Making Tax Digital for Income Tax: complete guide for small businesses

Making Tax Digital for Income Tax (MTD for Income Tax) or MTD for ITSA (Making Tax Digital for Income Tax Self Assessment), is one of the largest changes to the way individuals pay their personal taxes in the United Kingdom since the introduction of Self Assessment over thirty years ago. For many small business owners, this change is already in place.

From 6th April 2026, all sole traders and landlords with a qualifying gross income of £50,000 or more will have to file quarterly updates on their tax affairs with HM Revenue & Customs (HMRC). This will require them to maintain digital records and provide an update four times per annum, instead of the current once per annum format that has been in existence since 1996. The qualifying income threshold will reduce to £30,000 from 1st April 2027 and further reduced to £20,000 by 1st April 2028. Therefore, the vast majority of the UK’s self employed population will be required to comply with MTD for Income Tax within the next two years.

The purpose of this guide is to provide an explanation of what Making Tax Digital for Income Tax (MTD for Income Tax) means for you, who is required to comply, and by when; what you are required to do to comply with the requirements of MTD for Income Tax in practical terms; which software providers will support your compliance with MTD for Income Tax; and finally how to avoid the penalties associated with non-compliance. All information contained in this guide has been verified using HMRC’s published guidance dated February 2026.

What is Making Tax Digital for Income Tax?

Making Tax Digital (MTD) is a long-term initiative from HMRC to move the U.K. taxation system into an online environment and replace paperwork and manual methods with digital based systems and processes using real time data. MTD for VAT has been required for all VAT registered businesses since 2022. However, the next phase of this initiative will be MTD for Income Tax, where MTD for Income Tax will use the same digital first approach as used for MTD for VAT but for income tax purposes for self-employed people and landlords.

From a practical perspective, MTD for Income Tax replaces the standard Self Assessment tax return for most people filing their tax return once a year by 31st January with a process of submitting digital reports summarizing your income and expenses to HMRC via HMRC recognized software on a quarterly basis throughout the year and a Final Declaration at year end. The idea behind this approach is that instead of re-constructing your transactions over a 12-month period at the beginning of each year, you maintain your records digitally and submit a summary to HMRC every 3 months.

Important: MTD for Income Tax only applies to individual taxpayers who are taxed on income earned from self-employment and/or rental income. As such, it does not apply to employees taxed solely under Pay As You Earn (PAYE); nor does it apply to partners in partnership; nor does it apply to Limited Companies. HMRC has also announced that they have abandoned plans for Making Tax Digital for Corporation Tax.

The three core requirements of MTD for Income Tax

1. Digital record keeping

Paper records and manual spreadsheets alone no longer meet HMRC’s requirements. From your MTD start date, you must maintain digital records of all your business income and expenses using HMRC-recognised software. This means recording transactions as you go — not reconstructing them at year end.

You do not need to give up physical receipts — you can still keep originals — but the records must also exist in digital form within your MTD-compatible software. Importantly, you only need to keep digital records for your self-employment and property income. Other income sources, such as savings interest or dividends, are not required to be kept digitally, but must still be reported in your Final Declaration.

2. Quarterly updates

Four times a year, you must submit a summary of your business income and expenses to HMRC through your software. These are called quarterly updates, and the deadlines are fixed to the tax year — they do not change based on your accounting year.

Good news: quarterly updates do not need to be perfectly accurate. You can correct and adjust figures in subsequent updates, and the corrections will carry forward to HMRC automatically. What matters is that you submit something by each deadline — even if the numbers are not yet final.

You also have the option to report on calendar quarters (January–March, April–June, July–September, October–December) rather than the standard tax year quarters. This can make reconciling your records easier if your accounting already follows calendar months. Check with your software provider about how to set this up.

3. Final Declaration

At the end of each tax year, you submit a Final Declaration — HMRC’s replacement for the traditional Self Assessment tax return. This is where you confirm your full-year figures, include any income not covered by quarterly updates (savings, investments, employment income etc), claim allowances and reliefs, and finalise your tax position. The deadline is 31 January following the end of the tax year — the same date as the old Self Assessment return, so this part is not new. For the 2026/27 tax year, the Final Declaration deadline is 31 January 2028.

Who needs to comply, and when?

MTD for Income Tax is being rolled out in phases based on qualifying income. Your qualifying income is your combined gross income from self-employment and/or UK property — that is, your total turnover before any expenses are deducted. It is not your profit.

HMRC determines your qualifying income based on your Self Assessment tax return for the previous tax year. So, for the April 2026 phase, HMRC looks at your 2024/25 return (due 31 January 2026). If your qualifying income in that return exceeded £50,000, you are in scope from 6 April 2026. HMRC will write to you to confirm this, but it is your responsibility to check even if you don’t receive a letter.

