If you’ve been half-following Making Tax Digital for a few years without being certain whether it applies to you, that’s understandable. The rollout has been delayed multiple times, the rules have changed, the original End of Period Statement requirement was quietly scrapped, and the GOV.UK guidance is scattered enough that most people rely on accountants or trade bodies to translate it. This article tries to do that translation in one place.
The short version: Making Tax Digital is HMRC’s programme to move tax records and submissions online. MTD for VAT has applied to all VAT-registered businesses since April 2022. MTD for Income Tax started this month for sole traders and landlords earning above £50,000, and rolls out to lower thresholds in 2027 and 2028. If you’re in scope, you need compatible accounting software and you’ll submit quarterly updates to HMRC instead of one annual self-assessment return.
What is Making Tax Digital?
HMRC wants businesses to keep digital tax records and submit returns through software, rather than paper or the older HMRC online forms. The underlying aim is closer-to-real-time visibility of what businesses earn and spend, rather than waiting for an annual return that might arrive almost two years after the income was earned.
There are two separate MTD programmes that affect small businesses.
MTD for VAT applies to all VAT-registered businesses. It’s been live since April 2022 and if you’re registered, you should already be compliant.
MTD for Income Tax (MTD ITSA) is the newer one. It applies to sole traders and landlords above certain income thresholds, and it’s just gone live for the first cohort.
Who needs to comply and when?
MTD for VAT has applied to all VAT-registered businesses since April 2022, regardless of turnover. If you’re registered and not using MTD-compatible software, you’re already non-compliant.
MTD for Income Tax is rolling out in phases:
| When | Who |
| April 2026 | Sole traders and landlords with qualifying income above £50,000 |
| April 2027 | Sole traders and landlords with qualifying income above £30,000 |
| April 2028 | Sole traders and landlords with qualifying income above £20,000 |
| Date TBD | Partnerships |
| Date TBD | Limited companies (still in consultation) |
“Qualifying income” covers gross receipts from self-employed trading and property businesses. If you have both, for example a freelance business and rental income, both streams are added together. Employment income (PAYE) doesn’t count.
The threshold is based on your previous tax return. The April 2026 mandate applies to people whose 2024/25 return showed qualifying income above £50,000. April 2027 uses the 2025/26 return, and so on.
Limited companies aren’t affected yet. MTD for Corporation Tax is still at consultation stage and won’t arrive before the late 2020s at the earliest.
MTD for VAT: the key requirements
The core requirements have been in place for three years, but they’re worth stating clearly for anyone newly approaching the VAT threshold.
You need to keep digital VAT records, use HMRC-approved software to prepare and file your returns, and there must be a digital link between your records and your submission. That last point is the one that catches people out. Copying figures manually from a spreadsheet into a different piece of software doesn’t count. The data needs to flow digitally, through software that handles both, or through a connected pipeline like a CSV import or API link.
For businesses approaching the £90,000 VAT registration threshold, it’s worth choosing MTD-compatible accounting software before you register rather than scrambling to switch afterwards.
MTD for Income Tax: what actually changes
MTD for ITSA replaces the annual self-assessment return with quarterly updates plus a year-end Final Declaration.
Keep digital records throughout the year. Business income and expenses go into MTD-compatible software. You don’t need to categorise every transaction the moment it happens, but records need to be digital and in software that can communicate with HMRC.
Submit quarterly updates. Four times a year, you send HMRC a summary of income and expenses for that quarter. This isn’t a full return, you’re not calculating your tax bill at this point. You’re sending a summary of what came in and went out.
| Quarter | Period | Deadline |
| Q1 | 6 April – 5 July | 7 August |
| Q2 | 6 July – 5 October | 7 November |
| Q3 | 6 October – 5 January | 7 February |
| Q4 | 6 January – 5 April | 7 May |
Submit the Final Declaration by 31 January. At the end of the tax year, the Final Declaration replaces the self-assessment return. You confirm your total income, claim allowances and reliefs (personal allowance, trading allowance, capital allowances, etc.), and include any income sources outside your business. Your actual tax liability is calculated here. The deadline is the same as the old self-assessment deadline: 31 January following the end of the tax year.
One thing that changed from earlier versions of the MTD plan: HMRC scrapped the End of Period Statement that was originally part of the process. You no longer need to file one. It’s quarterly updates and the Final Declaration, nothing else.
