What is Making Tax Digital (MTD)?
Making Tax Digital (MTD) is HMRC’s long-planned move to drag the UK tax system into the digital age.
It marks the end of the annual tax return in its current format. Instead, those within scope, mainly self-employed individuals and landlords, will record income and expenses digitally and submit updates to HMRC every quarter through approved accounting software
HMRC’s official goal is to make it “easier to get tax right”.
But….unofficially, it’s about tightening compliance and improving government cashflow.
HMRC have realised waiting twelve months for cashflow isn’t great treasury management.
Why is MTD being introduced?
By requiring digital record-keeping, HMRC hopes to:
Reduce input errors and missed income
Gain real-time visibility of business activity
Collect tax more consistently throughout the year - in our eyes, the main purpose
For businesses, this means moving away from the old once a year format and towards maintaining accurate, up-to-date records through software that connects directly to HMRC.
When is it happening?
Making Tax Digital has been a long time coming. It was first announced by George Osborne in 2015, aiming to make tax “fully digital by 2020”.
Since then, the rollout has faced a series of delays, pilot schemes, and political rethinks.
2019: MTD for VAT launched for VAT-registered businesses over the £85,000 threshold.
2020–2021: The pandemic halted wider rollout, with businesses and accountants urging HMRC to slow the timetable.
2022: MTD for VAT extended to all VAT-registered businesses.
2023: After further consultation, the government postponed MTD for Income Tax to April 2026, citing the need for more testing and software readiness.
2024: The current timetable was set in legislation, with pilot testing expanded
The department has said there will be no further postponements, with software providers already connected to HMRC’s live system. In other words, this isn’t another plan; it’s happening.
Who does it apply to?
From 6th April 2026: Applies to self-employed individuals and landlords with total business and/or property income over £50,000.
(Assessed using income from the previous tax year — for example, if your 2024/25 income exceeds £50,000, you’ll be in scope from April 2026.)
From 6th April 2027: Applies to all individuals with income over £30,000, again based on income from the prior year.
From 6th April 2028 onwards: Applies to all individuals with income over £20,000.
Currently, MTD for Income Tax does not apply to:
Partnerships (although expected start date to be announced)
Trusts, estates, trustees of registered pension schemes, and non-resident companies
Taxpayers acting under a Power of Attorney
Non-UK resident foreign entertainers and sportspeople who have no other qualifying income for MTD ITSA
Taxpayers without a UK National Insurance Number as of 31 January before the start of the tax year
Trustees of charitable trusts or exempt unauthorised unit trusts
Taxpayers claiming qualifying care relief (for example, foster carers) for that income source only
Lloyd’s underwriters, ministers of religion, and recipients of distributions from real estate investment trusts or open-ended investment companies
There are limited circumstances where you can apply to be exempt from MTD entirely. You may qualify if:
You are digitally excluded, for example due to age, disability, remote location, or religious beliefs that prevent the use of technology
You are a trustee, personal representative, or non-resident company, which are not yet within MTD for ITSA
Your income is below the relevant threshold for the assessment year
However, once registered and in scope, you generally remain under MTD rules until you’ve had three consecutive years below thresholds.
What Types of Income Counts Towards the Threshold?
Only business and property income count. Employment income, pensions, savings interest, dividends and other investment income are excluded.
For jointly owned property, only your share of the income counts.
What If My Income Changes?
If your income later falls below the threshold, you may be able to apply to leave MTD, but this isn’t automatic.
An individual who is initially mandated to join MTD for ITSA due to exceeding thresholds may subsequently qualify for exemption if the receipts reported in their MTD quarterly updates drop below £20,000 for three years in a row.
Leaving MTD for Income Tax
You can stop complying with MTD for Income Tax when your gross income remains below the qualifying threshold for three consecutive tax years, or when your business or property income ceases permanently.
This rule is intended to prevent taxpayers from frequently joining, exiting, and re-joining MTD as their income fluctuates.
Example:
If a taxpayer is required to comply with MTD from 2027/28, but their gross income falls below £20,000 in each of the next three tax years: 2028/29, 2029/30 and 2030/31, they can opt out of MTD after submitting their final quarterly update for 2030/31 (due May 2031) and before the first quarterly update for 2031/32 becomes due.
