The Ultimate Guide for Making Tax Digital for Income Tax (MTD ITSA)

Making Tax Digital (MTD) is not simply a change in procedure, it is a complete overhaul of how the UK tax system interacts with millions of businesses, landlords, and the professionals who serve them. At its heart, MTD aims to do away with the inefficiencies, errors, and delays inherent in paperwork-based and manual self-assessment processes. Instead, MTD leverages modern digital technologies to ensure that tax reporting is accurate, real-time, and easy to integrate with daily business practices. 

MTD is the Government’s strategy for digitising the UK tax system. It aims to create a more efficient and accurate way of calculating and paying tax. MTD scheme was first introduced in 2019 for VAT registered businesses whose annual turnover was above £85,000 (the VAT threshold at that time) and was subsequently extended in 2022 to all VAT registered businesses, regardless of their turnover. 

First rolled out for VAT, and now expanding to income tax under the MTD for Income Tax Self-Assessment (MTD ITSA) program, this initiative represents one of government’s most ambitious digital transformations. Over 2.75 million individuals, including landlords and sole traders, will ultimately be brought within its scope.

Timeline & Mandate: Key Dates and Who Is Affected

The rollout of Making Tax Digital for Income Tax is being implemented in three stages. The exact date landlords and sole traders (self-employed) comes into MTD IT depends on their qualifying income:  

• April 2026: MTD for ITSA becomes mandatory for sole traders and landlords with qualifying income more than £50,000 based on 2024-25 tax returns. 
• April 2027: MTD for ITSA becomes mandatory for sole traders and landlords with qualifying income more than £30,000 based on 2025-26 tax returns. 
• April 2028: MTD for ITSA becomes mandatory for sole traders and landlords with qualifying income more than £20,000 based on 2026-27 tax returns. 

What is Qualifying Income for MTD?

Qualifying income is gross income received during the tax year from self-employment and/or income from UK or overseas property before any expenses.

When working out qualifying income we: 

• look at gross income before expenses  
• only consider income from Self Employment Income and/or income from UK or overseas property
• exclude other income such as PAYE income, partnership income, savings or dividends income 

Any income not reported on a Self-Assessment (SA) return will be excluded when calculating the thresholds. For example, rent-a-room receipts below the £7,500 limit, or trading and property income under £1,000 where the trading/property allowance is claimed, will not count towards the threshold as long as they are not included on the SA return. 

Where trading or property income starts part-way through a year, qualifying income should be grossed up to give an estimate for the full tax year. 

We will now look into the few examples to determine the qualifying income for different individuals and circumstances.

What are the Mandatory Things that you need to do under MTD ITSA? 

To put simply things up, MTD has three main elements: 

• Digital Recordkeeping,
• Quarterly updates and
• Yearend declaration

In order to meet the above requirements, all data must be carried out through approved digital links. 

The key features of Making Tax Digital for Income Tax Self-Assessment are as under:

A. Digital Record Keeping in Detail

All businesses and landlords within the MTD ITSA scope must keep all income and expense records in digital form. This means:

• Each transaction whether income or expenses must be recorded with its amount, date, and the tax category as defined by HMC. The tax categories follow those on self-assessment tax return. (See Below for Tax categories for Income and expenses for Sole Trader, UK Property and Foreign Property)
• Digital records must be kept for every separate self-employment or property business.

Taxpayers below the £90,000 VAT threshold can report total income and expenses instead of category breakdowns. This is often referred as “three-line accounts” reporting i.e. Income, expenses and profit/loss. The only exception to this rule is residential finance costs incurred by landlords (e.g., mortgage interest), which must continue to be classified separately. Taxpayers above the £90,000 VAT threshold must submit the category breakdowns along with the total income and expenses.  

Digital record keeping must be maintained alongside traditional record keeping requirements; keeping only digital records is not enough. Taxpayers need to keep the original financial documents, such as invoices and bank statements, from which their digital records are created, and these original documents must be retained for the required period.

Tax Category as Defined by HMRC for Self Employed or Sole Traders for Income and Expenses

Tax Category as Defined by HMRC for UK property Income and Expenses 

Tax Category as Defined by HMRC for Foreign property Income and Expenses 

B. Quarterly Updates Mechanics and Deadlines

Quarterly updates form the backbone of ongoing MTD compliance. Quarterly updates summarise the unadjusted income and expenses, with no tax or accounting adjustments required. A separate quarterly update is required for each property business or self-employment business. Hence, if an individual who has income from property and self-employment, must file eight quarterly updates every year.   

The taxpayer has the option to declare the disallowable amounts for each tax category at the time of submission of the Quarterly updates. However, it is not mandatory to submit them during the quarterly updates.  

The tax or the accounting adjustments are done once all four quarterly updates are submitted.  For Every three months, quarterly updates must be submitted to HMRC via MTD-compatible software based on the calendar period or standard period as applicable to the taxpayers. The filing deadline for the calendar period or standard period is summarised in the below table:

The filing deadline remains the same irrespective of whether the taxpayer chooses the standard period or a calendar quarter period. Any mistake/error discovered in a previous quarter can be collected in the following quarter along with the correction of underlying digital records.

