What is Making Tax Digital? Everything You Need to Know
Last updated: February 2026
Making Tax Digital (MTD) is HMRC’s programme to move the UK tax system from annual paper-based reporting to digital record-keeping with regular online submissions. Instead of filing a single Self Assessment return once a year, affected taxpayers need to sign up for MTD and use Making Tax Digital for Income Tax compatible software to keep digital records and send quarterly updates to HMRC throughout the tax year.
The programme began with VAT in 2019 and is now expanding to Income Tax Self Assessment (ITSA). By April 2028, sole traders and landlords with qualifying income of £20,000 or more will need to comply. This guide explains what MTD involves, who it affects, and the key dates you need to know.
Why HMRC introduced Making Tax Digital
HMRC first announced the concept behind MTD in 2015 as part of a broader push to become one of the most digitally advanced tax administrations in the world. The reasoning was straightforward: too many errors were creeping into paper-based tax returns, costing the Exchequer billions each year. HMRC’s own estimates put the annual tax gap from avoidable errors at around £8.5 billion.
MTD is a new way for sole traders and landlords to report their income and expenses to HMRC. The idea is that if taxpayers record their income and expenses digitally throughout the year, rather than reconstructing a full year of figures in January, the data sent to HMRC will be more accurate and more timely. Quarterly updates give HMRC a closer-to-real-time picture of tax liabilities, and they give taxpayers a clearer view of what they owe before the year-end bill arrives.
A brief history of MTD
MTD has taken longer to arrive than originally planned. The government first outlined its vision in the 2015 document “Making Tax Digital” and initially aimed to mandate quarterly reporting for most businesses from April 2018. That proved too ambitious. After consultations and a general election, the scope was narrowed to VAT first.
MTD for VAT launched in April 2019 for businesses with taxable turnover above the VAT registration threshold. It was extended to all VAT-registered businesses from April 2022, regardless of turnover. The current VAT registration threshold is £90,000 (from 1 April 2024).
MTD for Income Tax was originally planned for April 2024 but was delayed multiple times. The current confirmed timetable phases it in from 6 April 2026, starting with higher-income taxpayers and working downward. For a detailed breakdown of the Income Tax requirements, see our MTD Income Tax guide.
Who MTD affects right now
As of February 2026, MTD already applies to all VAT-registered businesses. If you are registered for VAT, you must keep digital records and file your VAT returns through MTD-compatible software. This has been mandatory since April 2022. More detail on this is available in our MTD for VAT guide.
The next major expansion is MTD for Income Tax Self Assessment, which begins rolling out from 6 April 2026. This affects sole traders and landlords whose self-employment and property income exceeds the threshold, not limited companies or partnerships (more on those below).
Making Tax Digital for Income Tax: the three phases
MTD for Income Tax is being introduced in three phases based on the taxpayer’s qualifying income. The thresholds are:
| Phase | Start date | Qualifying income threshold |
|---|---|---|
| Phase 1 | 6 April 2026 | Over £50,000 |
| Phase 2 | 6 April 2027 | Over £30,000 |
| Phase 3 | 6 April 2028 | £20,000 or more |
If your qualifying income exceeds the threshold for a given phase, you need to start using Making Tax Digital from that phase’s start date. You do not choose when to join. HMRC will assess your qualifying income based on your most recent Self Assessment tax return filing.
What counts as qualifying income
Qualifying income is your gross self-employment income plus gross UK property income. This is turnover, not profit. You cannot deduct expenses, allowances, or losses before measuring against the threshold. If your sole trade turns over £40,000 and your rental property brings in £15,000, your qualifying income is £55,000, even if your net profit after expenses is much lower.
Other income sources such as PAYE employment, dividends, savings interest, or pension income do not count towards the qualifying income threshold. Only self-employment and property income are included — your combined annual income from self-employment and UK property determines whether you need to use Making Tax Digital.
How MTD differs from Self Assessment
Under the current Self Assessment system, you file one tax return per year after the tax year ends. You have until 31 January following the end of the tax year (for online returns) to submit everything. Many taxpayers compile their records once a year and file in one go.
MTD changes this in three important ways. First, you must keep your records digitally from the outset, using MTD-compatible software rather than paper records or basic spreadsheets that are not connected to HMRC. Second, you must send quarterly summary updates to HMRC during the tax year, not just one return at the end. Third, at the end of the year, you submit a Final Declaration instead of a traditional Self Assessment tax return.
Self Assessment does not disappear entirely. The Final Declaration effectively replaces the annual tax return, and HMRC will still use the Self Assessment framework to calculate your liability. But the reporting rhythm shifts from annual to quarterly.
What quarterly updates involve
Each quarter, your software sends HMRC a summary of your income and expenses for that period. The four quarterly periods and their deadlines are:
| Quarter | Period covered | Deadline |
|---|---|---|
| Q1 | 6 April to 5 July | 7 August |
| Q2 | 6 July to 5 October | 7 November |
| Q3 | 6 October to 5 January | 7 February |
| Q4 | 6 January to 5 April | 7 May |
These are summary figures, not a transaction-level breakdown. Your software totals your income and categorised expenses for the quarter and submits them electronically through HMRC’s API. You do not need to send individual receipts or invoices.
If you have more than one income source (for example, a sole trade and a rental property), you must submit a separate quarterly update for each source. That means eight submissions per year rather than four.
The Final Declaration
After your fourth quarterly update, you must submit a Final Declaration by 31 January following the end of the tax year. For the 2026/27 tax year, that deadline is 31 January 2028.
The Final Declaration is where you confirm your total income for the year, claim any reliefs or allowances (such as the personal allowance, trading allowance, or capital allowances), and make any adjustments. It is the point at which your tax liability is finalised. HMRC removed the previously proposed End of Period Statement, so the Final Declaration is the only year-end submission you need to make.