* The £20,000 threshold for Phase 3 has been confirmed as the government’s intention, but the legislation has not yet been passed. This date and threshold may be subject to change.

⚠️  Is it just my turnover or my profit?

It’s your gross income — your total turnover before expenses. A sole trader with £55,000 of invoices but only £20,000 of profit is still in scope from April 2026. This catches more people than many expect.

Who is excluded?

Certain groups are not required to use MTD for Income Tax, and some can apply for an exemption:

• Employees who pay tax only through PAYE (no self-employment or rental income)
• Partners in general partnerships — a separate MTD timetable for partnerships will be announced separately
• Limited companies — MTD for Corporation Tax has been scrapped
• Trusts, estates, and non-resident companies
• Those who are digitally excluded due to age, disability, health conditions, or lack of internet access
• Non-UK residents who may need to use supplementary residence pages (deferred until April 2027 at earliest)

If you believe you qualify for an exemption, you must apply to HMRC — exemptions are not granted automatically. If you’re eligible, you must continue to file Self Assessment tax returns as before.

All the key dates and quarterly deadlines

MTD for Income Tax runs on the standard UK tax year (6 April to 5 April). Your quarterly update deadlines are set by HMRC and fall on the 7th of the month after each quarter ends. These are fixed dates — they do not flex if you choose calendar quarters, though the periods covered may differ slightly.

The same quarterly structure applies to all phases — only the start date differs (6 April 2026 for Phase 1, 6 April 2027 for Phase 2, 6 April 2028 for Phase 3).

📌  First quarterly deadline: 7 August 2026

If you are in Phase 1 (income over £50,000), your first quarterly update — covering 6 April to 5 July 2026 — is due by 7 August 2026. You need compatible software set up and linked to HMRC before this date. The practical advice is to have everything in place before 6 April 2026.

What about the 2025/26 Self Assessment return?

If you join MTD from 6 April 2026, you will still need to file your 2025/26 Self Assessment tax return as normal, by 31 January 2027. This is the last time you’ll use the traditional system for the income streams covered by MTD. After that, the Final Declaration takes over for future years. To avoid juggling both at once, FreeAgent and others recommend filing your 2025/26 Self Assessment as early as possible after 6 April 2026, before your MTD quarterly updates begin.

Penalties: what happens if you miss a deadline?

MTD for Income Tax introduces a new points-based penalty system to replace the old fixed-fine regime. The system works like penalty points on a driving licence — miss enough deadlines and you hit a threshold that triggers a financial fine.

* The soft-landing for Year 1 means HMRC will not apply penalty points for late quarterly updates submitted during the 2026/27 tax year only. This was confirmed to help taxpayers and software providers adjust. The soft landing does not apply to late Final Declarations or late payment of tax. From 2027/28 onwards, full penalty rules apply.

✅  Good news: Year 1 is a practice run

HMRC has confirmed a soft-landing period for the 2026/27 tax year. If you miss a quarterly update deadline in your first year of MTD, you will not receive penalty points, provided you are making genuine efforts to comply. However, this protection does not extend to late payment of tax or a late Final Declaration. And it ends entirely after 2026/27 — from April 2027 onwards, the full penalty regime applies.

Points-based penalty system explained

Under the new regime, each missed quarterly update adds one penalty point. Reach four points and you receive a £200 fine. After the fine, points can only be cleared by 12 consecutive months of on-time submissions. A late Final Declaration also adds points.

Late payment of tax is handled separately on a percentage basis: if you have not paid by day 16 after the due date, you face a 2% charge on the amount outstanding. This rises to 4% if payment remains outstanding at day 31. HMRC interest also accrues on unpaid amounts.

Note that MTD does not change when you pay your tax. Payment dates remain the same as under Self Assessment: 31 January for the balancing payment and first payment on account, and 31 July for the second payment on account.

Which software do you need for MTD for Income Tax?

You cannot use the HMRC portal or HMRC’s own tools to make MTD for Income Tax submissions. You must use HMRC-recognised commercial software. HMRC maintains an official list of compatible software at gov.uk/guidance/find-software-that-works-with-making-tax-digital-for-income-tax. Use the personalised finder tool on that page to filter by income type (self-employment, UK property, or foreign property).

Full accounting software vs bridging software

Full accounting software — such as QuickBooks, Xero, Sage, or FreeAgent — creates and maintains all your digital records and submits your quarterly updates and Final Declaration directly to HMRC. This is the most comprehensive option and the one most businesses will find easiest to use.

