What is Making Tax Digital for Income Tax (MTD IT)?

Making Tax Digital for Income Tax (known as MTD IT) is the new system for filing tax returns with HMRC for self employed workers, unincorporated businesses and property owners. It is part of a long term HMRC Making Tax Digital project aimed at overhauling and digitising the UK tax system. The project was started some 10 years ago with an objective of decreasing the tax gap which is the difference between the taxes collected by HMRC and the amount that should in theory be collected. Currently the tax gap runs at about 4.8% or nearly £40 billion in absolute terms.

What needs to be done under the Making Tax Digital for Income Tax rules?

HMRC will require those mandated into the new system to:
- Keep digital records of income and expenses
- Use software that works with MTD IT
- Submit quarterly updates
- Submit a final declaration
All of this replaces the current system of filing a self assessment tax return once a year.

Will MTD IT affect me?

If you are a sole trader or a landlord (even if you have a share in a property), you will legally be required to comply with MTD IT:
- From April 2026 if your qualifying income is more than £50,000
- From April 2027 if your qualifying income is more than £30,000
- From April 2028 if your qualifying income is more than £20,000
Qualifying income is the total gross income (before the deduction of expenses) from both self employment plus any income from UK or overseas property.
If you operate your business via a limited company or a partnership you are not currently affected by the new tax regime.

Will HMRC be contacting me?

From April 2025 HMRC are sending out letters to people who they think will be in scope of the new regime albeit they are basing this on the income reported on the self assessment tax return for 2023 / 2024 (which covers income in the period from 6 April 2023 to 5 April 2024).
HMRC will confirm if you have to comply with the new regime once the tax return for the 2024 / 2025 tax year has been filed (which covers income in the period from 6 April 2024 to 5 April 2025).

What do I need to do if I get a letter from HMRC?

Whilst you've still got plenty of time to act it's best not to ignore the letter. Over the next year you will need to start putting the necessary steps in place to ensure you are ready to comply with the new rules from April 2026.
If you already have an accounting system then you may not have much to do except to check that the system is or will be compliant with the new regime.
If you're less organised now is the time to make some changes. Start by getting a business bank account preferably one that has built in bookkeeping like Startling, Monzo, Tide or Mettle.
If you use a spreadsheet you will need some additional software to take the figures from your sheet and plug them into the HMRC system on a quarterly basis. This is known as bridging software.
Sign up for our MTD updates as we'll be producing a MTD set up checklist soon and we'd want you to be alerted to this.
Discuss what you need to do to meet the new rules with your accountant if you have one or you may feel that now is the right time to appoint an accountant to help you with the new regime at least initially.

Will I need software for Making Tax Digital for Income Tax?

Yes you will certainly need software for Making Tax Digital for Income Tax. Your transaction records (income and costs or expenses) will need to be kept electronically. This can be via a spreadsheet, a bank account with inbuilt bookkeeping or an accounting system such as Xero, FreeAgent, Sage or QuickBooks.
Depending on what you are using to record your transactions you may also need additional software to be able to file your figures with HMRC.
This is where the software options get complicated!
There will be two types of software:
- Bridging software which will allow you to make quarterly filings. Many of the bridging software options may be free to use.
- Final submission software which, as its name suggests, will allow you to file the final submission with HMRC. These software solutions are likely to carry a charge. The important thing to remember here is that, unlike before, there will be no free HMRC version of software that you can use to make the final submission. HMRC are withdrawing their free software for those who are under the new regime. So you will need to purchase something.
You can use one and the same system for both the quarterly returns as well as the final submission or you can use two separate systems.
Alternatively you can hand your figures over to your accountant and get them to file all the returns and submissions using their own software. You can find more information about the approved software on the HMRC web site although bear in mind that many software providers have yet to release their software and certainly most have not declared what prices they will be charging yet!

Do I have to sign up for MTD IT?

HMRC will not automatically register you for MTD IT if you are in scope. Your accountant will be able to do this for you or you can sign up yourself via the HMRC website using the same credentials as when registering for self assessment.

Do I have to keep my bookkeeping up to date quarterly?

