What Does Making Tax Digital Involve?

What Is Making Tax Digital?

Making Tax Digital (MTD) is an HMRC initiative to move tax reporting into the digital age. It’s designed to improve accuracy, reduce errors, and streamline the tax process for individuals and businesses.

The scheme is being rolled out gradually, with MTD for VAT already in place, and MTD for Income Tax (MTD ITSA) starting from April 2026.

What Does MTD Actually Involve?

If you're a sole trader or landlord, here's what you’ll need to do under Making Tax Digital for Income Tax:

1. Keep Digital Records

You must maintain digital records of your income and expenses using HMRC-approved software. That means no more spreadsheets or paper receipts — everything needs to be logged in an MTD-compliant system.

✔️ Income from self-employment

✔️ Rental income

✔️ Allowable business expenses

✔️ VAT (if applicable)

This makes it easier for HMRC to ensure you're declaring income correctly — and makes it easier for you to stay on top of your finances throughout the year.

2. Submit Quarterly Updates to HMRC

Instead of one annual Self Assessment tax return, you'll send quarterly updates to HMRC. These updates include a summary of your business income and expenses.

Quarterly deadlines:

• 5 August

• 5 November

• 5 February

• 5 May

These aren’t tax returns — you won’t pay tax after each update — but they do keep HMRC informed and help you estimate your future liability.

3. Submit an End-of-Period Statement (EOPS)

At the end of the tax year, you’ll review the data you've submitted and finalise your figures. This includes:

• Making any necessary adjustments

• Claiming reliefs

• Correcting errors

• Confirming your business income is accurate

The EOPS replaces parts of your current Self Assessment return but is focused specifically on each business or rental income stream.

4. Submit a Final Declaration

This is the last step — similar to today’s tax return — and brings together all your income (including employment, dividends, pensions, etc.).

This tells HMRC how much tax you owe and must be submitted by 31 January following the end of the tax year, just like now.

5. Use MTD-Compatible Software

To meet these obligations, you'll need to use software that connects directly with HMRC’s systems. Some popular options include:

• QuickBooks

• Xero

• FreeAgent

• Sage

• Zoho Books

• And many more

We’ll be reviewing and comparing these soon to help you pick the best option — stay tuned!

Who Needs to Comply?

Making Tax Digital for Income Tax applies to:

• Sole traders and landlords with income over £50,000 from April 2026

• Those with income over £30,000 from April 2027

• Those with income over £20,000 from April 2028

If your total gross income from self-employment and property exceeds the threshold, you must comply — even if the individual sources are below the limit.

What Are the Penalties?

From April 2026, HMRC will introduce a points-based penalty system for late submissions and payments. Repeated failures will lead to fines, so it’s important to stay organised and meet your deadlines.

Summary: What MTD Involves

Requirement	Description
Digital Record-Keeping	Log all income and expenses using MTD-compatible software
Quarterly Updates	Submit summaries to HMRC every 3 months
End-of-Period Statement	Finalise each business or property income stream annually
Final Declaration	Confirm total income and tax owed, including other income types

Final Tip

Get ahead by switching to digital record-keeping now, even if you're not yet legally required to do so. It’ll make the eventual transition smoother — and could help you run your business more efficiently in the meantime.

Need help choosing the right software or preparing for MTD?

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