Making Tax Digital (MTD) is HMRC's programme to digitise the UK tax system. The goal is to reduce errors, improve compliance, and give businesses and HMRC a more real-time view of tax obligations. While MTD for VAT has been in force since 2019, the much larger change — Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) — is now rolling out. If you're a sole trader or landlord, it will change how you report your income within the next year or two.
What Is Making Tax Digital?
MTD requires taxpayers to:
- Keep digital records of income and expenses
- Use MTD-compatible software to submit data to HMRC
- Send quarterly updates to HMRC instead of (or in addition to) an annual return
The concept represents a fundamental change to how self-employed people and landlords interact with the tax system. Instead of gathering all your records once a year in January and filing a single return, you'll be providing HMRC with a running picture of your income and expenses throughout the year.
MTD for VAT: Already in Force
For VAT-registered businesses, MTD has been mandatory since April 2019 (for those above the threshold) and April 2022 (for all VAT-registered businesses). If you're already VAT-registered and using software like Xero, QuickBooks, or FreeAgent to submit returns, you're already compliant with this element of MTD.
MTD for Income Tax Self Assessment: The Timeline
MTD for ITSA is being introduced in stages based on income level:
| Date | Who Is Affected |
|---|---|
| April 2026 | Sole traders and landlords with qualifying income over £50,000 |
| April 2027 | Sole traders and landlords with qualifying income over £30,000 |
| TBC | Those with income between £20,000 and £30,000 (date not yet confirmed) |
"Qualifying income" means gross income from self-employment and/or property — before expenses. So if you're a sole trader turning over £55,000 (even if your profit after expenses is £35,000), you're in scope from April 2026. If you're a landlord with rental income of £32,000, you come in from April 2027.
What Changes Under MTD for ITSA
Quarterly Updates
Instead of filing one annual Self Assessment return, you'll submit four quarterly updates to HMRC, reporting your income and expenses for each three-month period. The quarters align with the tax year (6 April–5 July, 6 July–5 October, etc.).
These aren't tax returns in themselves — you don't calculate your tax liability in each quarterly submission. They're summaries of your income and expenses for that quarter. HMRC will use them to build a running picture of your likely tax liability.
End-of-Period Statement
After the four quarterly updates, you submit an End-of-Period Statement (EOPS) for each source of income (each business or property). This is where you make any adjustments — such as adding in private use proportions or claiming allowances not captured in the quarterly data.
Final Declaration
Once all EOPS submissions are complete, you submit a Final Declaration — effectively replacing the current Self Assessment return. This is where you declare all your income sources (including employment, savings, dividends) and any reliefs, calculating your overall tax liability for the year.
The payment deadline remains 31 January following the tax year end.
Compatible Software
You cannot comply with MTD for ITSA using HMRC's own online portal — you must use HMRC-recognised third-party software. HMRC maintains a list of approved software on gov.uk, which includes:
- Xero — cloud accounting, popular with small businesses
- QuickBooks — widely used for self-employment bookkeeping
- FreeAgent — often bundled with NatWest and RBS business accounts
- Sage — well-established, particularly among larger businesses
- Bokio, Coconut — simpler apps aimed at sole traders and freelancers
- Various other providers; check HMRC's list for the most up-to-date options
Some software providers are more feature-rich than others. The right choice depends on your business type, the complexity of your expenses, and your budget. Prices range from around £10 to £35+ per month depending on the plan.
Digital Record Keeping
Under MTD for ITSA, you must keep digital records of:
- Each transaction: date, amount, and category
- Business income: every payment received and its date
- Allowable expenses: every cost with date and category
You don't have to store digital images of every receipt (though this is good practice and some software makes it easy via a phone camera). What matters is that the underlying data is captured digitally and flows through to your MTD submissions without manual re-entry — HMRC wants to see a digital link from your records to your submission.
What About Partnerships and Companies?
MTD for ITSA currently applies to sole traders and individuals receiving property income. The position for general partnerships is still being finalised, and limited companies are not affected (they already have their own digital filing requirements via iXBRL accounts and the CT600). If you operate as a limited company, this change does not affect you directly.
Penalties for Non-Compliance
HMRC has introduced a new points-based penalty system for MTD for ITSA. Each missed quarterly update or late submission earns a penalty point. Accumulate enough points and a financial penalty applies. The regime is broadly similar to the existing MTD for VAT penalty system. Penalties for deliberate non-compliance are significantly higher.
Importantly, HMRC has said that the first year of MTD for ITSA (2026/27 for those in the first wave) will include a "soft landing" period — reduced penalties for those making genuine efforts to comply but struggling with the transition.
What You Should Do Now
If you'll be in scope from April 2026, there are practical steps to take now:
- Confirm whether you're in scope. Check your gross self-employment and property income for 2024/25 — if it exceeds £50,000, you'll need to be compliant from April 2026.
- Choose your software. Don't leave this to March 2026. Speak to your accountant or try a few options with free trials. Getting familiar with software takes time.
- Start keeping digital records now. Even if compliance isn't mandatory until next April, adopting digital record-keeping immediately means the transition will be seamless.
- Review your bookkeeping habits. If you're currently collecting receipts in a shoebox and doing everything in January, MTD requires a fundamentally different approach — quarterly at minimum.
- Talk to your accountant. MTD changes how accountants and clients work together. Your accountant may need access to your software, and the workflow for quarterly submissions needs to be agreed in advance.
Will MTD Actually Help My Business?
Many sole traders and landlords are understandably frustrated by MTD — it's more administration, not less. But there are genuine benefits if you embrace the change. Keeping records quarterly rather than annually means you have a much clearer picture of your profitability throughout the year. You can adjust your spending or income mix mid-year rather than getting a nasty surprise in January. And if you're setting aside money for your tax bill, you'll have a much more accurate estimate of what you owe.
Getting Ready with Professional Support
At SMD Accountancy, we're already helping clients prepare for MTD for ITSA. We advise on software selection, set up digital record-keeping systems, and will handle the quarterly submissions and final declaration on your behalf. If you're approaching the £50,000 threshold or want to make sure you're ready well in advance, book a free 20-minute call and we'll walk you through exactly what you need to do.