Making Tax Digital 2026: Everything You Need to Know
Making Tax Digital (MTD) becomes mandatory from April 2026. If you’re self-employed or a landlord, this change will affect how you report your income to HMRC without doubt.
MTD for Income Tax will apply to those with qualifying income above £50,000 at first. The threshold expands to include those earning above £30,000 from April 2027 and above £20,000 from April 2028.
You’ll need to submit four quarterly updates throughout the tax year. No more filing a single annual Self Assessment. This article covers everything you need to know about MTD for Income Tax: the registration process, quarterly reporting requirements, penalties and exemptions, and how to prepare your business to comply.
What Is Making Tax Digital for Income Tax and Who Does It Affect?
MTD for Income Tax represents a new reporting method for sole traders and landlords to communicate their income and expenses to HMRC. This change marks the biggest admin change to the UK tax system since Self Assessment launched more than 30 years ago. You’ll split the admin throughout the year using recognised software instead of completing your tax return in one go.
The MTD 2026 Timeline and Roll-Out Dates
The UK government has committed to delivering MTD for Income Tax through a phased approach that starts 6 April 2026. Around 780,000 people with business or property income over £50,000 will join the service from April 2026, and a further 970,000 will join from April 2027. The government set out plans in March 2025 to lower the income threshold further. Those with qualifying income over £20,000 in the 2026 to 2027 tax year must use MTD from 6 April 2028.
Income Thresholds: Self-Employed and Landlords
You must use MTD for Income Tax if your total annual income from self-employment and property exceeds specific thresholds. Qualifying income means all business and property income from UK sources, calculated on a gross basis before expenses. If you earn £35,000 from self-employment and £20,000 from rental income, your combined qualifying income of £55,000 pushes you over the £50,000 threshold. You don’t join MTD partway through a tax year. HMRC reviews your Self Assessment tax return each year and writes to confirm when you need to start using the service.
Non-UK Residents with UK Income
Non-UK residents with UK property or sole trader income that exceeds the MTD threshold must comply with the same reporting requirements. Only UK property rental income and UK sole trader business turnover count towards the threshold. Income covered by the UK Property Allowance (£1,000) or Rent-a-Room relief (£7,500) does not count toward the turnover threshold. You remain within MTD scope if your UK income exceeds the threshold, even if you live abroad and are non-resident for UK tax purposes.
Key Differences from the Current Self Assessment System
The tax gap for Self Assessment businesses stands at around 18.5%, or £5 billion. MTD for Income Tax wants to close this gap through mandatory digital record-keeping and software-based reporting. You won’t fill out your tax return all at once anymore. You’ll send quarterly updates to HMRC from recognised software and submit your final tax return by 31 January each year. Limited companies don’t need to use this system, though partnerships will need to comply in the future.
How Making Tax Digital for Income Tax Works
Once enrolled in MTD for Income Tax, you’ll follow a structured reporting cycle that is substantially different from the traditional annual return approach. The system operates through regular digital submissions combined with year-end finalisation.
Quarterly Updates: What You Need to Submit
Every three months, your compatible software totals your digital records for each business and creates cumulative summaries for each income and expense category. These quarterly updates run from the start of the tax year. Your third update has everything from 6 April through to 5 January, plus any corrections to earlier periods. You don’t need to make accounting or tax adjustments before sending these updates.
Standard update periods line up with the tax year: 6 April to 5 July (due 7 August), 6 April to 5 October (due 7 November), 6 April to 5 January (due 7 February), and 6 April to 5 April (due 7 May). Calendar quarter elections line up with month-ends as an alternative. They run 1 April to 30 June, 1 April to 30 September, 1 April to 31 December, and 1 April to 31 March, with similar deadlines.
Understanding the Final Declaration
The final declaration replaces your traditional Self Assessment tax return. You’ll complete this year-end submission by 31 January following the tax year after submitting your four quarterly updates. Here you’ll make accounting adjustments, include non-business income sources and claim tax reliefs. Your quarterly data pre-populates the return. You need to verify accuracy and add missing elements.
