Making Tax Digital (MTD) is HMRC’s programme to modernise the UK tax system by requiring businesses and individuals to keep digital records and submit tax information to HMRC through compatible software. The goal is to reduce errors, make tax more accurate in real time, and eventually eliminate the annual tax return as we know it.
MTD is being rolled out in stages. Some businesses are already required to comply. Others will be brought in over the next few years. This guide explains what MTD requires, who is currently affected, and what you need to do to prepare.
Making Tax Digital: The Three Phases
| Phase | Who It Affects | When It Applies |
| MTD for VAT | All VAT-registered businesses | Mandatory since April 2022 for all VAT-registered businesses |
| MTD for Income Tax (ITSA) | Self-employed people and landlords with income above £50,000 | Mandatory from April 2026 |
| MTD for Income Tax (ITSA) | Self-employed people and landlords with income above £30,000 | Mandatory from April 2027 |
| MTD for Income Tax (ITSA) | Self-employed people and landlords with income above £20,000 | Mandatory from a later date — not yet confirmed |
| MTD for Corporation Tax | Limited companies | Under consultation — no confirmed start date yet |
MTD for VAT: Already Mandatory
If your business is VAT-registered, you are already required to comply with MTD for VAT. This has applied to all VAT-registered businesses since April 2022.
MTD for VAT requires you to:
- Keep digital VAT records using MTD-compatible software
- Submit your VAT returns to HMRC directly through that software (you cannot file manually through HMRC’s website)
- Maintain a digital link between your records and your VAT return submission
Compatible software includes Xero, QuickBooks, Sage, FreeAgent, and several others. HMRC publishes a full list of approved software on their website.
If you are VAT-registered and still filing VAT returns manually through HMRC’s website, you are not compliant with MTD for VAT and HMRC can issue penalties. Speak to an accountant about switching to compliant software immediately.
MTD for Income Tax Self Assessment: Coming From April 2026
MTD for Income Tax Self Assessment (MTD for ITSA) is the most significant change for self-employed people, sole traders, and landlords. It replaces the annual Self Assessment tax return with a system of quarterly digital updates to HMRC.
Who it affects first
From April 2026, MTD for ITSA becomes mandatory for:
- Self-employed people whose total gross income from self-employment exceeds £50,000 per year
- Landlords whose total gross rental income exceeds £50,000 per year
- People with a combination of self-employment and rental income totalling more than £50,000 per year
From April 2027, the threshold drops to £30,000, bringing a larger group into the mandatory regime.
What MTD for ITSA requires
Under MTD for ITSA, instead of filing one Self Assessment return per year, you will need to:
- Keep digital records of your business income and expenses throughout the year
- Submit quarterly updates to HMRC through MTD-compatible software (four submissions per year per income source)
- Submit an end-of-period statement after the tax year ends, confirming your figures for that year
- Submit a final declaration (replacing the current Self Assessment return) to confirm your total income and claim any reliefs
This is a significant increase in the frequency of reporting. Instead of one annual return, you will have at least four quarterly submissions plus an end-of-year declaration.
| The annual Self Assessment return is not going away immediately Under MTD for ITSA, the quarterly updates are not tax returns. They are estimates of your income and expenses for that quarter. The final declaration at year end is where you make adjustments, claim reliefs, and confirm your final tax position. The process becomes more frequent but each individual submission is less complex. |
MTD for Corporation Tax: Not Yet
HMRC has consulted on MTD for Corporation Tax but has not confirmed a start date. Limited companies are not currently required to comply with any MTD requirements beyond MTD for VAT if they are VAT-registered. Monitor HMRC communications for updates on this phase.
What Software Do You Need for MTD?
