What Does Making Tax Digital Mean? MTD Rules, Software, and Penalties

Making Tax Digital is HMRC’s programme requiring businesses and individuals to keep their tax records digitally and file returns through compatible software instead of on paper or through manual online forms. Every VAT-registered business in the UK has been inside these rules since April 2022, and self-employed people and landlords start joining from April 2026 depending on how much they earn. In practice it changes two things at once: how you keep your books, and how often you talk to HMRC.

Who Has to Comply

All VAT-registered businesses already have to use MTD-compatible software to keep VAT records and submit VAT returns, whatever their turnover. That applies even to businesses that registered voluntarily below the VAT threshold.¹

MTD for Income Tax is being rolled out to self-employed people and landlords in three phases, set by qualifying income:

From 6 April 2026: qualifying income over £50,000
From 6 April 2027: qualifying income over £30,000
From 6 April 2028: qualifying income over £20,000

HMRC identifies the first wave by looking at 2024–25 Self Assessment returns and writes to those affected telling them they must join by April 2026.² The £20,000 threshold for April 2028 was confirmed at the Spring Statement 2025.³

How Qualifying Income Is Measured

Qualifying income is your total gross income from self-employment and property before expenses. If you have several businesses or rental properties, you add them together. Employment income, dividends, savings interest, and other Self Assessment income do not count toward the threshold.⁴

The word “gross” catches people out. A landlord with £55,000 in rental income and £30,000 in allowable expenses still has qualifying income of £55,000, which puts them inside the April 2026 mandate. For jointly owned properties, each owner only counts their own share.

Partnerships and Companies

General partnerships were originally expected to join MTD for Income Tax in 2025, but HMRC has postponed that. The government has said it remains committed to bringing partnerships in and will review the approach after April 2027.⁵

Corporation tax is not being brought into MTD at all. HMRC confirmed in its Transformation Roadmap that it does not intend to introduce Making Tax Digital for Corporation Tax and will instead develop a separate approach for the businesses that pay it.

Quarterly Updates and the Final Declaration

Under MTD for Income Tax you no longer file one annual return. You send HMRC four quarterly summaries of business income and expenses, then a final declaration after the tax year ends. The standard quarterly periods and their deadlines are:

6 April to 5 July: due by 7 August
6 April to 5 October: due by 7 November
6 April to 5 January: due by 7 February
6 April to 5 April: due by 7 May

You can instead pick calendar quarter periods that end on the last day of each month, with the same one-month-and-two-days deadline pattern.⁶

After the four quarterly updates, you file a final declaration by 31 January following the end of the tax year. For 2026–27, that means 31 January 2028. At the final declaration stage you bring in any other income, such as employment, dividends, and savings, and claim your reliefs. It replaces the traditional Self Assessment return.⁷

If you have to join from 6 April 2026, HMRC will not apply penalty points for late quarterly updates during your first 12 months. The grace period does not cover the final declaration or late tax payments.⁶

Keeping Digital Records

Your financial records have to be created and stored digitally in compatible software. For VAT, each transaction has to carry details such as date of supply, value excluding VAT, and the VAT rate.⁸ For Income Tax the rules cover income and expense records for each self-employment and property source.

The rule most people trip over is the digital link. If you use more than one piece of software, say a spreadsheet for invoices and an accounting package for expenses, the figures have to move between them electronically. Copying and pasting, retyping, or moving data by hand is not allowed. The transfer has to happen through an API connection, a software-triggered CSV import, or a direct data feed. Once a record has been sent in a quarterly update, you must not manually move or copy it inside your software either. The point is an unbroken audit trail from first entry to filed figure.⁹

Compatible Software and Costs

You need software that can keep digital records and submit data to HMRC through its Application Programming Interface. There are two workable routes.

