Making Tax Digital Explained: What It Means for Your Business

Updated for the 2026/27 tax year.

Making Tax Digital, usually shortened to MTD, is changing how businesses, sole traders and landlords keep financial records and report information to HM Revenue and Customs.

For VAT-registered businesses, digital record-keeping and software-based VAT returns are already established requirements. From 6 April 2026, Making Tax Digital for Income Tax also became compulsory for the first group of qualifying sole traders and landlords.

MTD does not simply mean submitting an online form instead of a paper one. It requires specified financial records to be maintained digitally and submitted to HMRC through compatible software.

This guide explains who must use Making Tax Digital, what information needs to be sent, which software options are available and what sole traders, landlords and VAT-registered businesses should do to prepare.

What Is Making Tax Digital?

Making Tax Digital is HMRC’s programme for moving tax record-keeping and reporting into compatible digital systems.

The main objectives are to:

• Encourage businesses to maintain more current financial records.
• Reduce mistakes caused by incomplete or manually transferred information.
• Allow financial information to be submitted directly from compatible software.
• Give taxpayers a more current view of their estimated tax position.
• Make it easier for HMRC to identify missing or inconsistent information.

MTD currently operates through two main systems:

• Making Tax Digital for VAT.
• Making Tax Digital for Income Tax.

The rules, thresholds and submissions are different for each system.

Making Tax Digital for VAT

All VAT-registered businesses should now be using Making Tax Digital for VAT unless HMRC has confirmed that an exemption applies.

Newly VAT-registered businesses are normally enrolled automatically.

Under MTD for VAT, the business must generally:

• Maintain the required VAT records digitally.
• Use compatible software to prepare the VAT return from those records.
• Submit the VAT return to HMRC through the software.
• Maintain appropriate digital links where more than one system is used.
• Retain supporting invoices, calculations and VAT records.

The requirement applies even where the business’s turnover later falls below the VAT registration threshold. It normally continues until the business deregisters from VAT or receives an exemption.

Official guidance is available from HMRC’s Making Tax Digital for VAT collection.

Digital Records for VAT

Digital VAT records normally include information about the business and the transactions contributing to its VAT returns.

Depending on the circumstances, these records can include:

• The business name and VAT registration number.
• The VAT accounting schemes used.
• The date and value of sales.
• The VAT rate applied to each supply.
• Output VAT charged to customers.
• Purchase values and input VAT claimed.
• Reverse charge transactions.
• Adjustments affecting the VAT return.
• Imports, exports and other international transactions.

Digital records do not remove the need to retain original invoices, receipts and supporting calculations. The software entry and the supporting evidence serve different purposes.

Making Tax Digital for Income Tax

Making Tax Digital for Income Tax became compulsory from 6 April 2026 for the first group of sole traders and landlords.

Those within the system must use compatible software to:

• Create, store and correct digital records of self-employment and property income and expenses.
• Send quarterly updates to HMRC.
• Add other income and relevant year-end information.
• Submit the completed tax return through compatible software.

MTD for Income Tax does not remove the Self Assessment system. It changes how qualifying income and expenses are recorded and how the final tax return is submitted.

Who Must Use MTD for Income Tax?

You will generally need to use Making Tax Digital for Income Tax if all the following apply:

• You are an individual registered for Self Assessment.
• You receive income from self-employment, property or both.
• Your qualifying income exceeds the relevant threshold.
• You are not covered by an exemption.

The phased thresholds are:

MTD Start Date	Qualifying Income Test
6 April 2026	More than £50,000 in the 2024/25 tax year.
6 April 2027	More than £30,000 in the 2025/26 tax year.
6 April 2028	More than £20,000 in the 2026/27 tax year.

HMRC should write to people it identifies as being above the threshold. However, receiving no letter does not remove the individual’s responsibility to check whether the rules apply.

You can check the current requirements using HMRC’s guide to when Making Tax Digital for Income Tax applies.

Qualifying Income Means Income Before Expenses

Qualifying income is the total gross income from self-employment and property before business expenses are deducted.

It is closer to turnover than taxable profit.

For example, suppose someone receives:

• £32,000 of gross income from self-employment.
• £21,000 of gross rental income.

Their total qualifying income would be £53,000, even if their taxable profit after expenses was substantially lower.

Income from separate sole trader businesses and property sources is normally combined when testing the threshold.