C. Year-End Final Declaration and Compliance Cycle

At the end of the tax year, taxpayers must review all business and property records, adjust for disallowable expenses, add any other forms of income (such as dividends or pensions), and submit a “Final Declaration” digitally. The final declaration will replace the current self-assessment tax return.

The year-end declaration:

• Finalises taxable profit or loss. 
• Incorporates all tax adjustments, allowances, and claims. 
• Must be submitted by 31 January following the end of the tax year.

Who Needs to Comply with Making Tax Digital for Income Tax?

All sole traders, freelancers, and contractors earning above the relevant annual thresholds (£50,000 in April 2026, £30,000 in April 2027, £20,000 in April 2028) must comply.  

Landlords must include rental income (UK and foreign) for the threshold calculation. Those with both self-employment and property income must include the both the income for determining the MTD threshold. 

Where authorship of income is split (e.g., between spouses), both must report their share of income and expenses, with easements available for record-keeping.

Who is Excluded from Complying with Making Tax Digital?

Partnership business is not included for Making Tax Digital for Income Tax until post-2028. A separate pilot and guidance will follow. MTD is intended to be rolled out to Partnerships/LLPs in future with no timescales proposed so far.  

Partners in traditional partnerships and LLPs are not required to follow MTD rules for their partnership income. However, they may still need to comply with MTD if they also earn qualifying income from other sources such as self-employment or property income outside the partnership.

Who is Exempted from Complying with Making Tax Digital?

Individuals and businesses in the UK may be exempt from Making Tax Digital (MTD) for Income Tax if they meet certain criteria set out by HMRC. The most common exemption is for digital exclusion, which applies when a person cannot reasonably use digital tools due to age, disability, geographic remoteness, or religious beliefs that conflict with the use of technology. In these cases, an application must be submitted to HMRC for consideration. 

Another major exemption is for those whose qualifying income meaning self-employment and property income combined falls at or below £20,000, placing them outside the scope of MTD requirements. 

Additional automatic exemptions cover circumstances such as trusts, estates, foster carers, certain ministers, Lloyd’s Underwriters, and those lacking a National Insurance Number or using supplementary residence/remittance basis (SA 109), with some exemptions delayed until future dates. Some cases, like taxpayers with Power of Attorney or those whom HMRC cannot reasonably serve digitally, may also be considered for temporary or discretionary exemptions. 

Generally, unless the exemption is automatic or income-based, affected taxpayers must make a formal request and await a decision from HMRC. These exemptions ensure that MTD is applied fairly and takes into account the diverse needs and circumstances of UK taxpayers.

Can I Leave MTD if My business Circumstances Change, either after Joining or Before my MTD Start Date?

Making Tax Digital exit provisions depend significantly on timing and the nature of business changes, with different rules applying based on whether taxpayers cease all or some of their qualifying income sources.

When a taxpayer ceases their only source of qualifying income by completely winding up a sole trade or stopping property letting entirely, they can exit Making Tax Digital for Income Tax by submitting a final quarterly update covering the cessation period and notifying HMRC of the cessation date before the next quarterly update falls due, though the specific notification process has not yet been confirmed by HMRC.

Taxpayers with multiple qualifying income sources who cease only one activity must remain in MTD for their remaining income source unless that remaining income falls below the MTD threshold for three consecutive years, although early exemption applications may be possible if the remaining income becomes so low that MTD compliance is deemed "not reasonably practicable. 

For taxpayers whose qualifying income falls below the Making Tax Digital for Income Tax threshold while continuing their business activities, the standard rule requires them to remain in MTD until their income stays below the threshold for three consecutive tax years, but exceptions exist where taxpayers can apply to HMRC for early exemption if their income becomes sufficiently low that compliance costs are disproportionate to their business scale. 

MTD obligations are determined by the qualifying income declared on the tax return due by 31st January prior to the mandation date, meaning that even if circumstances change dramatically after filing, the taxpayer remains subject to MTD based on that historical income declaration. 

For example, someone whose 2024/25 return shows £60,000 of self-employment income would normally need to comply with MTD from April 2026 even if they ceased trading and became an employee in 2025/26, but HMRC has indicated that if all qualifying income sources cease before the expected MTD start date, registration for MTD will not be required, effectively providing an exit route for those whose circumstances change between filing their return and their scheduled MTD commencement.

Key Features of HMRC Approved MTD Software for ITSA Compliance?

To meet MTD obligations, taxpayers must use approved software that creates a digital connection between the financial records and HMRC's MTD for Income Tax portal. Manual data entry through copy-and-paste or paper submissions are not permitted under MTD rules.  

Using non-compliant software may result in HMRC penalties. Acceptable MTD software includes:

• Cloud-based accounting systems 
• Bridging software that connects Excel spreadsheets or desktop accounting programs directly to HMRC

Cloud based accounting systems are electronic softwares hosted online rather than installed on a company server or network which can be accessed from any internet-connected device such as computers, smartphones, or tablets. 

