Making Tax Digital for income tax is the biggest change to the UK tax system in a generation. If you’re a sole trader or landlord, it changes how you keep records, how you report income, and what software you need — starting from April 2026.
According to HMRC’s Making Tax Digital guidance, the goal is to move taxpayers away from annual paper returns and toward digital record-keeping with quarterly updates. In practice, this means the end of the traditional once-a-year Self Assessment filing as we know it.
Here’s a plain-English breakdown of what MTD for Income Tax is, how it works, who’s affected, and what you need to do.
What Is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax (MTD ITSA — Income Tax Self Assessment) is HMRC’s initiative to digitalise tax record-keeping and reporting. Instead of filing one annual Self Assessment return, you’ll:
- Keep digital records of your income and expenses using compatible software
- Send quarterly updates to HMRC through that software (every 3 months)
- Submit a final declaration by 31 January (replacing the annual Self Assessment return)
The key principle is that your records must be kept digitally — not in a shoebox of receipts or a paper ledger. According to HMRC’s MTD for Income Tax rules, you must use software that can connect to HMRC’s systems to submit updates.
How MTD for Income Tax Works: Step by Step
Step 1: Keep digital records
Throughout the tax year, you record your income and expenses in compatible software (e.g., FreeAgent, Account OS, Pie Tax, Coconut, Sage). This replaces the traditional approach of keeping receipts in a box and entering everything at year-end.
For most sole traders and landlords with turnover under £90,000, the digital record only needs to include:
- The date of each transaction
- The amount
- Whether it’s income or an expense
For those with turnover over £90,000, more detailed categorisation is required. See our guide on MTD qualifying income thresholds for the full breakdown.
Step 2: Send quarterly updates
Every 3 months, your software calculates a summary of your income and expenses for that quarter and sends it to HMRC. This is an automated process in most software — you review the figures and click submit.
The quarterly updates are not tax bills. They’re informational — they tell HMRC roughly how your year is going. No tax is due at this point. See our MTD quarterly updates guide for deadlines and details.
Step 3: Finalise your tax return
At the end of the tax year, you submit a final declaration through your software. This is similar to your current Self Assessment return — it includes any adjustments, capital allowances, and other reliefs that weren’t captured in the quarterly updates.
The deadline is still 31 January — the same as the current Self Assessment deadline. Your tax payment is also still due by 31 January.
Who Needs to Use MTD for Income Tax?
MTD for Income Tax applies to:
- Sole traders with self-employment income above the threshold
- Landlords with UK property income above the threshold
- Partners in partnerships (from April 2027, though partnerships with turnover above £20m may be deferred)
It does not apply to:
- Employees who only have PAYE income (no self-employment or property income)
- Companies (they’re already under MTD for VAT and Corporation Tax)
- Sole traders and landlords below the income threshold
The thresholds are based on qualifying income — which is your self-employment income plus your UK property income only. PAYE, pensions, dividends, and other income types don’t count toward the threshold. See our MTD qualifying income thresholds guide for the full rules.
The Phased Rollout: When Do You Need to Start?
MTD for Income Tax is being phased in over 3 years based on income level:
| Phase | Start date | Qualifying income threshold | Who’s affected |
|---|---|---|---|
| Phase 1 | 6 April 2026 | Over £50,000 | ~900,000 sole traders and landlords |
| Phase 2 | 6 April 2027 | Over £30,000 | ~700,000 additional sole traders and landlords |
| Phase 3 | 6 April 2028 | Over £20,000 | ~300,000 additional sole traders and landlords |
If your qualifying income is above the threshold for a given phase, you must register for MTD before the start date. HMRC is sending awareness emails to all Self Assessment filers who are likely to be affected.
For example, if you’re a sole trader with £55,000 in self-employment income:
- You fall into Phase 1
- You must start using MTD-compatible software by 6 April 2026
- Your first quarterly update will cover 6 April to 5 July 2026
If you’re a landlord with £35,000 in rental income:
- You fall into Phase 2
- You must start by 6 April 2027
- But you can volunteer to start earlier if you want to prepare
What Software Do You Need?
