What Is Making Tax Digital & Does It Apply to You?

Making Tax Digital is HMRC’s programme to move the UK tax system onto digital platforms, replacing paper records and annual returns with software-based reporting. This article explains what it means in practice, which taxes and business types it covers, the deadlines you need to know, and the steps to take before it affects you. Whether you are a sole trader, landlord, limited company director, or freelancer, this guide covers what applies to you.

• What is Making Tax Digital?
• MTD for VAT: already in force
• MTD for Income Tax Self Assessment (MTD ITSA)
• Who does MTD apply to?
• What actually changes day to day?
• Choosing the right software
• Exemptions and deferrals
• How to get ready now
• Frequently asked questions

What is Making Tax Digital?

Making Tax Digital is a government initiative that requires businesses and individuals to keep digital tax records and submit tax information to HMRC through approved software. The goal is to reduce errors caused by manual entry, give taxpayers a more accurate and up-to-date picture of what they owe, and move the UK towards a fully digital tax system.

MTD does not change how much tax you pay. It changes how you record income and expenses, and how you report that information to HMRC. Think of it as replacing a paper spreadsheet and an annual online return with accounting software that connects directly to HMRC.

The programme has been rolled out in stages:

• MTD for VAT: mandatory for most VAT-registered businesses since April 2022
• MTD for Income Tax Self Assessment (MTD ITSA): rolling out from April 2026
• MTD for Corporation Tax: still at consultation stage, with no confirmed mandatory start date yet

MTD for VAT: already in force

If your business is VAT-registered, MTD almost certainly already applies to you. Since April 2022, all VAT-registered businesses, regardless of turnover, have been required to keep digital VAT records and file VAT returns through MTD-compatible software.

This means you cannot simply log into your HMRC online account and type in your VAT figures any more. Your software must pull the figures directly from your digital records and submit them via an API connection to HMRC.

If you are already using cloud accounting software like Xero, QuickBooks, or FreeAgent, you are likely compliant. If you are still using a spreadsheet, you will need bridging software that connects the spreadsheet to HMRC’s systems, or better still, move to a fully MTD-compatible platform.

The VAT registration threshold for 2026/27 remains £90,000. Businesses below this threshold that have voluntarily registered for VAT are also within MTD for VAT.

MTD for Income Tax Self Assessment (MTD ITSA)

This is the next major change, and the one that will affect the largest number of people. MTD for Income Tax replaces the annual self assessment tax return with quarterly digital submissions, plus a final year-end declaration.

The rollout timetable

HMRC is introducing MTD ITSA in phases based on income level:

• April 2026: sole traders and landlords with total qualifying income over £50,000
• April 2027: sole traders and landlords with total qualifying income over £30,000
• April 2028: sole traders and landlords with total qualifying income over £20,000 (subject to confirmation)

“Qualifying income” means self-employment income plus property income. Employment income, dividends, and other sources do not count towards the threshold for MTD ITSA purposes.

What replaces the tax return?

Under MTD ITSA, instead of filing one tax return per year, you will submit:

1. Four quarterly updates: a summary of your income and expenses for each quarter, submitted through MTD-compatible software
2. A final declaration: confirms your figures for the year, covers any other income sources (dividends, employment income, savings interest) and replaces the existing Self Assessment return

Quarterly updates are not tax returns. They do not trigger an immediate tax payment. They are more like a running summary that builds up a picture of your tax position throughout the year. Your tax payment dates remain broadly the same: 31 January and 31 July for payments on account.

Who does MTD apply to?

Sole traders

If you are self-employed with income above the relevant threshold, you will need to comply with MTD ITSA from the date your income band is brought in. This applies whether you run a trade, offer professional services, or work as a freelancer. Even if you have a day job and earn self-employment income on the side, that self-employment income counts towards the qualifying income threshold.

Landlords

Property rental income counts as qualifying income for MTD ITSA. If your rental income, alone or combined with self-employment income, exceeds the threshold, you fall within MTD. This includes residential lettings, furnished holiday lets (subject to separate changes), and commercial property income.

Limited company directors

MTD for Corporation Tax has not been legislated yet, so limited companies are not currently in scope for MTD ITSA. Directors who also receive self-employment or rental income personally may still be caught by MTD ITSA rules on those income streams. Your company’s corporation tax return is unaffected for now.

Partnerships

General partnerships will be brought into MTD ITSA at a later date. HMRC has not yet confirmed the timetable. Watch for further announcements if you trade through a partnership.

Businesses already in MTD for VAT

Being compliant with MTD for VAT does not automatically make you compliant with MTD ITSA. The two operate under different rules, use different software functions, and involve separate submissions. You may need to check whether your existing software covers both.

What actually changes day to day?

In practical terms, MTD ITSA means you need to record your income and expenses digitally throughout the year, not just at year end. You cannot wait until January and then compile everything from bank statements and receipts. You need a system that captures transactions as they happen, or at least on a regular basis during each quarter.

Each quarter, your software will send a summary to HMRC. HMRC’s systems will then show an estimated tax liability based on the figures submitted so far. This gives you an early warning if your tax bill is larger than expected, which helps with cash flow planning throughout the year.