Bridging software — products like 123 Sheets or Forbes MTD — sits between your existing spreadsheets and HMRC’s systems. If you currently keep your accounts in Excel and don’t want to move to a full accounting package, bridging software takes your spreadsheet data and formats it for HMRC submission. You still need to keep digital records in your spreadsheet, and the spreadsheet must be maintained digitally throughout the year — not reconstructed just before each deadline.

For most small businesses, a full accounting package is simpler, less error-prone, and not much more expensive than maintaining a bridging software setup alongside spreadsheets. Bridging software is primarily useful for businesses with complex existing systems, or those whose accountant already uses a specific tool.

HMRC-recognised software: our recommendations

Prices correct as of February 2026. Always verify current pricing directly with the provider. HMRC’s software list is regularly updated as more providers are recognised — check gov.uk for the most current list.

Which software should I choose?

The answer for most small businesses is whichever accounting software they already use:

• Already on QuickBooks? QuickBooks is HMRC-recognised for MTD for Income Tax. Check your plan includes the MTD functionality and enable it in settings.
• Already on Xero? Xero is HMRC-recognised for MTD. The Grow, Comprehensive, and Ultimate plans all include MTD for Income Tax capabilities.
• Already on Sage? Sage Accounting is HMRC-recognised. Ensure you’re on a plan that includes MTD for Income Tax submissions.
• Already on FreeAgent? FreeAgent is HMRC-recognised and is particularly well regarded for its step-by-step MTD guidance. Free to qualifying NatWest/RBS customers.
• Not using accounting software yet? This is the time to start. QuickBooks and FreeAgent are the most accessible options for sole traders new to digital accounting.
• Love your spreadsheets? Use bridging software such as 123 Sheets to remain compliant without switching your whole system.
• A landlord with just one or two properties? Hammock is purpose-built for landlords and is the first software HMRC recognised specifically for property income MTD. It starts at £8/month.

🔗  Use HMRC’s free software finder

Visit gov.uk/guidance/find-software-that-works-with-making-tax-digital-for-income-tax and use the personalised finder tool. It asks about your income sources and generates a tailored list of compatible options. This is the definitive list — if a product isn’t on it, it cannot legally submit your MTD returns to HMRC.

Step-by-step: how to get ready for MTD for Income Tax

Step 1: Check if and when it applies to you

Look at your 2024/25 Self Assessment return (due 31 January 2026). Add together your gross self-employment income and any gross rental income. If the combined total is over £50,000, you are in scope from 6 April 2026. If it is over £30,000 but under £50,000, you have until April 2027.

Remember: it’s gross income, not profit. Even if your expenses are high and your profit is low, it’s the total income figure that counts.

Step 2: Sign up with HMRC

Once you know you’re in scope, sign up for MTD for Income Tax through your Government Gateway account at gov.uk/guidance/sign-up-your-business-for-making-tax-digital-for-income-tax. You must be registered for Self Assessment and have submitted a tax return in the last two years. If you use an accountant, they can sign you up on your behalf. HMRC recommends signing up well before your start date — ideally by March 2026 if you are joining in April 2026.

Step 3: Choose and set up your software

Pick a compatible software product from HMRC’s list and set it up before your start date. This involves creating an account, connecting the software to your HMRC Government Gateway account, and authorising it to make submissions on your behalf. Most providers have step-by-step guides for this process. Allow at least a few days for the authorisation process to complete.

If you’re new to digital accounting, it’s also worth taking time to familiarise yourself with your chosen software before April 2026. Use the time before your first quarterly deadline (7 August 2026) to record a few months of transactions and get comfortable with how the system works.

Step 4: Start keeping digital records from 6 April 2026

From your MTD start date, all your self-employment and property income and expenses must be recorded digitally in your chosen software. You don’t need to enter historic transactions before your start date — only those from 6 April 2026 onwards.

Good habits to develop from day one:

• Record income and expenses as they happen, rather than in batches
• Connect your bank account(s) to your software via bank feeds, where available — this imports transactions automatically
• Photograph and upload receipts immediately using your software’s mobile app
• Categorise transactions correctly from the start — it’s much easier than recategorising a backlog
• Reconcile your bank feed to your software records at least monthly

Step 5: Submit your quarterly updates

By 7 August 2026, submit your first quarterly update covering 6 April to 5 July 2026. Your software will collate your digital records and generate a summary of income and expenses to send to HMRC. In most products, this is a few clicks once your records are up to date.

You do not need to be perfectly accurate for quarterly updates — corrections can be made in future quarters. However, the more accurate your records throughout the year, the less work you’ll have to do at the Final Declaration stage.

Repeat for Q2 (deadline 7 November 2026), Q3 (deadline 7 February 2027), and Q4 (deadline 7 May 2027).

Step 6: Submit your Final Declaration by 31 January 2028

After your four quarterly updates for 2026/27, submit your Final Declaration by 31 January 2028. This is where you confirm all your income sources for the year (including savings, dividends, and employment income if applicable), claim allowances and reliefs, and finalise your tax position.

