What Is MTD for Income Tax and Who Does It Affect?

Making Tax Digital for Income Tax is HMRC’s new reporting system for UK sole traders and landlords. Instead of filing a single Self Assessment return each year, you’ll keep digital records in compatible software, send HMRC a summary of your income and expenses every three months, and then confirm your final figures at year end. It becomes mandatory in stages from 6 April 2026, starting with people whose qualifying income is above £50,000, and eventually reaching those above £20,000.

Who Has to Use It, and From When

Whether you’re pulled into the system depends on your qualifying income in a specific earlier tax year. The mandate rolls out in three waves:

Each threshold is measured against one specific tax year, not just any year. If your 2024-25 qualifying income was £48,000, the first wave doesn’t catch you even if your 2025-26 figure jumps to £55,000. You’d enter through the £30,000 gate when HMRC reviews your 2025-26 return instead.

If your income sits below all three thresholds, you can sign up voluntarily.² Some people do this to test their software before mandation reaches them; others just find quarterly reporting keeps them on top of their finances.

General partnerships aren’t in scope yet. HMRC has said partnerships will be brought in eventually but hasn’t set a date.¹ If you’re a partner in a trading partnership, that income stays on Self Assessment for now, though separate sole trader or rental income of your own would still count toward the MTD thresholds.

What Counts as Qualifying Income

Qualifying income is your combined gross turnover from self-employment plus your gross rental income from property, measured before you deduct any expenses or reliefs.¹ If you run more than one small business, or have both a sole trade and a rental property, HMRC adds all those streams together to check the threshold. Foreign property income that appears on your Self Assessment return counts too.

Because the test is on gross figures, a business with high turnover but slim margins can be mandated even if the actual taxable profit is modest.

How Quarterly Reporting Works

The core change is moving from one annual return to four quarterly updates plus a final declaration. Each quarter, your software sends HMRC a summary of your income and expenses for that period. These aren’t full tax returns; you’re confirming totals your software has already calculated from your digital records.

The standard quarterly periods and deadlines are:³

Quarter 1 (1 April to 30 June): update due by 31 July
Quarter 2 (1 July to 30 September): update due by 31 October
Quarter 3 (1 October to 31 December): update due by 31 January
Quarter 4 (1 January to 31 March): update due by 30 April

HMRC treats periods that run 1 April to 31 March as equivalent to the tax year of 6 April to 5 April, so the five-day mismatch at each end of the year doesn’t create extra work.³

After the four quarterly updates, you file a final declaration confirming the full year’s figures. This is where you make adjustments, claim reliefs, and add any income the quarterly summaries didn’t cover. The final declaration replaces the Self Assessment tax return, and it’s due by 31 January following the end of the tax year, the same date Self Assessment returns currently use. Once submitted, HMRC calculates your total tax liability from the accumulated data.

Software and Digital Records

You can’t use MTD without compatible software that connects to HMRC. The software does three jobs: keeps your digital records, sends the quarterly updates, and submits the final declaration. HMRC publishes a software finder listing products that work with MTD for Income Tax.⁴ Providers already listed include Sage, Pandle, and Hnry, with more in development ahead of April 2026.

Digital records replace paper ledgers. Every business transaction, every expense receipt, every rental income payment has to be recorded digitally. Spreadsheets on their own aren’t enough unless they feed into compatible software that transmits to HMRC. The point of the design is that your records stay current instead of being reconstructed from a shoebox of receipts each January.

Penalties

HMRC is bringing in a new penalty regime with MTD, replacing the old fixed Self Assessment penalties. There’s a soft landing for the first wave: no penalties for missing quarterly update deadlines during the 2026-27 tax year.⁵ From 2027-28 onward, the full system applies.

Late submissions use a points system. Each missed quarterly update or final declaration earns one point. When you reach four points, you get a £200 penalty, and every further missed deadline triggers another £200.⁵ You can only receive one point per deadline, even if you run multiple businesses.

Late payment penalties are separate and apply from year one. In your first year under the new regime you have 30 days from the payment due date to pay in full or agree a payment plan before penalties apply; after that first year the grace period is 15 days. The structure is:⁵

Up to 15 days late: no penalty.
16 to 30 days late: 3% of the tax owed at day 15 (waived in your first year).
31 or more days late: 3% of tax owed at day 15, plus 3% of tax owed at day 30, plus a daily charge at an annual rate of 10% on the outstanding balance from day 31 until it’s paid, up to two years.

On top of these, HMRC charges late payment interest from the first day the payment is overdue until it’s cleared, at the Bank of England base rate plus 2.5%.⁵ Small bills can climb quickly once the daily interest and percentage charges stack, so contacting HMRC early about a payment plan is usually the cheaper move.

Exemptions

Not everyone can reasonably keep digital records, and HMRC allows exemptions. You may qualify if it isn’t reasonably practicable for you to use electronic communications or keep electronic records because of age, disability, or where you live, or if you’re a member of a religious society whose beliefs are incompatible with using electronic communications.⁶

Some people are exempt automatically. If your 2024-25 Self Assessment return indicated that you’re not physically or mentally capable of providing financial information to HMRC and you have a power of attorney, deputy, or guardian in place, HMRC treats you as exempt without an application.⁷

To apply for a digital exclusion exemption, call HMRC’s Self Assessment helpline or write to them with the subject line “Making Tax Digital for Income Tax — digitally excluded application.” HMRC aims to respond within 28 calendar days.⁸ If granted, you carry on using Self Assessment through paper or telephone-based methods. With the first mandation date set for April 2026, applying early is worth doing rather than leaving your position uncertain.

1
GOV.UK. Find Out if and When You Need to Use Making Tax Digital for Income Tax
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GOV.UK. Making Tax Digital for Income Tax Self Assessment for Sole Traders and Landlords
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HM Revenue and Customs. Making Updates During the Tax Year – Making Tax Digital for Income Tax Service Guide
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GOV.UK. Choose the Right Software for Making Tax Digital for Income Tax
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GOV.UK. Penalties for Making Tax Digital for Income Tax
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ICAEW. Digitally Excluded Can Now Apply for MTD Exemption
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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. Apply for an Exemption from Making Tax Digital for Income Tax