Worked example: Tom’s first year under MTD
Tom is a self-employed plumber in Leeds. His sole trade turned over £58,000 in the 2024/25 tax year, and he has no property income. His qualifying income of £58,000 puts him into Phase 1, starting 6 April 2026.
Tom signs up for MTD ITSA through HMRC’s online service and chooses FreeAgent as his compatible software. From April 2026, he records all his invoices and expenses in FreeAgent as they happen. At the end of Q1 (5 July 2026), FreeAgent generates a summary showing £14,200 in income and £4,800 in expenses. Tom reviews the figures and submits through the software before the 7 August deadline.
He repeats this for Q2, Q3, and Q4. His total income for the year comes to £61,500, with £22,300 in allowable expenses. In January 2028, Tom’s accountant prepares his Final Declaration, claims capital allowances on a new van worth £8,000, and submits it before 31 January. Tom’s tax bill is calculated based on his net profit of £39,200 (before the van allowance), adjusted for the capital allowance claim.
What software you need
You must use Making Tax Digital software that is recognised by HMRC as MTD-compatible. This means the software can connect directly to HMRC’s systems through their API to submit your quarterly updates and Final Declaration.
Options range from full accounting packages like Xero, QuickBooks, and FreeAgent to simpler MTD software such as bridging tools that work alongside spreadsheets. If you prefer using spreadsheets for your records, bridging software that works with Making Tax Digital lets you maintain your existing workflow while meeting HMRC requirements. HMRC publishes a list of compatible software for MTD Income Tax on GOV.UK. Some products are free for taxpayers with straightforward affairs, while others charge monthly or annual fees.
The key requirement is that the software must maintain digital links. You cannot type figures from a paper notebook into the software at the end of each quarter. The digital record must be the primary record, with data flowing digitally from the point of entry through to submission. Our software comparison tool compares all options that work with Making Tax Digital for Income Tax.
Penalties for late submissions
MTD for Income Tax uses a points-based penalty system. Each late quarterly update adds one penalty point to your account. Once you accumulate four points, you receive a £200 fixed penalty. Every subsequent late submission also triggers a £200 penalty until you bring your compliance up to date and the points are reset.
There is good news for the first year. HMRC has confirmed a soft landing for the 2026/27 tax year: no penalty points will be issued for late quarterly updates during the first four quarters. This gives taxpayers time to adjust to the new system without the risk of financial penalties for missed deadlines. Late payment penalties and interest on overdue tax still apply during the soft landing period.
From the 2027/28 tax year onward, the full penalty points regime takes effect. You can read more about how the system works in our penalties and compliance guide.
Corporation Tax and partnerships
Two categories of taxpayer are not yet included in MTD timelines. MTD for Corporation Tax has no mandatory start date set. HMRC has not confirmed when (or whether) limited companies will be brought into the MTD framework for Corporation Tax. Do not rely on any unofficial dates you may see elsewhere.
Partnerships have been deferred from MTD for Income Tax, and no mandation date has been announced. This applies to general partnerships, limited partnerships, and limited liability partnerships. Individual partners who also have sole trade or property income in their own name may still be caught by MTD ITSA in their personal capacity if their qualifying income exceeds the threshold.
Common questions about Making Tax Digital
Is Making Tax Digital the same as Self Assessment?
No. Self Assessment is the existing system where you file one annual tax return. MTD builds on top of Self Assessment by adding digital record-keeping requirements and quarterly reporting. Your Final Declaration under MTD replaces the annual Self Assessment return, but the underlying tax calculation is the same.
Do I need to pay tax quarterly under MTD?
The quarterly updates are reporting obligations, not payment obligations. You are sending HMRC a summary of your income and expenses each quarter. Your actual tax payment dates remain the same as under Self Assessment: 31 January and 31 July for payments on account, with a balancing payment on 31 January after the tax year.
What if my income drops below the threshold after I have signed up?
If your qualifying income falls below the threshold for a sustained period, you can apply to HMRC to be exempted from MTD ITSA. However, a temporary dip in one year does not automatically remove your obligation. HMRC will look at your income over a reasonable period before agreeing to remove you from the programme.
Can I use a spreadsheet for MTD?
You can use a spreadsheet for your record-keeping, but you will need bridging software to submit the data to HMRC. The spreadsheet must maintain digital links with the bridging software, meaning you cannot manually retype figures. Several providers offer bridging tools specifically designed to work with Excel or Google Sheets.
Are there any exemptions from MTD?
Yes. HMRC provides exemptions for taxpayers who are digitally excluded (for example, due to age, disability, or location), those without a National Insurance number, foster carers using the qualifying care relief, and people subject to a Power of Attorney or Court of Protection appointment. If you believe you qualify for an exemption, you should contact HMRC directly.
Is Making Tax Digital free?
Using Making Tax Digital itself costs nothing — there is no fee to sign up or submit to HMRC. However, you do need MTD software to file your quarterly updates, and some software charges a subscription. HMRC offers its own free tool for straightforward cases, and several providers offer free or low-cost options. See our guide to free MTD software for a full comparison.
What happened to the End of Period Statement?
The End of Period Statement was part of earlier MTD proposals but has been removed. You no longer need to submit a separate end-of-period statement. The Final Declaration, due by 31 January following the tax year, is the only year-end submission required under MTD for Income Tax.
Need help with Making Tax Digital?
Jack Ross Chartered Accountants have been advising businesses in Manchester since 1948. As a Xero Gold Partner, we can set up your MTD-compatible software, handle your quarterly submissions, and ensure you meet every deadline. Get in touch to find out how we can help.