These systems are software applications that perform various accounting tasks such as calculations, transactions, data analysis, and report generation, with automated processes that are quick and easy to repeat. In the Making Tax Digital for Income Tax context, they specifically enable businesses to:

• Maintain digital records of income and expenses in real-time
• Submit quarterly updates directly to HMRC through secure connections
• Generate automated calculations and tax estimates
• Complete year-end finalisation digitally

Bridging software for Making Tax Digital is a tool which links business records to HMRC's systems in an MTD-compatible manner, specifically designed to enable businesses to continue using their existing record-keeping methods while meeting MTD compliance requirements. 

It extracts and collects information from the spreadsheets you've been maintaining year long and consolidates it. Then, it links it to HMRC's portal and submits it electronically.  

However, bridging software does not fulfil the other requirements of MTD, such as digital record keeping and maintaining digital links between data. Many suggest bridging tools shouldn't be used as anything other than a very temporary stopgap measure, as they provide a transitional solution for businesses moving from traditional record-keeping methods to full MTD compliance while maintaining their existing workflows. 

List of Software Approved by HMRC

Penalties for Non-Compliance with Making Tax Digital (MTD)

HMRC has introduced a points-based penalty system under MTD for Income Tax. This system is designed to be fairer and more proportionate. Occasional mistakes won’t immediately trigger fines, but repeated failures will lead to financial penalties. 

How do the Late Submission Penalties work under the Points System  

• Each missed submission deadline (quarterly update or final declaration) earns one penalty point. 
• When you reach a penalty threshold, you’ll receive an automatic £200 fine. 
• Every further missed deadline after the threshold results in another £200 fine. 

The threshold depends on how often you are required to submit updates: 

Expiry and Resetting of Points 

1. Expiry (if threshold not reached): Penalty points automatically expire two years after the month in which they were given. 
2. Resetting (after a fine): If you’ve reached the threshold and received a fine, your points do not simply expire. Only after meeting both conditions, your points reset to zero: 

Late Payment Penalties and Interest 

Penalties under MTD are applied separately for late submissions and late payments. Both systems aim to encourage timely compliance, but they operate independently.  

How  do the Late Payment Penalties Work

Interest starts accruing immediately after the due date, while penalties increase in stages depending on how long the payment remains overdue. 

The first charge covers the initial 30 days after the due date. During the first 15 days, no penalty is applied. Between days 16 and 30, a half-rate penalty of 2% of the outstanding tax applies if no Time-to-Pay (TTP) arrangement has been agreed. However, if a TTP plan is arranged during this period, the first charge is halted, and no penalties accrue. 

The second charge comes into effect from day 31 onwards if any tax remains unpaid and no TTP arrangement is in place. At this stage, HMRC continues to apply interest on the outstanding tax daily until the balance is fully settled. Agreeing to a TTP arrangement stops the second charge from the date the plan is approved, provided the taxpayer adheres to the agreed payment schedule. 

How MTD is Different from the Current Self-Assessment Tax Return? 

Making Tax Digital (MTD) represents a fundamental shift from the traditional Self-Assessment system, primarily changing how frequently businesses interact with HMRC. While the current Self-Assessment requires only annual filing by 31 January (or October 31st for paper returns), MTD mandates quarterly digital updates every three months, with each submission due within one month of the quarter-end, plus an additional annual declaration. 

This increased frequency is accompanied by strict digital record-keeping requirements, as MTD participants must maintain their records using HMRC-recognised software that can submit data directly to HMRC, contrasting with the current system, where taxpayers can use paper records, basic spreadsheets, or file through various methods, including online portals, paper forms, or agents. 

The software requirement under MTD enables real-time error checking and validation, providing immediate feedback on data accuracy, whereas the current Self-Assessment system typically only identifies errors during processing or subsequent investigations. This technological integration creates more frequent, automated digital interactions with HMRC throughout the year, moving away from the traditional model of primarily annual contact. The penalty structure has also evolved under MTD, with separate penalties for late quarterly submissions in addition to annual filing penalties, reflecting the increased compliance touchpoint. 

Will the Due Dates for Paying Tax Change Under MTD? 

Tax payment deadlines will remain unchanged under Making Tax Digital, maintaining the same schedule currently used for Self-Assessment. The final tax liability for each tax year continues to be due by 31 January following the end of that tax year.

For taxpayers required to make payments on account for the subsequent year, these advance payments retain their existing deadlines of 31 January and 31 July respectively. This continuity ensures that while MTD for Income Tax introduces new reporting requirements and digital submission processes, the fundamental payment timeline that taxpayers are already familiar with remains intact. 

How can Landlords and Sole Traders Prepare for MTD 

Getting ready for Making Tax Digital early can make compliance smoother and reduce stress. Here are practical steps for landlords and self-employed property owners: 

Final Thoughts 

MTD for Income Tax is one of the most significant digital transitions in UK tax a change that both demands compliance and offers the potential to elevate business efficiency, client collaboration, and the advisory worth of accountants. 

With incremental mandates between 2026 and 2028, proactive planning, segmented onboarding, and the smart use of automation technology, you can make this transformation an advantage rather than a burden. The earlier and more purposefully you prepare, the more smoothly your transition will be, and the greater benefit you—and your clients—will derive from a fully digital tax future. 

Frequently Asked Questions