Your software should guide you through this process. Many products will also generate a tax calculation so you can see what you owe before you submit. The Final Declaration replaces the old Self Assessment tax return for income covered by MTD — but it covers the same ground, so the content will feel familiar.

Working with an accountant under MTD

If you use an accountant to prepare your Self Assessment return, they can continue to handle your MTD obligations on your behalf. Your accountant can sign you up for MTD, submit quarterly updates, and file your Final Declaration using MTD-compatible software.

However, it’s important to talk to your accountant soon if you haven’t already. Some accountants are well-prepared; others are still updating their processes and software. Key questions to ask:

• Are you set up to submit MTD for Income Tax quarterly updates on my behalf?
• Which software do you use, and will I need access to it as well?
• What will you need from me each quarter, and by when?
• Will there be any increase in fees to reflect the additional quarterly work?

Even if your accountant manages everything, you are still responsible for ensuring your digital records are accurate and that deadlines are met. It’s a good idea to be familiar with the basics of MTD even if you delegate the submissions to a professional. Your accountant acts as either a main agent (who can manage all your MTD submissions) or a supporting agent (who can view but not submit). You can have multiple supporting agents.

Practical tips for making MTD work for your small business

MTD for Income Tax sounds daunting, but most businesses that have adopted digital record keeping through the MTD for VAT rollout report that the transition is smoother than they feared. Here are the most useful practical changes to make now:

Separate your business and personal finances

If you don’t already have a separate business bank account, open one before your MTD start date. Mixing business and personal transactions in the same account is the single biggest source of reconciliation headaches. A dedicated business account means every transaction is relevant, bank feeds import cleanly, and categorisation is straightforward.

Set up bank feeds immediately

Connect your business bank account to your MTD software using bank feeds. This automatically imports your transactions into the software on a daily or weekly basis, removing the need to enter them manually. Most major UK banks — including Barclays, HSBC, Lloyds, NatWest, Santander, and many challenger banks — support bank feeds through open banking.

Use your software’s mobile app

Most MTD-compatible accounting packages include a mobile app that lets you photograph receipts, record expenses, and raise invoices from your phone. Getting into the habit of logging expenses immediately — in the car after a client visit, for example — is far easier than trying to remember them weeks later.

Don’t wait for your accountant to set quarterly deadlines

If your accountant has historically driven your tax timeline, they may now need you to provide records four times a year rather than once. Agree the new workflow early: when do they need records by, what format, and what do you need to do on your end before they can prepare the quarterly update?

Use the quarterly updates as a tax planning tool

One of the genuine benefits of MTD, if you embrace it, is that you’ll have a near-real-time view of your likely tax liability throughout the year. Your software will typically show an estimated tax position after each quarterly update. This means you can set aside tax regularly rather than facing a large lump sum in January — and you can make more timely decisions about expenses and pension contributions.

Don’t panic if a quarterly update isn’t perfect

HMRC has designed the quarterly updates to be summaries, not audit-quality returns. You can correct errors in subsequent quarters. What matters most in year one is establishing the habit of submitting on time. Accuracy improves over time as you become familiar with the system.

Frequently asked questions

MTD for Income Tax: quick reference summary

Here are the key facts to keep in mind:

• Phase 1 start date: 6 April 2026 (income over £50,000)
• Phase 2 start date: 6 April 2027 (income over £30,000)
• Phase 3 start date: 6 April 2028 (income over £20,000 — subject to legislation)
• Qualifying income: Combined gross self-employment + property income — not profit
• Three requirements: Digital records · Quarterly updates · Final Declaration
• Q1 2026/27 deadline: 7 August 2026 (covers 6 April – 5 July 2026)
• Q2 2026/27 deadline: 7 November 2026
• Q3 2026/27 deadline: 7 February 2027
• Q4 2026/27 deadline: 7 May 2027
• Final Declaration 2026/27: 31 January 2028
• Penalty system: Points-based — 4 points triggers £200 fine
• Year 1 soft landing: No penalty points for late quarterly updates in 2026/27 only
• Software required: HMRC-recognised commercial software — cannot use HMRC’s own tools
• Not affected: Employees (PAYE only), limited companies, general partnerships (for now)

Related guides on GoSmallBusiness.co.uk:

Best accounting software for small businesses UK 

Best payroll software for small businesses UK

What expenses can I claim as a sole trader? 

How to register for VAT: step-by-step guide

Information correct as of February 2026, based on HMRC published guidance. Tax rules can change — always check gov.uk or consult a qualified accountant for advice specific to your situation. This article will be reviewed and updated with each new HMRC guidance update.