Understanding Making Tax Digital (MTD)
Making Tax Digital (MTD) is HMRC’s long-term initiative to move the UK tax system fully online. It replaces the traditional Self Assessment process with a digital system that requires regular record keeping and more frequent reporting. The goal is simple: reduce errors, improve accuracy, and give taxpayers a clearer picture of their liabilities throughout the year. HMRC provides full details on its programme on GOV.UK under “Making Tax Digital”.
Currently, most sole traders and landlords report income annually via a Self Assessment tax return. MTD changes this approach. Instead of one yearly submission, taxpayers will maintain digital records and submit quarterly updates for each business or property income source. At the year’s end, a final digital declaration replaces the traditional return, helping to minimise mistakes caused by manual entries and paper-based processes.
This shift is significant because it changes how and when you report your income. Rather than completing a single return each January, you will manage your tax position continuously with accurate digital records forming the basis of every submission. This provides both HMRC and taxpayers with a more up-to-date and accurate view of taxable income throughout the year.
Who Must Join Making Tax Digital for Income Tax and When
Making Tax Digital (MTD) for Income Tax becomes mandatory from 6 April 2026. Whether you must use it depends on your Self Assessment status and your qualifying income, which is your total gross self-employed and property income before expenses.
You must use MTD if all the following apply:
- You are a sole trader or landlord.
- You report self-employed or property income.
- Your qualifying income is more than £20,000.
HMRC phases in MTD based on your qualifying income for each tax year. The table below outlines when you will need to start:
| Tax Year | Gross Qualifying Income Threshold* | Tax Year to Start MTD |
|---|---|---|
| 2024-25 | £50,000 | 2025-26 |
| 2025-26 | £30,000 | 2026-27 |
| 2026-27 | £20,000 | 2027-28 |
*See the 'Who must use MTD' section to check how qualifying income is calculated.
Business partnerships will join later, and HMRC will publish a timetable. You can sign up early, but you do not need to join until after you have submitted the Self Assessment return that confirms your qualifying income.
Who Is Exempt
You are exempt if your qualifying income is £20,000 or less. You can also be exempt if you are digitally excluded and HMRC agrees it is not reasonable for you to keep digital records. Some individuals are automatically exempt, including trustees, personal representatives of someone who has died, individuals without a National Insurance number by 31 January before the tax year, Lloyds members, and non-resident companies.
How HMRC Confirms Your Start Date
HMRC reviews your Self Assessment return each year. If your income is above the relevant threshold, HMRC will write to you confirming that you must start using MTD from the next tax year. Even without a letter, you are responsible for checking your qualifying income and signing up on time.
How Making Tax Digital Changes Your Tax Reporting
Making Tax Digital (MTD) replaces the traditional annual Self Assessment return with a digital reporting system. Instead of sending one return each January, you will keep digital records throughout the year, submit quarterly updates, and complete a final digital declaration after the tax year ends. HMRC explains this structure in its Making Tax Digital guidance on GOV.UK.
Quarterly Updates
Quarterly updates are short digital submissions sent to HMRC every three months. They show your income and expenses for each business or property source. HMRC sets out the required information in its Update Notice.
There are four standard quarterly periods:
- 6 April to 5 July
- 6 July to 5 October
- 6 October to 5 January
- 6 January to 5 April
The filing deadlines are always the same: the seventh day of the second month after the period ends (for example, 7 August for the first quarter). You can choose to report using calendar quarters by making a formal election with HMRC. Quarterly updates do not finalise your tax; they give HMRC an ongoing view of your position based on your digital records.
End of Year Finalisation
At the end of the tax year, you complete a final digital submission, which replaces the traditional Self Assessment tax return. Here you confirm your total income, adjust any figures from the quarterly updates, claim reliefs and allowances, and finalise your tax position. HMRC uses this submission to calculate your final bill for the year.
Penalties Under Making Tax Digital
HMRC’s new penalty system for Making Tax Digital (MTD) for Income Tax replaces automatic fines with a fairer points-based model. When you miss a submission deadline, you receive a penalty point rather than an immediate charge. A financial penalty of £200 only applies once you reach two points for late annual submissions. Points can later be reset once all filing obligations are met and any overdue returns are submitted. This approach focuses on persistent non-compliance rather than occasional mistakes.
Late Submission Penalties
If you fail to submit your quarterly or final digital updates on time, HMRC will assign penalty points according to the points system. Occasional late submissions are unlikely to trigger a financial penalty unless the points threshold is exceeded. This system is designed to encourage timely filing without penalising first-time or minor errors.
Late Payment Penalties
Late payment penalties under MTD work differently. If tax remains unpaid 30 days after the payment deadline, HMRC applies an initial percentage-based charge. From day 31 onward, a daily accruing charge is added until the balance is cleared. Setting up a Time to Pay arrangement within 15 days of the deadline prevents penalties, provided the arrangement is maintained.
These rules apply to volunteers joining MTD from April 2024, although financial penalties only take effect for annual obligations due from January 2026.
Exemptions from Making Tax Digital
Digital Exclusion
You may apply for an exemption if you cannot use digital tools due to age, disability, or location—for example, lack of reliable internet access. HMRC evaluates these requests individually and may require supporting evidence.
Income Exemption
Individuals with qualifying income below the £30,000 threshold (from April 2027 under current plans) are not required to join MTD. Those below this level will continue using the traditional Self Assessment system unless they voluntarily opt in.
Qualifying Care Income
Certain individuals receiving qualifying care income may be exempt from MTD obligations, following the same rules that currently apply under Self Assessment.
No National Insurance Number
MTD for Income Tax requires a valid National Insurance number. If HMRC has not issued one—for example, for new arrivals to the UK—you may be exempt until your number is in place.
MTD-Compliant Software
Making Tax Digital requires all records to be kept digitally and submitted to HMRC using recognised software. This means you cannot rely solely on spreadsheets or paper records unless you use a bridging solution to connect them to MTD-compliant software. The right software helps you maintain accurate records, calculate your income and expenses, and submit quarterly updates efficiently.
Several well-known options are widely used by self-employed individuals and landlords. Xero, Quickbooks and FreeAgent are all popular solutions.
When choosing software, it is important to consider how it fits your workflow. Look for features like automatic transaction categorisation, report generation, multi-device access, and the ability to authorise agents if you use an accountant. Some software allows bridging tools to connect existing spreadsheets or accounting systems to HMRC, which can be useful if you are transitioning from manual record keeping.
Preparing for Making Tax Digital
Preparing for Making Tax Digital starts with reviewing your current records. Ensure all income and expenses are accurately documented and stored digitally. This will form the foundation for your quarterly updates and final submissions.
Choose MTD-Compliant Software
Select software or apps that are HMRC-recognised for MTD compliance and suited to your business or property income. Familiarise yourself with the features, reporting options, and how it integrates with HMRC submissions.
Check Your Digital Infrastructure
Ensure you have reliable internet access and secure digital storage for all records. Having a robust system in place prevents delays or errors when submitting quarterly updates.
Get Professional Support if Needed
Professional onboarding and support services can guide you through setting up your systems, training on digital reporting, and ensuring your transition to MTD is smooth and compliant. If in doubt, contact a tax professional for advice on what will be required across the year.
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