Making Tax Digital for Income Tax (MTD IT) will bring a fundamental shake-up in how taxpayers and agents interact with HMRC and each other. However, before you can start to get your clients and your practice ready, you need to understand the key rules.

MTD IT will apply to individual sole traders and landlords.

The exact date a taxpayer comes into MTD IT depends on their qualifying income:

• Over £50,000 means into MTD IT from April 2026
• £30,000–£50,000 means into MTD IT from April 2027
• £20,000–£30,000 means into MTD IT from April 2028

The government has also said that they will continue to consider how to bring the benefits of digitalisation to the 4m sole traders and landlords with income below £20,000. It therefore appears that this threshold could be lowered even further in the future.

Qualifying income is gross income from trading and property as reported in the tax return for which the filing deadline has just passed. For example, when looking at who has to join from April 2026, we look at the tax return for 2024/25 (filing deadline 31 January 2026).

When working out qualifying income we:

• Look at gross income before expenses
• Only consider income from sole trades and property (and not partnership/PAYE income, salaries, dividends and so on)
• Look at the total amount if a taxpayer has more than one trade, or a trade and a property business

There are three core requirements under MTD IT.

1. Digital Record-Keeping

Digital records are the foundation of MTD IT. Software must be used to keep records of the amount, category and date of income and expenses of the trade or property business.

The categories follow those on the current self assessment return. If your turnover from either self-employment or property is below the VAT threshold, you can opt for three-line accounting and just categorise each item as either income or expense instead.

It is best practice to keep digital records in as close to real time as possible, but the legislation only requires them to be in place before you file the relevant quarterly update.

2. Quarterly Updates

The digital records will be used to prepare and file quarterly updates with HMRC.

Quarterly updates are not mini-tax returns. They merely report the total of each income and expense category for that quarter, with no tax or accounting adjustments required. The quarters follow the tax year and are cumulative, with the deadline being one month and two days after the end of each quarter.

Unlike VAT you can’t change your quarters, but you can elect for “calendar quarters”, such that:

• Q1 ends on 30 June
• Q2 ends on 30 September
• Q3 ends on 31 December
• Q4 ends on 31 March

The filing deadline remains the same however.

A separate quarterly update is needed for each trade or property business a taxpayer has. So, if a taxpayer has a sole trade and is also a landlord, they will need to make a total of eight quarterly submissions each year.

3. Finalisation

At the end of the tax year, the taxpayer will need to finalise their position.

This will involve adjusting the information reported in the quarterly updates for accounting and tax purposes, declaring other sources of income and claiming allowances and reliefs. This process will have the same deadline as the current self assessment return (31 January after the end of the tax year) and work in a very similar way, but with greater pre-population of information.

It’s long been known that some form of third-party software would be needed to keep digital records and file quarterly updates under MTD IT. However, it was expected that the year-end tax return could either be filed via software, or using a HMRC-provided online service.

In a late change of plans, it’s now been announced that, unlike the current self-assessment process where millions of taxpayers use the HMRC provided online tool to submit their self-assessment, the HMRC filing option will not be available under MTD IT.

This means that, for those in MTD IT, software will need to be acquired that can file the self assessment tax return. HMRC refers to this as a “full software journey”. The current HMRC online service will however remain available for those outside MTD IT.

There are record-keeping and reporting relaxations for some taxpayers, in particular joint property owners.

They can choose to either:

• Keep full digital records of their share of the income and expenses of the joint property, or
• Just record a single total amount for their share of each category of:
  • Property income once a quarter
  • Property expenses once a year

For quarterly updates, joint property owners can also choose to either:

• Report the totals of each category in the usual way, or
• Just report their share of income, with their share of expenses reported via the end-of-year finalisation process

Joint property owners can also apply the three-line accounting easement described above if they are eligible.

Given the scale of the changes involved there will, inevitably, be teething problems as we move into MTD for income tax.

However, the good news is that missing a single quarterly update deadline won’t result in a late-filing penalty. Instead, under the new MTD late-filing regime, you’ll receive a penalty point for each late submission, only receiving a £200 penalty when you rack up a total of four points. As points expire after 24 months, the odd late filing shouldn’t cause any sleepless nights.

At the Spring 2025 Statement the government announced that they will increase late payment penalties for VAT taxpayers and income tax self assessment taxpayers as they join MTD, from April 2025 onwards.

The new rates will be:

• 3% of the tax outstanding where tax is overdue by 15 days
• +3% where tax is overdue by 30 days
• +10% per annum where tax is overdue by 31 days or more