Making Tax Digital (MTD) Guide 2026: Everything You Need to Know
📋 Quick Summary
- MTD for VAT – Already mandatory for all VAT-registered businesses
- MTD for Income Tax – Starts April 2026 for income over £50,000
- April 2027 – Threshold drops to £30,000
- Quarterly reporting – Four submissions per year plus final declaration
- Software required – Must use HMRC-compatible accounting software
Making Tax Digital (MTD) is HMRC's ambitious programme to transform the UK tax system into a fully digital service. If you're self-employed, a landlord, or run a small business, MTD will affect how you keep records and report to HMRC.
The changes are happening in phases, with significant new requirements coming into force in April 2026. This guide explains everything you need to know about MTD, who it affects, and how to prepare.
What is Making Tax Digital?
Making Tax Digital is HMRC's initiative to modernise the UK tax system. Instead of keeping paper records and filing annual tax returns, MTD requires you to:
- Keep digital records using compatible software
- Submit quarterly updates to HMRC (for Income Tax)
- Use digital links – no manual copying of figures between software
- File via software – not through HMRC's website
The idea is to reduce errors, make tax easier to manage throughout the year, and give HMRC more accurate, real-time data.
MTD for VAT (Already Mandatory)
If you're VAT-registered, you're already required to comply with MTD for VAT. This has been mandatory since:
- April 2019 – Businesses with taxable turnover above £85,000
- April 2022 – ALL VAT-registered businesses (including voluntary registrations)
MTD for VAT Requirements
- Keep digital VAT records
- Submit VAT returns using MTD-compatible software
- Ensure digital links between software (no manual re-typing)
- Cannot file VAT returns through HMRC's old online portal
If you're VAT-registered and not yet compliant, you need to act immediately – you could face penalties.
MTD for Income Tax (Starting April 2026)
The bigger change for most people is MTD for Income Tax Self Assessment (MTD ITSA). This affects self-employed individuals and landlords.
Who Must Comply and When?
| Date | Who Must Comply |
|---|---|
| April 2026 | Self-employed and landlords with gross income over £50,000 |
| April 2027 | Self-employed and landlords with gross income over £30,000 |
| TBC | Those earning under £30,000 (date not yet confirmed) |
⚠️ Important: "Gross Income" Not Profit
The thresholds are based on gross income (total turnover/rental income before expenses), NOT your profit. So even if your profit is low, if your turnover exceeds £50,000, you'll need to comply from April 2026.
Who Does MTD for Income Tax Affect?
MTD for Income Tax applies to income from:
Self-Employment
Sole traders, freelancers, contractors
Property Income
Landlords with rental properties
Gig Economy
Uber, Deliveroo, taxi drivers
Who is NOT affected (yet)?
- Limited company directors (Corporation Tax has separate digital requirements)
- Partnerships (rules are being developed separately)
- Those with income below the thresholds (can opt in voluntarily)
Quarterly Reporting: How It Works
Under MTD for Income Tax, you'll need to submit quarterly updates to HMRC, plus an End of Period Statement (EOPS) and Final Declaration.
| Period | Deadline | What You Submit |
|---|---|---|
| 6 April – 5 July | 5 August | Q1 income & expenses summary |
| 6 July – 5 October | 5 November | Q2 income & expenses summary |
| 6 October – 5 January | 5 February | Q3 income & expenses summary |
| 6 January – 5 April | 5 May | Q4 income & expenses summary |
| End of Period Statement | 31 January | Finalise business/property figures |
| Final Declaration | 31 January | Confirm all income (replaces SA return) |
The quarterly updates are summaries, not detailed accounts. You report total income and total expenses for the period – the detail stays in your digital records.
What Software Do You Need?
You must use HMRC-recognised MTD-compatible software. Popular options include:
Popular MTD-Compatible Software
| Software | Best For | Price |
|---|---|---|
| QuickBooks | Small businesses, easy to use | From £12/month |
| Xero | Growing businesses, excellent integrations | From £15/month |
| FreeAgent | Freelancers, contractors | From £14.50/month |
| Sage | Traditional businesses, payroll | From £12/month |
| HMRC App | Very simple needs only | Free |
Your accountant can advise on the best software for your situation and help set it up correctly.
What Happens If You Don't Comply?
HMRC uses a points-based penalty system for MTD:
MTD Penalty System
- 1 point for each late quarterly submission
- 4 points = £200 penalty (for quarterly submissions)
- Additional £200 for each subsequent late submission while at 4 points
- Points expire after 24 months of on-time submissions
- Late payment penalties also apply (up to 4% of tax owed)
The good news is HMRC won't charge penalties immediately – you get a chance to build compliance habits. But once you hit the threshold, penalties kick in for every late submission.
How to Prepare for MTD
If MTD applies to you from April 2026, here's what to do now:
✅ Your MTD Preparation Checklist
- Check if you're affected – Is your gross income over £50,000?
- Choose MTD-compatible software – Don't wait until April!
- Start keeping digital records – Get used to entering transactions regularly
- Sign up for MTD – You'll need to register with HMRC before April 2026
- Talk to your accountant – They can manage MTD compliance for you
- Set calendar reminders – Quarterly deadlines are easy to miss
The Benefits of MTD (Yes, There Are Some!)
While MTD might seem like extra work, there are genuine benefits:
- No year-end scramble – Records are kept up-to-date throughout the year
- Better financial visibility – Know your profit position quarterly
- Fewer errors – Digital records reduce mistakes
- Easier tax planning – Quarterly figures help you plan for tax bills
- No surprises – You'll have a clearer picture of your tax liability
Frequently Asked Questions
Can I use spreadsheets for MTD?
Yes, but only with "bridging software" that connects your spreadsheet to HMRC's systems. The spreadsheet alone isn't enough – you need a digital link to submit the data. Most people find it easier to use dedicated accounting software.
What if I have multiple income sources?
If you're both self-employed AND a landlord, you need to report both under MTD if your combined gross income exceeds the threshold. You can use the same software for both or separate software for each.
Will MTD replace self-assessment?
Eventually, yes. The "Final Declaration" under MTD replaces the annual self-assessment tax return. You'll still declare all your income, but through your MTD software rather than the traditional tax return form.
Can my accountant handle MTD for me?
Absolutely! Most accountants, including us at LimeTree, can manage your MTD compliance entirely. We can maintain your digital records, submit quarterly updates, and handle all HMRC communications on your behalf.
I'm below the threshold – should I opt in anyway?
It's optional, but some people choose to voluntarily join MTD to get used to the system before it becomes mandatory. It can also help you keep better records throughout the year.
Need Help with Making Tax Digital?
Don't stress about MTD – let us handle it for you. We'll set up your software, maintain your records, and submit your quarterly updates.
Sardar Muhammad, AAT
Sardar is the founder of LimeTree Accounting Solutions, an AAT-accredited practice based in Glasgow. He helps individuals and small businesses navigate tax compliance, including Making Tax Digital.