Yes, MTD IT will require you to keep on top of your record keeping & bookkeeping on a quarterly basis as a minimum. You can no longer leave this as an annual task to be completed just before the filing deadline.
A key advantage of updating your records quarterly will be that you can keep an eye on your tax liability and make sure you are setting aside enough money to pay your tax bill when it becomes due so that this isn't a surprise to you just before the payment deadline.

How can I manage my records to make reporting easier?

There are a number of ways to get prepared for the reporting requirement of MTD IT. A top tip is to use a business bank account to record your business transactions being your business income and expenses. Use a separate bank account for your personal transactions.
Accounts such as those from Starling, Mettle, Monzo or Tide are excellent for capturing business income and costs with the added bonus of having a built in bookkeeping function.
Sole trader business owners who have a turnover of less than £90,000 can follow what is called the "three line approach" to filing the new quarterly returns as they can with their current self assessment tax returns.
What this actually means is that you only need to enter two figures on your quarterly update being the total income and the total costs - the third figure of profit (income less costs) is calculated by the system.
This simplifies your bookkeeping as you just need to capture all of your business income and all of your business costs. Personal costs should be excluded; these include your own income tax, National Insurance, personal expenses and any amounts that you have taken out of the business to live on.

What if I am both self-employed and a landlord?

If you have more than one source of qualifying income, you will have to submit separate quarterly updates. For example, if you are a self-employed plumber with a rental property; you will have to submit 4 quarterly updates for your plumbing business and 4 quarterly updates for your rental property as well as a final declaration.
You will also have to make separate quarterly updates if you have UK & overseas property income or income from furnished & unfurnished property rentals.

What are the reporting deadlines to submit the updates?

Under the new system, cumulative updates will need to be submitted to the tax quarter end dates which are different to the calendar quarters being:

HMRC will allow updates to be filed to calendar quarter end dates, via making a calendar quarter election, to make things easier. This means that the filing dates would be:

What is the Final Declaration?

In addition to the quarterly reporting a final declaration needs to be filed to the usual self assessment deadline of 31st January following the end of the tax year. The final declaration, which will also include other income not reported as part of the MTD IT returns such as savings interest, dividends etc, will replace the usual self assessment tax return for individuals falling within the new regime.

Do I have to pay tax quarterly now?

No you do not have to make quarterly tax payments yet. The tax payment deadline remains unchanged at 31st January following the end of the tax year as well as payments on account due on 31st January and 31st July.

When do I stop filing self assessments?

Any self assessments due under the old rules will still need to be filed being:
- Self assessment for the tax year 2024 / 2025 (6 April 2024 to 5 April 2025) which is due by 31 January 2026
- Self assessment for the tax year 2025 / 2026 (6 April 2025 to 5 April 2026) which is due by 31 January 2027.
As the first quarterly return under the new regime is due by 7 August 2026 there is likely to be some confusion during the cut over to the new system.
It is advisable to file your 2025 / 2026 return as early as possible just to get it out of the way. However the tax due will not have to be paid until 31 January 2027.

Do I need to use an Accountant?

If you have read up on the requirements of the new Making Tax Digital for Income Tax reporting regime and are still unsure of what you have to do or would prefer to concentrate your time on running your business, then seeking the help of a reputable accountant is advisable. You may find that after receiving help with the initial set up and filing the updates for the first few periods, you are ready to go it alone. Alternatively, you may want your accountant to take care of all the filings for you.

Are there any exemptions to MTD IT?

You will not be required to comply with MTD IT in certain circumstances being:
- You are a carer and your only income is qualifying care income
- If you have been granted exemption from Making Tax Digital for VAT by HMRC, you will be automatically exempt
- A Digital exclusion - being, for example, that you have an unreliable broadband connection or a disability prevents you from using computers
The process for claiming exemption has not yet been confirmed by HMRC.

Where can I find more information?

More information can be found on the HMRC web site.
Your accountant should be able to guide you through the process and make sure you are ready for the new regime.
If you do not have an accountant and need some general help or guidance you can the contact us and we will try to help. Complete the form using the "I have a Making Tax Digital for Income Tax Query" option.