You must use software that’s compatible with HMRC’s Making Tax Digital system. According to HMRC’s software guidance, compatible software must be able to:
- Record income and expenses digitally
- Submit quarterly updates to HMRC
- Submit the final declaration (end-of-year return)
- Connect to HMRC via an API
Popular compatible software includes:
- FreeAgent — popular with sole traders, integrates with NatWest/RBS business accounts (10% off with this link)
- Account OS — AI accounting for UK micro-businesses
- Pie Tax — comprehensive, good if you have an accountant
- Coconut — designed specifically for sole traders, simple interface
- Sage — established, good for more complex businesses
- TaxScouts — includes MTD filing in their service
Spreadsheets alone are not sufficient — but you can use spreadsheet bridging software that connects your spreadsheet to HMRC’s API. However, most sole traders find it easier to switch to dedicated accounting software.
The cost of MTD-compatible software typically ranges from £10–£30/month. See our guide on MTD software costs as an allowable expense to find out if you can claim this back on your tax return.
What Changes vs What Stays the Same
What changes
- Record-keeping: Must be digital (no more shoebox of receipts entered once a year)
- Reporting frequency: Quarterly updates instead of one annual return
- Software requirement: Must use HMRC-compatible software
- Registration: You must actively register for MTD (it’s not automatic)
What stays the same
- Payment deadline: Still 31 January — no change to when you pay tax
- Payment amount: Still calculated the same way (income minus allowable expenses and reliefs)
- Tax rates: Same income tax bands and rates
- Self Assessment registration: You still need a UTR (Unique Taxpayer Reference)
- Allowable expenses: Same rules on what you can claim — see our allowable expenses guide
What Happens If You Don’t Comply?
HMRC has introduced a new penalty regime for MTD. Penalties apply for:
- Late quarterly updates: A penalty after 3 months of lateness
- Late final declaration: Points-based system, with a penalty after reaching the threshold
- Failure to keep digital records: Penalty of up to £5,000 for deliberate failure
- Late payment: Interest on overdue tax plus potential penalties
Importantly, there are no penalties for inaccuracies in quarterly updates — as long as your final declaration is accurate. The quarterly updates are expected to be based on your best available information at the time, not perfect figures. This was clarified in a Coconut MTD webinar where attendees asked about penalties for getting quarterly figures wrong.
How to Prepare for MTD Now
Even if your threshold date isn’t until April 2027 or 2028, you should start preparing now:
- Switch to accounting software — if you’re still using spreadsheets or paper records, move to compatible software now. The earlier you switch, the easier the transition will be.
- Get your records in order — make sure your income and expense records are up to date and accurate. See our receipt sorting guide for help.
- Check your qualifying income — calculate whether your self-employment + property income exceeds the threshold. See our MTD qualifying income thresholds guide.
- Consider volunteering early — if you’re due to start in 2027 or 2028, you can sign up early to get used to the system.
- Talk to your accountant — if you use one, ask them about their MTD readiness and what software they recommend.
The Bottom Line
Making Tax Digital for Income Tax is not a new tax — it’s a new way of reporting. The tax you pay doesn’t change. What changes is how you keep records (digital), how often you report (quarterly), and what tools you use (compatible software).
The key dates to remember:
- April 2026: MTD starts for qualifying income over £50,000
- April 2027: Extends to qualifying income over £30,000
- April 2028: Extends to qualifying income over £20,000
- 31 January: Still your payment deadline — no change
Start preparing now by switching to compatible software and getting your digital records in order. The transition is much easier if you’re already using accounting software when your threshold date arrives.
For help understanding the income thresholds, see our MTD qualifying income thresholds guide. For practical guidance on quarterly updates, see our MTD quarterly updates guide. For the full jargon buster, see our HMRC jargon buster.