Making Tax Digital: A Complete Guide for the Self-Employed

Making Tax Digital: A Complete Guide for the Self-Employed

If you’re self-employed or a business owner, chances are, you’ve heard about Making Tax Digital. And if it’s left you feeling a bit unsure or overwhelmed, you’re not alone.

MTD is a big shift in the way tax works in the UK. While it might sound complicated, the good news is that it will likely make keeping records and paying tax easier in the long run. 

In this guide, we’ll break down what MTD actually is, who it applies to, when it starts, what you’ll need to do, and more. 

What is Making Tax Digital?

Making Tax Digital is HMRC’s big move to modernise the UK tax system. The idea is to make it more accurate, more efficient, and easier for people to stay on top of their obligations. By requiring businesses and individuals to keep digital records and send updates online using approved software, HMRC hopes to reduce human error and close the “tax gap” - that is, the difference between the tax that’s owed and what actually gets paid. In fact, HMRC claims that MTD for VAT – a system that has been in place since April of 2019 for some businesses - has already been successful in generating additional tax revenue. 

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

Who needs to use Making Tax Digital 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 with MTD for ITSA.
• 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.

Read more: Turnover Vs Profit: What’s the Difference 

According to government estimates, this means that 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 details like the amount, date, and category of each transaction. New products are being created all the time, but software that’s currently compatible with MTD is 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’ll be expected 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, it’s just about keeping HMRC in the loop with your earnings throughout the year.

Here’s when the quarterly updates are due each tax year:

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

These deadlines are the same for everyone using MTD for Income Tax, so they’re easy to remember once you get used to the rhythm.

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 accurate. This is the point where you can tidy up your figures; maybe you need to correct something from a previous update, include expenses you forgot, or apply year-end adjustments like capital allowances. These changes are all done through your MTD-compatible software. If any of the earlier updates need amending, you can do that too, so HMRC has the most up-to-date and accurate picture of your business's financial activity.

Once your business accounts are fully up to date, you’ll also need to report any other taxable income you received in the year. This might include things like dividends, interest, employment income, or pension income. Everything needs to be declared in your final submission.

This all comes together in something called the Final Declaration, effectively the replacement for the traditional Self Assessment tax return.

A really 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.), so it’s essential to 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 have to pay your tax.

So, if you’re already in the Self Assessment system, you’ll be familiar with the usual payment deadlines, and they’ll stay the same under MTD. That means:

31st January: 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.

31st July: the second payment on account.

In short, the reporting process may be changing (and getting a lot more digital) but the dates when you need to pay what you owe are staying exactly the same.

What about late submissions or payments?

To keep things fair, 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. Too many points, and you’ll be hit with a financial penalty. The same applies if you pay your tax late. The system is unfortunately a little complex, so if you want more information, we recommend checking out this guide from our friends at ICAEW. 

Are there any exemptions to Making Tax Digital?

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 don’t need to follow the MTD rules if any of the following apply:

• You don’t have a UK National Insurance number on 31st January 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 on.
• 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 genuinely 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 recognises this and 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. 

So, 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), you might be able 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 gives you the chance to get familiar with how the system works and get a head start in choosing the right software for your business, so why not give it a try?