn £40,000 from self-employment and £15,000 from rental property. Your total qualifying income is £55,000. You are above the £50,000 threshold and must join MTD from April 2026.
Example 2: You earn £60,000 from your job (PAYE) and £20,000 from a side business. Your qualifying income is £20,000. You are below the threshold and do not need to join MTD in April 2026 (but might in 2027 or 2028 as thresholds drop).
Example 3: You earn £30,000 from self-employment and have no property income. You are below the April 2026 threshold but above the April 2027 threshold, so you will need to join from April 2027.
Income is measured gross (before expenses), not net profit.
What You Need to Do Under MTD
Once MTD applies to you, there are four key obligations:
1. Keep digital records. Your business income and expenses must be recorded in digital form. A shoebox of receipts no longer counts. You can use accounting software, a spreadsheet linked to MTD bridging software, or a compatible app.
2. Submit quarterly updates. Four times a year, you send HMRC a summary of your income and expenses. These are not full tax calculations — they are simply the totals for the quarter. Think of them as progress reports.
Quarterly updates are due one month after the quarter ends. If your quarters align with the tax year (April-March), your deadlines would be 5 August, 5 November, 5 February, and 5 May.
3. Submit an End of Period Statement (EOPS). After the tax year ends, you confirm that your quarterly figures are complete and correct, and add any adjustments (capital allowances, overlap relief, etc.). This is due by 31 January after the tax year ends.
4. Submit a Final Declaration. This replaces the traditional Self Assessment tax return. You confirm all your income sources (not just self-employment and property), claim allowances, and settle your tax bill. Due by 31 January.
What Software Do You Need?
To comply with MTD, your software must be able to keep digital records and submit data directly to HMRC through their API. There are three main approaches:
Full accounting software (recommended): Xero, QuickBooks, Sage, and FreeAgent are all MTD-compatible. They handle everything from bank feeds to VAT to quarterly submissions. Prices range from £10 to £40 per month.
Spreadsheet + bridging software: If you prefer to keep records in Excel, you can use ‘bridging software’ like Absolute, VitalTax, or Taxd. You prepare your spreadsheet as normal, then the bridging software reads it and submits to HMRC. This is a lower-cost option (some bridging software is free or under £10 per month).
HMRC’s free software: HMRC has committed to providing free MTD software for those with the simplest tax affairs (straightforward income and expenses, no VAT, no employees). Details are still emerging for the ITSA rollout.
If you already use accounting software, check with your provider that they are MTD-ready for Income Tax. Most major providers are.
Do not wait until April 2026 to sort out your software. Give yourself time to choose the right solution, migrate your data, and learn how to use it. Many providers offer free trials — start exploring your options now.
Penalties Under MTD
MTD introduces a new points-based penalty system for late submissions:
- You receive 1 point for each late quarterly update, EOPS, or Final Declaration
- Once you hit the threshold (4 points for quarterly filers), you receive a £200 penalty
- You continue to receive £200 penalties each time you submit late while at the threshold
- Points expire after a period of compliance (all deadlines met for 12 months for quarterly filers)
Separate penalties apply for late payment of tax, which work on an interest and surcharge basis similar to the current system.
The key difference from the old system is that penalties are for late submissions, not just late tax payments. Even if you owe no tax, submitting your quarterly update late can earn you a point.