Soft landing for 2026/27
For the first year of MTD ITSA, HMRC won’t issue penalty points for late quarterly updates. This applies to the 2026/27 tax year only.
If you’re in the first cohort (income above £50,000) and miss a quarterly deadline this year, HMRC won’t penalise you for it. It’s adjustment time for people getting set up with software and the new rhythm.
The soft landing covers late quarterly submissions only. The Final Declaration is still due 31 January 2028 and normal late-filing penalties apply.
Software: what you need
Both MTD programmes require HMRC-approved software. You can’t submit directly through HMRC’s website, you need a third-party product connected to HMRC’s system.
FreeAgent is free if you bank with NatWest, RBS, Ulster Bank, or Mettle. Otherwise around £19/month. Built specifically for freelancers and small businesses, with a clean MTD submission workflow.
Zoho Books has a free tier for businesses with annual revenue under £35,000. Paid plans from around £10/month. MTD-compatible and often overlooked.
QuickBooks is widely used, particularly among sole traders. Good automated receipt capture. Plans from around £14/month.
Xero suits businesses that want accounting, invoicing, and bank reconciliation in one place. Plans from around £16/month. Strong UK accountant support.
Sage Accounting works well if you’re already in the Sage ecosystem or your accountant uses it. Plans from around £15/month.
Spreadsheets alone don’t qualify for MTD ITSA. For MTD VAT, bridging software that connects a spreadsheet to HMRC’s API is still accepted. For Income Tax, you need proper accounting software.
If you’re not sure which to choose, two questions narrow it down fastest: is your bank NatWest group (in which case FreeAgent is free), and does your accountant already use one of these platforms (in which case staying in the same ecosystem saves time).
Exemptions
Most sole traders and landlords who cross the income thresholds will be in scope. The routes to exemption are narrower than people tend to assume.
Digital exclusion is the main one. HMRC considers applications from people who genuinely cannot use computers due to age, health conditions or disability, location (no reliable internet connection), or membership of a religious community that doesn’t use digital technology for communications or record keeping.
HMRC is specific about what won’t qualify: being unfamiliar with accounting software, having a small number of transactions, finding the software an extra cost, or preferring paper. These are not grounds for an exemption.
Automatic temporary exemptions exist for a small number of specific situations, mainly people whose 2024/25 tax return included trust or estate income, non-resident performer income, or income averaging claims for farmers or creative artists.
Applications for digital exclusion exemptions are assessed individually. HMRC aims to respond within 28 days.
What happens if you don’t comply
Once the soft landing ends, late quarterly submissions attract penalty points under HMRC’s points-based system. Four points in a 12-month period triggers a £200 penalty, with further £200 penalties for each subsequent failure. The points reset to zero once you’ve filed on time for a sustained period.
Late payment of tax is handled separately, through the existing interest and surcharge regime — that’s unchanged.
Frequently asked questions
No. Qualifying income covers self-employed trading and property income only. PAYE employment income isn’t included. A £30,000 freelance income and an £80,000 salary puts you below the current £50,000 threshold.
Yes. Gross rental income from UK property is qualifying income, whether you have one property or twenty.
The digital record-keeping requirement applies to you, not just your accountant. Your accountant can use their own software to submit on your behalf, but you need digital records at your end. Your accountant is the best person to advise on the practical arrangement — some set clients up with shared access to the same platform.
Not for mandatory purposes. If there’s a chance you’ll cross the £30,000 threshold in your 2025/26 return — which would bring you in scope from April 2027 — getting familiar with compatible software now is sensible. Waiting until closer to April 2027 is fine too.
The threshold is assessed annually on the previous year’s return. If your 2024/25 income was above £50,000 and your 2025/26 income drops below it, you’d still be in MTD for 2026/27, because the mandate was triggered by the earlier return. HMRC’s guidance on exit from MTD is less clearly documented than the entry rules — worth asking your accountant to clarify for your specific situation.
MTD for Income Tax: the quarterly submission process, Final Declaration, and how it differs from self-assessment in detail.
MTD for sole traders: what changes if you’re self-employed, and what to do if you have multiple income streams.
MTD for landlords: how property income works under the new system.
Best MTD software for small businesses UK: a full comparison by price, ease of use, and who each suits.
MTD exemptions: the full detail on who qualifies and how to apply.
MTD for VAT: a guide for businesses approaching or past the registration threshold.
