Making Tax Digital for Income Tax represents a major change to the way sole traders and landlords maintain their financial records and report income to HM Revenue and Customs.
The first mandatory phase began on 6 April 2026. Individuals within the rules must now maintain digital records, send quarterly updates and submit their annual tax return using compatible software.
This means that bookkeeping can no longer be treated solely as a once-a-year exercise completed immediately before the Self Assessment deadline. Affected taxpayers need an organised process for recording income and expenses throughout the tax year.
Carter Bookkeeping Services helps sole traders and landlords choose suitable accounting software, establish digital bookkeeping processes and prepare for their quarterly and annual reporting responsibilities.
This guide explains who must use Making Tax Digital for Income Tax, how qualifying income is calculated, what quarterly updates include and how to prepare your records.
What Is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax is HMRC’s digital reporting system for qualifying sole traders and landlords.
It is sometimes referred to as Making Tax Digital for Income Tax Self Assessment or MTD for ITSA. However, HMRC now normally refers to the service as Making Tax Digital for Income Tax.
Individuals within the system must use compatible software to:
- Create and maintain digital records of self-employment and property income and expenses.
- Correct those digital records when errors are identified.
- Send quarterly summaries to HMRC.
- Make any necessary accounting and tax adjustments after the end of the tax year.
- Add other income and information required for Self Assessment.
- Submit their annual tax return using compatible software.
Quarterly updates do not replace the annual tax return. They provide HMRC with cumulative summaries of self-employment and property income and expenses during the year.
When Does Making Tax Digital for Income Tax Apply?
The system is being introduced in stages according to qualifying income.
| Qualifying Income | Income Measured From | Mandatory Start Date |
|---|---|---|
| More than £50,000 | 2024/25 Self Assessment tax return | 6 April 2026 |
| More than £30,000 | 2025/26 Self Assessment tax return | 6 April 2027 |
| More than £20,000 | 2026/27 Self Assessment tax return | 6 April 2028 |
HMRC will review the relevant Self Assessment return and may write to individuals who need to join the system.
However, receiving no letter does not automatically mean that Making Tax Digital does not apply. Sole traders and landlords remain responsible for checking their own qualifying income and signing up when required.
What Is Qualifying Income?
Qualifying income is the total gross income from self-employment and property before expenses are deducted.
It is based on turnover rather than taxable profit.
For example, suppose an individual receives:
- £32,000 of gross income from a sole trader business.
- £21,000 of gross rental income.
Their total qualifying income would be £53,000, even if business and property expenses reduced their eventual taxable profit substantially.
Qualifying income can include income from:
- One or more sole trader businesses.
- UK property.
- Foreign property.
- A combination of self-employment and property sources.
Where property is jointly owned, the individual’s share of the gross property income normally counts towards their qualifying income.
Income That Does Not Count Towards the Threshold
Other personal income does not normally form part of qualifying income for the MTD threshold.
This can include:
- Employment income taxed through PAYE.
- Company dividends.
- Savings interest.
- Pension income.
- Capital gains.
- Income received through a limited company.
- An individual partner’s share of partnership income.
These income sources may still need to be reported in the annual tax return, even though they do not count towards the MTD qualifying-income threshold.
Who Does Not Currently Need to Use MTD for Income Tax?
Making Tax Digital for Income Tax does not currently apply to every person who submits a Self Assessment return.
Those generally outside the current scope include:
- Limited companies.
- Partnerships reporting partnership income.
- Employees whose income is dealt with entirely through PAYE.
- Individuals with only dividend, savings or pension income.
- Individuals whose qualifying income is £20,000 or less.
- People covered by an automatic or approved exemption.
A company director may still need to use the system personally if they also receive sufficient sole trader or property income outside the company.
Similarly, a partner may be outside the system for partnership income but within it for a separate sole trader business or personally owned rental property.
Exemptions From Making Tax Digital
Some exemptions are applied automatically, while others must be requested from HMRC.
Automatic Exemptions
Automatic exemptions can include:
- Partnerships, until HMRC introduces a future timetable for them.
- Individuals whose qualifying income is £20,000 or less.
- Individuals without a National Insurance number before the start of the relevant tax year.
- Certain trusts, personal representatives and other specified roles.
- Some individuals making particular claims or using specified Self Assessment supplementary pages.
Some automatic exemptions apply only temporarily. Individuals should therefore check whether an exemption covers one tax year or continues until their circumstances change.
Digital-Exclusion Exemptions
An individual may be able to apply for exemption where it is not reasonable or practical for them to use compatible software.