All MTD-compatible software must be able to:
- Store digital records of income and expenses
- Submit information directly to HMRC through the MTD API
- Maintain a digital link between records and submissions (no manual re-keying of figures)
Popular MTD-compatible options include:
| Software | Best For | Approximate Monthly Cost |
| Xero | Small businesses and landlords wanting full accounting | £15 to £42 per month |
| QuickBooks | Small businesses, good for invoicing | £12 to £35 per month |
| FreeAgent | Freelancers and small businesses | £19 per month (free with some business bank accounts) |
| Sage | Established businesses, accountant-friendly | £15 to £36 per month |
| Landlord-specific software | Landlords with property portfolios | Varies |
Some spreadsheet-based approaches are also compliant if they use a bridging software tool to submit figures to HMRC digitally. However, full MTD-compatible accounting software is generally the more robust and less error-prone solution.
How to Prepare for MTD
Step 1. Confirm whether you are already required to comply. If you are VAT-registered, MTD for VAT applies now. If you are self-employed or a landlord with income above £50,000, start preparing for April 2026.
Step 2. Choose MTD-compatible software. Select software that suits your business and start using it now rather than waiting until the deadline. Building good digital record habits takes time.
Step 3. Set up digital bookkeeping. Move your income and expense recording into the software. This does not need to be complex. Even basic categorisation of bank transactions is sufficient for most businesses.
Step 4. Speak to your accountant. Your accountant needs to be connected to your MTD software to receive your submissions and support you through quarterly updates. If you do not currently use an accountant, MTD is a good time to start.
Step 5. Maintain digital links throughout. HMRC requires that there is a digital link between your records and your submissions at every stage. You cannot manually re-key figures from a spreadsheet into submission software without a bridging tool.
Penalties for Not Complying With MTD
HMRC has introduced a points-based penalty system for MTD-related late submissions:
- Each missed quarterly submission earns one penalty point
- Once you reach a threshold number of points (four for quarterly filers), a £200 penalty is charged
- Further missed submissions after reaching the threshold each generate an additional £200 penalty
- Points expire after 24 months of full compliance
This system is designed to be lenient for occasional missed submissions while penalising persistent non-compliance. However, the underlying obligation to submit and the interest on late payments remain unchanged.
Frequently Asked Questions
Does Making Tax Digital apply to me if I am self-employed?
It depends on your income level. MTD for VAT already applies if you are VAT-registered. MTD for Income Tax Self Assessment applies from April 2026 if your gross income from self-employment exceeds £50,000 per year, and from April 2027 if it exceeds £30,000. Below these thresholds, you continue filing Self Assessment returns as usual until a lower threshold is confirmed.
Does Making Tax Digital apply to landlords?
Yes, from April 2026 for landlords with gross rental income above £50,000, and from April 2027 for those above £30,000. The quarterly submissions apply to each property income source separately. If you have both rental income and self-employment income, both are reported under MTD for ITSA.
Can I still use a spreadsheet for Making Tax Digital?
Yes, with a bridging tool. If you keep records in a spreadsheet, you can use MTD bridging software to submit figures to HMRC digitally without re-keying them manually. However, full MTD-compatible accounting software is generally more reliable and reduces the risk of digital link failures.
What happens to Self Assessment under Making Tax Digital?
The annual Self Assessment return is replaced by a combination of quarterly updates and a final annual declaration. The quarterly updates report estimated income and expenses. The final declaration confirms the year’s figures, claims reliefs, and settles the tax liability. The process becomes more frequent but each submission is less complex than the current annual return.
Will my accountant handle MTD for me?
Yes, if your accountant is set up for MTD. Most accountancy firms, including M&B Tax Services, are already MTD-ready for VAT and are preparing for MTD for Income Tax. Your accountant connects to your MTD software through HMRC’s agent services, reviews your quarterly figures, and submits on your behalf.
Get MTD-Ready With M&B Tax Services
M&B Tax Services helps businesses and landlords get MTD-ready. We advise on the right software, set up your digital bookkeeping, and handle your quarterly submissions and annual declarations so you stay compliant without the admin burden.
We are ICB-regulated accountants based in Rugby. Whether you are already required to comply with MTD for VAT or preparing for MTD for Income Tax in 2026, we can make the transition straightforward.
Book a free 30-minute call and we will confirm exactly what MTD requires for your business and what you need to do to prepare.
Joanna Bruty
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