Making Tax Digital for Income Tax: Everything You Need to Know

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is the next major step in HMRC’s plan to modernise the UK tax system. After transforming VAT reporting, HMRC is extending digital record-keeping and online submissions to the self-employed and landlords.

The goal of Making Tax Digital is simple but ambitious: reduce tax errors, improve accuracy, and give taxpayers a clearer view of their tax position throughout the year. If you’re self-employed or earn income from property, this article will walk you through what MTD for Income Tax means, who it applies to, how it works, and how to prepare.

Summary of Key Points

• MTD ITSA replaces annual paper or online Self Assessment filing with digital record-keeping and quarterly submissions
• It starts in April 2026 for individuals earning over £50,000, in April 2027 for those earning over £30,000 and in April 2028 for those earning over £20,000
• Lower-income groups (under £20,000) remain outside the system for now
• You must use compatible software. HMRC will not provide a free filing tool for those in scope
• Preparing early will make the transition smoother and help you avoid penalties

What Is Making Tax Digital for Income Tax?

• Use MTD-compatible software to record your income and expenses
• Submit quarterly updates of your records to HMRC
• File a Final Declaration through the same software, confirming the final figures and adjustments, effectively replacing your traditional Self Assessment Tax Return

HMRC’s objective is to make tax administration more effective, efficient and easier for individuals and businesses to get right.

Who Needs to Use MTD for Income Tax?

You’ll fall under MTD ITSA if all of the following apply:

• You are a sole trader or landlord (or both)
• You are registered for Self Assessment
• Your qualifying income exceeds the relevant threshold (Refer table below).

What Counts as Qualifying Income for Making Tax Digital for Income Tax?

Qualifying income means your gross self-employment and property income before expenses. It does not include income from employment (PAYE), dividends or partnership income.

Thresholds & Start dates of MTD ITSA

These phased start dates are designed to give smaller businesses more time to prepare.

Who Is Exempt from MTD for Income Tax?

• Your qualifying income (self-employment + property) is £20,000 or less
• You are digitally excluded; for example, if it’s not reasonable for you to use digital software because of age, disability, remoteness, or religious grounds
• You belong to a special category such as: Trustees (including charitable trustees),Executors or administrators of an estate, Non-resident companies, Individuals without a National Insurance number for the relevant year

<b>Note:</b> If you are exempt or granted an exemption from MTD ITSA, you’ll continue to submit your tax return through the traditional Self Assessment system.

How to Comply with Making Tax Digital for Income Tax?

To comply with MTD for Income Tax, you need to follow the below steps:

Step 1: Choose Compatible Software

You must use software that is officially recognised as MTD-compatible by HMRC.

Your software must allow you to:

• Create and store digital records
• Send quarterly updates directly to HMRC
• Submit your final end-of-year declaration

<b>Important:</b> HMRC will not offer a simple online filing service for those within MTD ITSA. You must use MTD-compliant software or appoint an agent who does MTD ITSA.

Step 2: Keep Digital Records

You’ll need to record details such as:

• The date, amount, and type of income or expense
• Separate records for each business source if you operate multiple trades
• Separate records for property income, including UK and overseas properties

Step 3: Submit Quarterly Updates

Every three months, you’ll send a summary of your income and expenses to HMRC. This doesn’t calculate your final tax but gives HMRC and you a live view of your earnings.

These MTD quarterly updates will replace the current once-a-year reporting cycle.

Step 4: Final Declaration Submission

At the end of your accounting year, you’ll finalise your records and submit a Final Declaration. This step allows for adjustments, reliefs, and other personal income to be added much like the current Self Assessment return.

Step 5: Sign Up & Get Authorised

You can enrol for MTD ITSA either:

• Through your chosen software
• Via your accountant or tax agent (who must also be MTD-authorised)

You can also sign up early before it becomes mandatory to get used to the new system.

Step 6: Prepare Ahead

Before your mandatory start date:

• Check your eligibility and confirm your income threshold
• Select and test software compatible with your needs
• Organise your records digitally now to make the transition smoother
• Authorise your accountant or agent (if you use one)
• Plan for quarterly reporting to manage cash flow and compliance effectively

What Happens If You Don’t Comply MTD for Income Tax?

Failing to comply, for example, not using compatible software, missing quarterly updates, or not keeping digital records may lead to:

• Penalties or surcharges under HMRC’s digital reporting rules
• Tax assessments based on HMRC’s best estimates

What are the Benefits and Challenges of Making Tax digital for Income tax?

The benefits and challenges of the Making Tax Digital for Income Tax (MTD ITSA) are discussed as under:

Benefits

• Greater Visibility - You’ll have a clearer, more accurate picture of your tax position throughout the year.
• Reduced Errors - Digital record-keeping minimises mistakes from manual entry or missed receipts.
• Modernisation - Submissions are streamlined and automated, saving time in the long run.
• Financial Control - Quarterly updates help you budget for tax bills gradually instead of facing a lump sum after year-end.

Challenges

• Software Costs - You’ll need to pay for an MTD-compatible package or ensure your accountant’s system covers you.
• Learning Curve - Adapting to new digital tools and reporting routines may take time.
• Uncertainty Near Thresholds - Those earning close to £30,000 or £20,000 may find it difficult to predict when they’ll need to comply.
• Multiple Income Streams - Self-employed individuals with multiple trades will need to manage separate records and submissions.

Practical Tips for Getting Ready for Making Tax Digital for Income Tax (MTD ITSA)

• Start early. Don’t wait for the deadline, begin testing software now.
• Check software listings. Only use tools approved by HMRC as MTD-compatible.

• Keep records up to date. Regular updates make quarterly submissions quick and easy.
• Review your business structure. Ensure separate records for each trade or property.
• Stay informed. Legislation and thresholds may evolve — check GOV.UK regularly.
• Seek advice. Talk to your accountant or tax agent if you’re unsure how MTD affects you.

Conclusion

Making Tax Digital for Income Tax represents a major change in how millions of taxpayers interact with HMRC.

While it introduces new obligations particularly around software and quarterly reporting it also offers the opportunity to manage your finances more efficiently and stay on top of your tax position year-round.

Additional Resources to HMRC

• Making Tax Digital for Income tax Exemption: Exemption from Making Tax Digital for Income Tax

• Making Tax Digital for Corporation Tax: Making Tax Digital for Corporation Tax