Relevant circumstances can include:
- Age combined with an inability to use digital systems.
- A health condition or disability.
- Religious beliefs incompatible with using electronic communications.
- Other circumstances that make digital compliance unreasonable or impracticable.
Being unfamiliar with accounting software, having only a small number of transactions or facing additional cost is not normally sufficient on its own.
HMRC considers digital-exclusion applications according to the individual’s circumstances.
What Digital Records Must Be Kept?
A digital record is a record of business or property income or expenditure created and stored within software that works with Making Tax Digital for Income Tax.
The records should normally include:
- The amount of each transaction.
- The transaction date.
- The relevant income or expense category.
- The income source or business to which it relates.
Examples of information that may need to be recorded digitally include:
- Sales invoices.
- Cash sales.
- Marketplace and payment-platform income.
- Rental income.
- Supplier invoices.
- Business expenses.
- Property repairs and running costs.
- Bank charges.
- Vehicle and travel costs.
- Professional fees.
Supporting evidence such as invoices, bank statements and receipts must still be retained. Keeping a transaction in accounting software does not remove the normal Self Assessment record-retention requirements.
Can You Continue Using Spreadsheets?
Yes. A spreadsheet can form part of a compliant MTD system.
However, a spreadsheet by itself will not normally be able to send quarterly updates and the annual tax return to HMRC.
You will need compatible bridging software that connects digitally to the spreadsheet.
Where several software products are used, the information must move between them through an appropriate digital link. Acceptable links can include:
- Linked spreadsheet cells.
- CSV or XML imports and exports.
- Application programming interfaces.
- Automated software integrations.
- Uploading and importing a digital file.
Manually retyping figures or copying and pasting records between systems will not normally satisfy the digital-link requirements.
How Quarterly Updates Work
Every three months, compatible software adds together the digital records for each self-employment and property business.
The resulting totals are submitted to HMRC as a quarterly update.
Quarterly updates:
- Contain totals for the income and expense categories used.
- Are sent separately for each self-employment and property business.
- Are cumulative from the beginning of the tax year.
- Do not include copies of individual invoices or receipts.
- Do not require full accounting or tax adjustments before submission.
- Are summaries rather than separate tax returns.
You must normally send an update even where a business had no income or expenses during the latest period.
Because the updates are cumulative, correcting a digital record can be reflected in the next update without reopening every previous submission.
Standard Quarterly Update Deadlines
The standard periods align with the tax year running from 6 April to 5 April.
| Cumulative Update Period | Submission Deadline |
|---|---|
| 6 April to 5 July | 7 August |
| 6 April to 5 October | 7 November |
| 6 April to 5 January | 7 February |
| 6 April to 5 April | 7 May following the end of the tax year |
For those who entered MTD on 6 April 2026, the first quarterly update deadline is 7 August 2026.
Calendar Quarterly Update Periods
Individuals whose accounting period runs from 1 April to 31 March can choose calendar update periods.
| Cumulative Calendar Period | Submission Deadline |
|---|---|
| 1 April to 30 June | 7 August |
| 1 April to 30 September | 7 November |
| 1 April to 31 December | 7 February |
| 1 April to 31 March | 7 May following the end of the tax year |
The deadlines remain the same whichever update periods are selected.
Calendar periods must be selected for the relevant income source before the first quarterly update is sent. They cannot normally be changed for that tax year after an update has been submitted.
Do Quarterly Updates Calculate Your Final Tax Bill?
After an update is sent, the software or HMRC account may display an estimated tax calculation.
This estimate should be treated cautiously because it may not include:
- Year-end accounting adjustments.
- Capital allowances.
- Loss claims.
- Private-use adjustments.
- Other income not yet recorded.
- Reliefs and allowances.
- Changes made later in the tax year.
The estimate can still assist with cash flow planning, but it should not automatically be treated as the final amount payable.
What Happens After the Fourth Quarterly Update?
After the final quarterly update, the taxpayer or their agent must review the records and complete the annual tax return process.
This can involve:
- Correcting missing or inaccurate transactions.
- Resending the fourth update where digital records have changed.
- Making accounting adjustments.
- Applying tax adjustments and restrictions.
- Claiming relevant allowances and reliefs.
- Adding employment income.
- Adding dividends and savings income.
- Reporting pension and foreign income.
- Reporting capital gains where required.
- Checking student or postgraduate loan information.
- Reviewing the final tax calculation.
- Submitting the tax return through compatible software.
Is an End of Period Statement Required?
No. The planned requirement to submit a separate End of Period Statement has been removed.
The year-end process is completed through the annual tax return submitted using MTD-compatible software.