The quality of your bookkeeping becomes more important under MTD. If your records are messy, you will struggle to produce accurate quarterly updates. Errors submitted quarterly can compound over the year and create more work at the year-end stage.

Choosing the right software

You must use HMRC-recognised software to comply with MTD. HMRC publishes a list of compatible software products on its website. The main options are:

• Cloud accounting platforms: Xero, QuickBooks, FreeAgent, Sage. These store your records, prepare summaries, and submit directly to HMRC. They are the most straightforward option for most businesses.
• Bridging software: tools that connect a spreadsheet to HMRC’s API. This is technically compliant but more cumbersome and prone to error.
• HMRC’s own free tools: HMRC may offer a basic free product for the simplest cases, but check the latest HMRC guidance for what is available.

Xero is particularly well-suited to MTD compliance. It already handles MTD for VAT submissions and is being updated to support MTD ITSA. If you are not yet using cloud software, our bookkeeping service can set Xero up for you and keep your records ready for your MTD start date.

When choosing software, consider:

• Whether it covers both MTD for VAT and MTD ITSA if you need both
• The cost versus the time you will save
• How easily it connects to your bank account for automatic transaction feeds
• Whether your accountant can access it to review and submit on your behalf

Exemptions and deferrals

Not everyone will be required to join MTD. HMRC has set out some exemptions, though the rules are specific:

• Income below threshold: if your qualifying income stays below the threshold for your cohort, you remain outside MTD ITSA. If it later rises above the threshold, you will be brought in.
• Digitally excluded individuals: if you cannot use digital tools due to age, disability, remoteness, or religious beliefs, you can apply to HMRC for an exemption. These are assessed on a case-by-case basis.
• Insolvency practitioners: certain insolvency situations may be exempt. Check the latest HMRC guidance.

An exemption from MTD does not mean an exemption from tax. You would still file a conventional Self Assessment return if required.

How to get ready now

If MTD ITSA will apply to you from April 2026, you have a limited window to prepare. Here is what to do:

1. Check your income level. Add up your self-employment income and rental income for the current tax year. If it exceeds £50,000, you are in the first wave from April 2026.
2. Review your record-keeping. Are you already using accounting software? If not, now is the time to start. The longer you wait, the harder the transition becomes.
3. Choose compatible software. Pick a platform that HMRC has confirmed will support MTD ITSA submissions. Xero, QuickBooks, and FreeAgent are the most widely used options.
4. Set up bank feeds. Most cloud platforms can connect to your business bank account and pull transactions automatically. This makes quarterly updates far quicker to produce.
5. Talk to your accountant. Your accountant needs to be prepared too. They will need access to your software, and you both need to agree on how quarterly reviews and submissions will work.
6. Get into a quarterly routine. Even before MTD is mandatory, start categorising your income and expenses every three months. It builds the habit and removes the January panic.

If your business is in construction, e-commerce, healthcare, or content creation, sectors where income can be variable and come from multiple sources, keeping digital records from the start of each quarter is particularly important. Irregular income makes accurate quarterly updates harder if you let records slip.

The transition to MTD is manageable with the right software and a good bookkeeping routine. Those who prepare early will find it far less disruptive than those who leave it to the last minute.

Frequently asked questions

When does Making Tax Digital for Income Tax start?

MTD for Income Tax Self Assessment starts in April 2026 for sole traders and landlords with qualifying income over £50,000. The threshold drops to £30,000 from April 2027, and is expected to fall to £20,000 from April 2028, subject to confirmation from HMRC.

Does Making Tax Digital apply to limited companies?

Not yet. MTD for Corporation Tax is still at consultation stage and there is no confirmed mandatory start date. Limited companies continue to file corporation tax returns as normal. However, directors with personal self-employment or rental income may be caught by MTD ITSA as individuals.

Do I still need to file a Self Assessment tax return under MTD?

The annual Self Assessment tax return is replaced by quarterly updates and a final declaration. The final declaration serves a similar purpose to the current return, capturing all income sources and finalising your tax position, but it sits within your MTD software rather than HMRC’s existing Self Assessment portal.

What counts as qualifying income for MTD ITSA?

Qualifying income means income from self-employment and UK property. Employment income, dividends, pension income, and savings interest do not count towards the threshold. If your combined self-employment and rental income exceeds the relevant threshold, you are in scope.

Can I use a spreadsheet for Making Tax Digital?

Yes, but only if you use bridging software that connects the spreadsheet to HMRC’s API. A plain spreadsheet on its own does not meet MTD requirements. Most accountants recommend moving to dedicated cloud software instead, as it is more reliable, less error-prone, and saves time in the long run.

What happens if I miss a quarterly MTD update?

HMRC is introducing a new points-based penalty system for MTD ITSA. You accumulate points for missed submissions, and once you reach a certain threshold, a financial penalty applies. The exact rules are set out in HMRC’s penalty reform legislation. Check the latest HMRC guidance for current thresholds and penalty amounts.