The first is full accounting software, an all-in-one package that handles record-keeping, categorisation, and filing. Products such as Xero, QuickBooks, FreeAgent, and Sage sit in this group. The second is bridging software with a spreadsheet: you keep your records in a spreadsheet and the bridging tool connects it to HMRC. The link between the spreadsheet and the bridge still has to be automated.¹

HMRC keeps lists of recognised compatible software on GOV.UK for both VAT and Income Tax. Being on the list is not an endorsement, only confirmation that the software can talk to HMRC. Prices vary. Several providers offer free MTD-compatible tools for sole traders and landlords with straightforward affairs, and paid subscriptions for small businesses typically run from around £5 to £20 a month depending on features. Free versions often cap the number of transactions or clients, so check the limits before you commit.

Penalties

Late submissions run on a points system. Each missed quarterly update or return deadline earns one point. When you hit four points, HMRC charges £200, and every further missed deadline after that adds another £200. Points reset to zero if you meet all deadlines across a set compliance period.¹⁰

Late payment penalties are separate and scale with how long the tax stays unpaid. The sooner you pay, the lower the penalty. This replaced the old flat-rate late payment surcharges.¹⁰

Record-keeping failures carry their own charges. If you do not keep the required digital records or you break the digital link rules, HMRC can impose up to £3,000 per quarterly period. These are not automatic and usually come out of compliance checks. For VAT, HMRC can also charge up to £400 for filing a VAT return outside MTD-compatible software without prior agreement.⁸

Exemptions

HMRC will consider an exemption if you are digitally excluded. The accepted grounds are age, health, or disability that prevents you from using a device to keep or submit digital records; practising membership of a religious group whose beliefs are incompatible with digital communications, where you do not use digital devices in business or personal life; or no internet access at your home or business location with no suitable alternative.

HMRC will not grant an exemption simply because you have always filed on paper, find accounting software unfamiliar, have few records, or would face extra time and cost.¹¹

If HMRC has already confirmed you are exempt from MTD for VAT on digital exclusion grounds, you can ask Self Assessment enquiries to carry that exemption across to MTD for Income Tax without a fresh application, as long as your circumstances have not changed. Employed ministers of religion who completed the SA102M supplementary page on their 2024–25 return get a temporary automatic exemption until 2029.¹¹

How to Sign Up

HMRC will not enrol you automatically. You register through GOV.UK using the same Government Gateway user ID and password you use for Self Assessment. To be eligible, you must already be registered for Self Assessment and have filed a return in the last two years.¹²

During sign-up you give details of your active sole trader businesses and property income sources, including names, addresses, start dates, and the nature of your trade. HMRC may ask you to verify your identity by matching a photo to a passport or driving licence through a mobile app, or by answering questions based on information it already holds.¹²

Once registered, you link your compatible software to your HMRC account. The software then submits quarterly updates and the final declaration directly, without a separate login to an HMRC filing page. HMRC recommends signing up early rather than waiting for the deadline, so the software is connected and your records are flowing well before the first update falls due.¹³

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GOV.UK. Find Software Thats Compatible With Making Tax Digital for VAT
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GOV.UK. Check if Youre Eligible for Making Tax Digital for Income Tax
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GOV.UK. Modernising the Tax System Through Making Tax Digital
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GOV.UK. Work Out Your Qualifying Income for Making Tax Digital for Income Tax
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GOV.UK. Government Announces Phased Mandation of Making Tax Digital for ITSA
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GOV.UK. Use Making Tax Digital for Income Tax – Send Quarterly Updates
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GOV.UK Campaign. MTD for Income Tax Dates You Need to Know
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Legislation.gov.uk. The Value Added Tax Regulations 1995
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GOV.UK. Use Making Tax Digital for Income Tax – Create Digital Records
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GOV.UK. Penalties for Making Tax Digital for Income Tax
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GOV.UK. Find Out if You Can Get an Exemption From Making Tax Digital for Income Tax
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GOV.UK. Sign Up for Making Tax Digital for Income Tax
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GOV.UK Campaign. Get Ready for Making Tax Digital for Income Tax – When to Start