Older guidance referring to an EOPS and a separate Final Declaration should therefore be treated with caution.
Does MTD Change When Income Tax Is Paid?
Making Tax Digital changes record-keeping and reporting frequency. It does not currently create four separate quarterly Income Tax payments.
The normal Self Assessment payment timetable continues to apply.
- The annual tax return and balancing payment are normally due by 31 January after the end of the tax year.
- The first payment on account is normally due on 31 January where applicable.
- The second payment on account is normally due on 31 July.
For the 2026/27 tax year, the MTD tax return and balancing payment will normally be due by 31 January 2028.
Penalties for Missing MTD Deadlines
HMRC has introduced a points-based late-submission penalty system for Making Tax Digital for Income Tax.
However, there are no penalty points for missing quarterly update deadlines during the first mandatory tax year, 2026/27.
Affected individuals must still:
- Maintain the required digital records.
- Send all four quarterly updates.
- Complete the updates before submitting the annual tax return.
Penalties can still apply if the annual tax return is submitted late or tax is paid late.
For tax years after 2026/27, a missed quarterly update or tax return deadline can generate a penalty point. The normal MTD threshold is four points, after which a £200 penalty can apply. Further missed deadlines can result in additional £200 penalties while the taxpayer remains at the threshold.
Choosing MTD-Compatible Software
HMRC does not provide a general bookkeeping system for Making Tax Digital for Income Tax.
The taxpayer or their agent must select commercial software recognised as compatible with the service.
The software must be able to:
- Create, store and correct digital records.
- Support the relevant self-employment and property income sources.
- Send quarterly updates.
- Add other income required for Self Assessment.
- Make year-end adjustments.
- Submit the annual tax return.
Not every product supports every income source or every part of the annual tax return. A platform used successfully for MTD for VAT may not automatically meet all MTD for Income Tax requirements.
Software options can include:
- All-in-one bookkeeping and tax-return software.
- Separate record-keeping and tax-submission products.
- Spreadsheets connected through bridging software.
- Free software for taxpayers with relatively simple affairs.
Carter Bookkeeping Services can help compare and configure suitable accounting software according to your business structure and reporting requirements.
What to Check Before Choosing Software
- Does it support self-employment, UK property and foreign property where required?
- Can it submit both quarterly updates and the annual tax return?
- Can it report other income sources included in your Self Assessment return?
- Does it support more than one sole trader business?
- Can it manage jointly owned property?
- Does it connect to your business bank account?
- Can it import existing spreadsheet records?
- Does it allow access for your bookkeeper and tax adviser?
- Does it provide receipt capture and invoice storage?
- Can you export your data if you later change providers?
- What will the full cost be after any introductory discount?
How to Prepare for Making Tax Digital
1. Check Your Qualifying Income
Review the gross self-employment and property income shown on the relevant Self Assessment return.
Add together all qualifying sources rather than reviewing each one separately against the threshold.
2. Confirm Whether an Exemption Applies
Check both automatic and application-based exemptions. Do not assume that difficulty learning new software is sufficient by itself.
3. Choose Suitable Software
Select software that supports all your relevant income sources and can submit the annual tax return as well as quarterly updates.
4. Sign Up for the Service
MTD enrolment is not completed simply by purchasing software. The individual or their authorised agent must complete the sign-up process with HMRC.
5. Authorise the Software
The compatible software must be connected and authorised to communicate with HMRC.
6. Confirm the Accounting and Update Periods
Check whether standard tax-year periods or calendar periods are more suitable before submitting the first quarterly update.
7. Create a Digital Record-Keeping Process
Decide how invoices, receipts, bank transactions and property records will be captured throughout the year.
This may include:
- Connecting a dedicated business bank account.
- Emailing supplier invoices to the accounting platform.
- Using mobile receipt-capture software.
- Creating sales invoices within the software.
- Importing marketplace and payment-provider transactions.
- Separating property and self-employment records.
8. Reconcile the Records Regularly
Bank feeds and integrations can create duplicate, missing or incorrectly categorised entries.
Accounts should be reconciled regularly rather than immediately before the quarterly deadline.
9. Keep Tax Reserves
Quarterly estimates can help with planning, but the business should also maintain its own tax forecast and reserve sufficient cash for the annual liability and payments on account.
Common MTD Mistakes
- Using net profit instead of gross income: The MTD threshold is based on qualifying income before expenses.
- Checking each business separately: Self-employment and property income normally need to be combined.
- Assuming an HMRC letter is required: Individuals remain responsible for checking their own position.