Tax Payment Dates Under MTD
Payment dates remain unchanged from Self Assessment. You’ll pay your balancing payment and first payment on account by 31 January. The second payment on account is due 31 July.
Digital Record-Keeping Requirements
You must record the date, amount and category of each transaction as it occurs. Typing annual totals into software at year-end to create records doesn’t comply with the regulations. Keep your digital records for at least five years after the 31 January submission deadline.
Setting Up for Making Tax Digital: Requirements and Registration
Determine which type suits your needs before selecting software. You can choose products that create digital records or bridging software that connects to existing spreadsheets. Single software handles everything, while multiple products working together may better suit complex situations. At WCL, we can help recommend which software is best for along with providing training to get you started.
Digital Records: What You Must Keep
Record the date, amount and category for each transaction. You must link them through methods like linked spreadsheet cells, XML/CSV importing, automated transfers or API connections if using multiple software products.
How to Register for the MTD Service
You must be registered for Self Assessment and have submitted a tax return within the last two years. Provide your business start date, name, address and trade nature when you sign up. You may need identity verification through passport matching or answering security questions.
Penalties, Exemptions and What Happens If You Don’t Comply
The Points-Based Penalty System Explained
When you sign up for MTD, you agree to a points-based penalty regime that is different from Self Assessment. You receive one penalty point each time you submit a quarterly update or tax return late. HMRC issues a £200 financial penalty once you reach four penalty points within a two-year period. Each late submission after reaching the threshold triggers another £200 penalty.
HMRC operates a soft landing period for the first 12 months. No penalty points apply for late quarterly updates during 2026/27, but penalty points for late tax returns still apply. You receive a maximum of one penalty point per quarter if you submit multiple quarterly updates late for the same quarter.
Late Submission and Late Payment Rules
Points expire after 24 months if you stay below the four-point threshold. You must submit all quarterly updates and tax returns on time for 12 months once you reach four points. You also need to clear any outstanding submissions from the previous 24 months before HMRC removes your points.
Late payment penalties apply based on how many days payment is overdue. Days 1-15 incur no penalty. Days 16-30 attract a 3% penalty on the tax due at day 15, whilst day 31 onwards triggers an additional 3% penalty plus a 10% annual rate on outstanding balances. You have 30 days before penalties start during your first year, reducing to 15 days after that.
Who Is Exempt from Making Tax Digital
Several exemptions exist. You don’t need to use MTD for Income Tax if you’re filing as a trustee or personal representative of someone who has died. Individuals without a National Insurance number cannot sign up. Lloyd’s members reporting underwriting business and those lacking physical or mental capacity with power of attorney arrangements are also exempt. Non-resident companies fall into this category too.
Temporary exemptions until April 2027 apply if you claimed averaging relief or qualifying care relief, or included specific supplementary pages in your 2024/25 tax return.
The Digitally Excluded Exemption
Being digitally excluded means it’s not reasonable for you to use compatible software to keep digital records or submit returns. You must apply for this exemption by contacting HMRC. Valid grounds include age, health conditions, or disability preventing computer use and religious beliefs incompatible with electronic communications. You may also qualify if you cannot access internet at home, business, or alternative locations.
HMRC will not accept applications based on previous paper filing, unfamiliarity with accountancy software, few digital records, or concerns about time and cost. HMRC wants to respond within 28 days, though this may extend if further information is required. You can appeal decisions within 30 days of receiving your decision letter.
Income Exemption Thresholds
You’re exempt and don’t need to use MTD for Income Tax if your qualifying income is £20,000 or less. You only become exempt again once mandated into the system if your qualifying income falls below the threshold for three consecutive tax years. This exemption applies based on filed tax returns or quarterly updates.
Conclusion
MTD represents a huge change in the administration of UK taxation, bringing a much greater need to be on top of your finances. No longer will people be able to leave their accounting until the end of the year.
With the April 2026 deadline now upon us, you need to act promptly to ensure smooth compliance and avoid penalties under the new points-based system.
If you have any questions or want help getting started, please get in touch. We’d love to hear from you.
