A complete guide to Making Tax Digital

A complete guide to Making Tax Digital

Making Tax Digital (MTD) is a new way for self-employed professionals to report their expenses and income to HMRC.

It’s more than possible, therefore, that you’ve heard something about it. But perhaps it’s left you feeling uncertain or overwhelmed.

If so, you’re not alone. MTD is a major change to the way tax works.

But while it sounds complicated, the good news is that it will make record keeping and paying tax easier in the long run.

This guide breaks down what MTD is, who it applies to, when it starts, and what you need to do next.

What is Making Tax Digital?

This is HMRC’s big endeavour to modernise the tax system, with the aim of making it more accurate and efficient. The hope is that MTD will also make it simple for people to stay on top of their obligations.

The idea is that by mandating the maintenance of digital records, and requiring people to send updates via approved software, the amount of human error will be reduced. HMRC also hopes to close the ‘tax gap’ - the difference between the tax that’s owed and what gets paid.

MTD for VAT has been in place since April 2019 for some businesses and HMRC claims it has already helped generate additional tax revenue.  

The scheme is now being extended to Income Tax Self-Assessment (ITSA) for self-employed individuals and landlords, with the roll-out phased in over several years and different income thresholds determining when taxpayers must comply.

Who needs to use MTD and when?

The implementation of MTD for ITSA is being rolled out in stages:

• From April 2026: Self-employed individuals and landlords with gross income over £50,000 will be required to comply.
• From April 2027: The threshold lowers to include those with gross income over £30,000. 
• From April 2028: The threshold lowers again to include those with gross income over £20,000.

Gross income refers to the total income from self-employment and property before any expenses or tax deductions. 

According to the government, this means around 780,000 self-employed individuals and landlords will be required to use MTD for Income Tax from April 2026, with a further 970,000 joining from April 2027.

What do I need to do?

Under MTD for ITSA, affected taxpayers must:

Keep digital records:

This includes detailing the amount, date, and category of each transaction. New products are being created constantly, but a list of currently compatible software can be found listed on the gov.uk website.

If you have more than one source of income for which you need to file quarterly updates, for example, two separate self-employments or a self-employment and a rental property, you’ll need to keep separate digital records for each source.

Send quarterly updates:

Once you’ve signed up, you will need to send a summary of your business income and expenses to HMRC every three months - that’s four updates a year. 

You won’t need to pay tax when you send an update. Instead, the aim is to keep HMRC in the loop with your earnings throughout the year.

Quarterly updates are due each tax year:

• First update: August 7 (for income and expenses from April 6 to July 5)
• Second update: November 7 (for July 6 to October 5)
• Third update: February 7 (for October 6 to January 5)
• Fourth update: May 7 (for January 6 to April 5) 

These deadlines are the same for everyone using MTD for Income Tax.

Finalise your business income:

At the end of each tax year, you’ll need to review and adjust your digital records to make sure everything is correct. This will allow you to adjust any inaccurate figures and include any expenses you may have forgotten.

These changes will all need to be done through your MTD-compatible software. If any of earlier updates need amending, you will be able to do that too. This will mean HMRC has the most up-to-date, accurate picture of your business's financial activity.

Once your accounts are fully up to date, you’ll need to report any other taxable income you received in the year, including items like dividends, interest, employment income, or pension income.

This information all comes together in a Final Declaration, which is effectively the replacement for the traditional Self-Assessment tax return.

One important thing to note is that you won’t be able to use HMRC’s free online service to do this anymore. Everyone under MTD for Income Tax must make their final declaration through commercial software (like FreeAgent, Xero, QuickBooks, etc.). It is therefore essential that you choose a provider that covers all parts of the process, not just the quarterly updates.

What about paying tax?

MTD changes how you report your income to HMRC, but it doesn’t change when you must pay your tax. If you’re already in the Self-Assessment system, you’ll be familiar with the usual payment deadlines. 

That means:

• January 31 remains the deadline for paying your balancing payment for the previous tax year, and your first payment on account for the current year if that applies to you.
• July 31 is when your second payment on account is due.

In short, the reporting process is changing, but the dates when you need to pay what you owe remain the same.

What about late submissions or payments?

HMRC is also introducing a new points-based penalty system. If you miss a quarterly update or file late too many times, you’ll accumulate points. If you get too many points, you’ll be hit with a financial penalty.

Are there any exemptions?

While Making Tax Digital will apply to most self-employed people and landlords, some individuals are exempt, either automatically or because they qualify for what's called ‘digital exclusion.’

Automatic exemptions:

You won’t need to follow the MTD rules if:

• You don’t have a UK National Insurance number on January 31 before the tax year begins. You’ll be exempt for that tax year, though you’ll need to follow MTD rules in future years if you get a National Insurance number later.
• You’re a foster carer or a shared lives carer, and your only income is from ‘qualifying care income.’ If this is your situation, you’re automatically outside the scope of MTD.
• You’ve already been exempted from MTD for VAT by HMRC, and you're also VAT registered. If this applies to you, you're automatically exempt from MTD for Income Tax as well - no need to reapply.

Digital exclusion and other reasons:

Some people may find it difficult or even impossible to keep digital records or use software. If that’s you, you may be able to apply for an exemption. 

HMRC allows exemptions for:

• People with a disability that makes it hard to use computers or digital tools.
• Those living in remote areas where broadband is patchy or unreliable.
• People who are older or not confident using technology.
• Individuals who are members of a religious group that objects to using electronic records or communication.

In short, if it’s not reasonably practical for you to use digital systems, HMRC may grant you an exemption. 

If you think this applies to you, you’ll need to apply for an exemption. You can find more information here. 

Where do I sign up?

You can read everything you need to know about signing up here. Even though MTD for Income Tax isn’t compulsory for most people until April 2026  - or 2027, depending on your income, it is possible to sign up voluntarily now. 

HMRC is running a pilot programme to help test and improve the service, and they’re encouraging people to take part.

Joining early will give you the chance to get familiar with the system and get a head start in choosing the right software.