Making Tax Digital for Income Tax Explained

What Making Tax Digital for Income Tax is

Making Tax Digital, often shortened to MTD, is HMRC plan to move tax reporting online. For income tax it means that affected sole traders and landlords will no longer just file one tax return a year. Instead they will keep their records digitally and send HMRC regular updates through the year using compatible software.

There are three parts to it. You must keep digital records of your business and property income and expenses. You must send HMRC quarterly updates, which are short summaries of your income and costs every three months. And after the year ends you must submit a final declaration that pulls everything together and confirms your figures, replacing the old self assessment return.

The aim is fewer errors and a more up to date picture of what you owe. It does change how you work, though, so it pays to understand it early. Our overview here sits alongside our wider guide to self assessment.

Who is affected and the timeline

MTD for Income Tax is being phased in by income level, starting with the highest earners. The key dates are:

• From 6 April 2026, it applies to sole traders and landlords with qualifying gross income over £50,000.
• From April 2027, it extends to those with qualifying gross income over £30,000.
• From April 2028, a further extension is planned to those with qualifying gross income over £20,000.

The thresholds are based on a past tax year of income, so HMRC looks at your figures from an earlier year to decide whether you are in. If you are over the relevant level, you must comply from the start date for that band.

This matters because the £50,000 group needs to be ready now, while lower earners have a little more time. Even so, the smart move is to get your systems in order before your start date rather than at the last minute. If you are a property owner, our landlord tax guide covers how this affects rental income.

Qualifying income means gross, not profit

This is the point that trips most people up, so it is worth being very clear. The thresholds are based on qualifying income, which is your combined self employment and property gross income before you take off any expenses.

Gross means the total money coming in, not the profit you are left with. You add together your self employment turnover and your rental income, and that combined figure is what gets compared with £50,000, then £30,000, then £20,000.

The trap is thinking in terms of profit. Someone might have modest profits after costs and assume they are nowhere near £50,000, when their combined gross income is well over it. The expenses do not reduce the figure used for the threshold test.

It is also combined. A person with two smaller income streams, say some self employment and some rent, has to add them together. Each one on its own might be under the threshold, but together they can push you over. Keep this gross and combined rule front of mind when working out whether MTD applies to you. Our notes on allowable expenses explain what counts as a cost, but remember those costs do not change the threshold test.

A worked example

This is why we keep stressing gross and combined. Misreading it can leave you unprepared on day one.

Quarterly updates and the final declaration

Under MTD you send HMRC a quarterly update for each business or property source. These updates are running totals of your income and expenses for the quarter. They are summaries, not full tax calculations, and they let HMRC see how your year is shaping up.

After the tax year ends you complete a final declaration. This is where you confirm your figures, add anything that does not come through the quarterly updates, claim your reliefs and allowances, and finalise your tax position for the year. It replaces the self assessment tax return you file today.

One thing many people find reassuring is that the deadlines for actually paying your tax do not change. The quarterly updates are about reporting, not paying. You still pay your income tax on the usual dates, so MTD does not bring your payments forward. Keep an eye on our UK tax deadlines page so you do not miss anything.

Software, digital records and penalties

MTD requires compatible software. You cannot simply email HMRC a spreadsheet. You need software that can keep your records digitally and send the quarterly updates and final declaration in the right format. Well known options include cloud accounting tools, and you can read our comparison of QuickBooks versus Xero to help you choose.

Digital records mean your income and expenses are captured and stored electronically rather than in a paper book or a shoebox of receipts. Good bookkeeping habits make this straightforward, because the records you keep through the year are exactly what the software reports.

MTD uses a points based penalty system. In simple terms, each time you miss a submission deadline you get a penalty point. You can build up points without an immediate fine, but once you reach a set number of points a financial penalty is charged. Points expire after a period of good compliance, so getting back on track clears them over time. Late payment of tax is dealt with separately, with its own charges. The message is simple: file each update on time and you avoid points altogether.

Common mistakes

The biggest mistake is judging the threshold on profit rather than gross income. The test uses your combined gross self employment and property income before expenses, so plenty of people are caught who assume they are too small.

A second mistake is forgetting to combine income streams. Self employment and rent are added together, so two modest sources can together cross the threshold.

A third is leaving software until the last minute. Moving from paper or a basic spreadsheet to compatible software takes a little setup, and rushing it near your start date causes stress and errors.

A fourth is assuming payment dates change. They do not. Some people panic that MTD means paying tax four times a year, which is not the case. The quarterly updates are reports, not payments.

Finally, ignoring the quarterly deadlines builds up penalty points that can turn into fines, even though no single missed update may feel serious at the time.

What you should do

First, work out your qualifying income correctly. Add your gross self employment income and your gross property income, before any expenses, and compare the total with £50,000, then £30,000, then £20,000 to see which start date applies to you.

If you are over £50,000, you need to be ready for 6 April 2026, so act now. If you are in a later band, use the extra time to prepare properly rather than waiting.

Choose compatible software and start keeping digital records as early as you can, ideally before your start date, so the switch is smooth. Get into the habit of recording income and expenses as you go.

Diarise the quarterly update dates and the final declaration so you never drop a submission and pick up penalty points. Remember your tax payment dates stay the same.

If all of this feels like a lot, you do not have to do it alone. We can set up your software, keep your digital records and handle every quarterly update and final declaration for you. Get a fixed fee quote and let us take MTD off your plate.

Frequently asked questions