- Believing quarterly updates replace the tax return: The annual return is still required.
- Using outdated EOPS guidance: The separate End of Period Statement requirement has been removed.
- Choosing VAT-only software: The product must support MTD for Income Tax and the annual return.
- Mixing separate businesses together: Quarterly updates are required for each self-employment and property business.
- Leaving bookkeeping until the deadline: Three months of unreconciled records can be difficult to correct quickly.
- Treating the quarterly estimate as final: Tax adjustments and other income may significantly change the amount.
- Manually transferring records: Required data should move between connected systems through digital links.
- Assuming outsourcing removes responsibility: The taxpayer remains legally responsible for the information submitted.
Potential Benefits of Digital Bookkeeping
MTD creates additional reporting responsibilities, but a properly maintained digital system can also offer practical business benefits.
- Financial records are updated more regularly.
- Missing invoices and expenses can be identified earlier.
- Bank and payment accounts can be reconciled throughout the year.
- Income and expenses can be reviewed by business or property.
- Tax liabilities can be estimated more frequently.
- The annual tax-return process may involve less historic data entry.
- Business owners and bookkeepers can work from the same records.
These benefits depend on maintaining accurate records. Software cannot identify every missing transaction or determine automatically whether each expense is allowable.
How Carter Bookkeeping Services Can Help
Carter Bookkeeping Services helps sole traders and landlords establish practical systems for Making Tax Digital for Income Tax.
Our support can include:
- Reviewing whether the MTD thresholds apply.
- Reviewing your current bookkeeping process.
- Comparing compatible accounting software.
- Setting up digital bookkeeping records.
- Connecting bank feeds and other integrations.
- Separating multiple businesses and property sources.
- Creating receipt and invoice processes.
- Reconciling bank and payment accounts.
- Preparing quarterly update information.
- Identifying missing or incorrectly categorised transactions.
- Preparing records for the annual tax return.
- Coordinating with your accountant or tax adviser.
- Providing ongoing monthly or quarterly bookkeeping support.
A holistic bookkeeping review can also assess whether your existing software, bank feeds and financial processes are ready for digital reporting.
Frequently Asked Questions
Does MTD for Income Tax Apply to Limited Companies?
No. The current system applies to qualifying individuals receiving self-employment or property income. Limited companies remain subject to separate Corporation Tax and company-reporting rules.
Does It Apply to Partnerships?
Partnerships do not currently need to use Making Tax Digital for Income Tax for partnership reporting. HMRC is expected to set out a future timetable.
An individual partner may still be affected by a separate sole trader business or personally held rental property.
Do I Need MTD If My Profit Is Below £50,000?
Possibly. The threshold is based on gross qualifying income before expenses rather than profit.
Do I Need to Send Four Tax Returns?
No. Quarterly updates are summaries of income and expenses, not separate tax returns. One annual tax return is still submitted after the tax year ends.
Will I Pay Tax Every Quarter?
Not under the current rules. The normal Self Assessment balancing-payment and payment-on-account deadlines continue to apply.
Can I Continue Using Excel?
Yes, provided the spreadsheet is digitally connected to compatible bridging software capable of sending quarterly updates and the annual tax return.
Do I Need to Send Copies of Every Receipt?
No. Quarterly updates contain category totals rather than copies of individual invoices and receipts.
The supporting documents must still be retained in case they are needed for bookkeeping, the annual return or an HMRC compliance check.
What Happens If I Have Two Businesses?
You need to maintain separate digital records and send quarterly updates for each self-employment and property business within MTD.
Can a Bookkeeper Submit the Updates for Me?
Yes. An appropriately authorised agent can maintain records and send quarterly updates on your behalf using compatible software.
You remain responsible for providing complete information and ensuring the annual tax return is accurate.
What Happens If My Income Falls Below the Threshold?
Once you are within MTD, you may be able to opt out after your qualifying income remains below the relevant threshold for three consecutive tax years.
Are There Penalties for Missing the First Quarterly Updates?
HMRC will not apply penalty points for late quarterly updates during 2026/27. You must still complete the updates before submitting the annual tax return.
Late-return and late-payment penalties can still apply.
Prepare Your Records for Making Tax Digital
Making Tax Digital for Income Tax has moved bookkeeping from an annual task towards a continuous digital process.
The most effective preparation is to establish reliable software and record-keeping procedures before quarterly deadlines approach. This gives you time to correct bank feeds, organise receipts and resolve missing transactions without last-minute pressure.
Contact Carter Bookkeeping Services to discuss your qualifying income, current bookkeeping system and MTD software requirements.