More examples:
If you sell your last rental property in 2025/26, your final property income return will be for that year only. You would not need to enter MTD from April 2026.
If you start the 2026/27 tax year under MTD but later cease trading or sell your property during that same year, you’ll submit your final digital update and declaration, then exit MTD once that income stream is closed.
The key point: MTD applies only while you have ongoing qualifying income. Once it stops, so does your MTD obligation.
Reporting Periods and Deadlines
Each tax year will be divided into four reporting quarters, followed by a final declaration (similar to your current tax return).
Quarterly updates will be required but there is a choice between standard (tax) quarters and calendar quarters.
Standard quarterly reporting would be as follows:
Quarter | Period Covered | Submission Deadline |
|---|---|---|
Q1 | 6th April - 5th July | 7th August |
Q2 | 6th July - 5th October | 7th November |
Q3 | 6th October - 5th January | 7th February |
Q4 | 6th January - 5th April | 7th May |
Final Declaration | Whole tax year | 31st January 2028 |
Calendar quarters:
Quarter | Period Covered | Submission Deadline |
|---|---|---|
Q1 | 1st April - 30th June | 7th August |
Q2 | 1st July - 30th September | 7th November |
Q3 | 1st October - 31st December | 7th February |
Q4 | 1st January - 31st March | 7th May |
Final Declaration | Whole tax year | 31st January 2028 |
Penalties and Compliance Risks
HMRC will introduce a new points-based penalty system for late or missed MTD submissions.
Each missed update will earn a penalty point
Once you reach four points, you receive a £200 fine
Points expire after 24 months if you stay compliant
You can also be fined for failing to keep digital records or submitting inaccurate data.
In short: stay organised and submit on time, or it could get expensive quickly.
Bookkeeping, Cashflow and Tax Budgeting
Quarterly updates mean a more consistent bookkeeping rhythm.
You’ll need to ensure your income and expenses are recorded regularly, not once a year.
Bank feeds and reconciliations should be kept up to date, and invoices, receipts, and statements stored digitally.
With quarterly data shared digitally, both you and HMRC will see your tax position build throughout the year.
That visibility means it’s easier to plan but it also removes the cushion of surprise.
A good rule of thumb:
Set aside a portion of profits for tax each month (around 20–30% depending on your marginal rate)
Review quarterly summaries with your accountant to adjust for seasonal fluctuations or unexpected costs
Done right, MTD can make tax less painful by making it predictable.
Choosing Compliant Software
To qualify as MTD-compliant, software must:
Keep digital records of income and expenses
Link directly to HMRC via an API connection
Link directly to HMRC via an API connection
Popular options such as Xero, QuickBooks, Sage and FreeAgent are already MTD-ready for VAT and preparing for ITSA.
If you’re still on Excel, “bridging software” can temporarily connect spreadsheets to HMRC, but it’s a short-term fix, not a long-term solution.
If you’re unsure which platform is right for your business or property income, we can help you explore what’s available and ensure you’re ready well before the new rules apply.
Illustrative example: Landlord
Sarah owns two rental properties bringing in £2,200 a month each, total £52,800 a year in gross rent.
She’s over the £50,000 threshold, so she’ll need to join MTD from April 2026.
Every quarter she’ll use MTD-compatible software (like Xero or FreeAgent) to record income and allowable expenses: mortgage interest, repairs, insurance and submit a digital summary to HMRC.
She’ll still make her final year-end declaration by 31 January, confirming her total figures and reliefs.
If her rental income falls below thresholds for three consecutive years or she sells the properties entirely, she can apply to leave MTD.
Next Steps
Here’s what to do now to stay ahead of the curve and avoid last-minute chaos:
Check your income level: MTD applies based on gross income (not profit).
If your 2024/25 business or rental income exceeds £50,000, you’ll be in from April 2026.
If it’s over £30,000, you’ll follow from April 2027.
Review your accounting software: Make sure it’s MTD-ready and HMRC-listed. If not, start planning an upgrade now.
Adopt quarterly habits early: Begin reviewing and reconciling your accounts every few months.
Any questions - reach out to us - we can confirm your MTD status, help you select the right software, and get your systems aligned before the deadlines.
Note: This note reflects the law in force as at 3 October 2025 together with draft primary and secondary legislation published on 21 July 2025.