Income That Does Not Normally Count Towards the Threshold

Qualifying income does not normally include:

• Employment income taxed through PAYE.
• Dividends.
• Bank and savings interest.
• State or private pension income.
• A partner’s share of partnership profit.
• Capital gains.

These sources may still need to be included in the final tax return, even though they do not form part of the MTD qualifying-income test or quarterly updates.

Partnerships and Making Tax Digital

Partnerships do not currently need to use Making Tax Digital for Income Tax.

HMRC has stated that partnerships will be brought into the system in the future, but a timetable has not yet been announced.

A partner’s share of partnership profit does not normally count towards that individual’s MTD qualifying income.

However, a partner may still need to use MTD for separate income received personally from:

• A sole trader business.
• UK or overseas property.
• Another qualifying self-employment source.

Limited Companies and Corporation Tax

Limited companies are not currently required to use a separate Making Tax Digital for Corporation Tax system.

The government has consulted on further modernisation of company tax returns, but no MTD for Corporation Tax implementation date is currently in force.

This should not be confused with the closure of HMRC’s former joint online filing service.

From 1 April 2026, companies that previously used HMRC’s online service generally need commercial software to file their Company Tax Return and supporting accounts with HMRC.

This software requirement is separate from Making Tax Digital for Income Tax.

What Are Quarterly Updates?

Quarterly updates are summaries of income and expenses created from the digital records held in the compatible software.

They are not quarterly tax returns.

Quarterly updates generally contain:

• Total income recorded for the relevant business or property source.
• Totals for the expense categories used in the records.
• Cumulative figures from the beginning of the tax year to the end of the update period.

HMRC does not receive copies of individual invoices or receipts as part of the quarterly update.

You do not normally need to make accounting or tax adjustments before sending an update. Adjustments such as capital allowances, private-use restrictions and certain year-end corrections can be dealt with later.

A quarterly update must still be sent where no income or expenses were recorded during the latest period.

Quarterly Update Deadlines

Businesses using standard tax-year update periods generally follow these deadlines:

Cumulative Update Period	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

Businesses using a 1 April to 31 March accounting period may be able to use calendar update periods instead.

The submission deadlines remain 7 August, 7 November, 7 February and 7 May.

Each update is cumulative. For example, the update due on 7 November contains totals from the beginning of the tax year to the end of the second update period, not only transactions from the previous three months.

Does MTD Mean Paying Tax Every Quarter?

No. Sending quarterly updates does not currently create quarterly Income Tax payment deadlines.

After an update is sent, the software or HMRC account may show an estimated tax position. This estimate can help with cash planning, but it is not normally an immediate demand for payment.

Self Assessment tax generally remains payable according to the existing deadlines, including:

• The balancing payment due on 31 January.
• The first payment on account due on 31 January where applicable.
• The second payment on account due on 31 July where applicable.

The estimate displayed after a quarterly update may be incomplete where other income, reliefs or adjustments have not yet been included.

What Happens at the End of the Tax Year?

Quarterly updates do not replace the year-end tax return.

After the final quarterly update, the records should be checked and any necessary accounting or tax adjustments made.

The final tax return may need to include:

• Corrections to self-employment or property records.
• Capital allowances.
• Private-use adjustments.
• Reliefs and allowances.
• Employment income.
• Dividends and savings income.
• Partnership income.
• Pensions and other taxable income.
• Capital gains where relevant.

The completed return is submitted through software compatible with Making Tax Digital for Income Tax.

For the 2026/27 tax year, the normal online filing and payment deadline is 31 January 2028.

One Business or Several Income Sources

A person may have more than one income source within Making Tax Digital.

For example, someone could operate:

• A bookkeeping business.
• A separate online retail trade.
• A residential property business.

Digital records and quarterly updates generally need to be maintained separately for each qualifying self-employment or property business.

The software selected must therefore support every relevant income source or work correctly with additional software products.

What Software Is Required?

You must use software recognised as compatible with the relevant MTD service.

The software may be:

• A complete cloud accounting package.
• Desktop accounting software with the required HMRC connection.
• A spreadsheet connected to compatible bridging software.
• A combination of connected software products.

HMRC does not require every business to purchase a large or expensive accounting package.

However, the software must be capable of completing the tasks required for the relevant MTD system.

Can You Continue Using a Spreadsheet?

Yes, a spreadsheet can still form part of an MTD-compatible process.

The spreadsheet normally needs to be connected to recognised bridging software that can communicate with HMRC.

For MTD for Income Tax, check that the software combination can:

• Maintain or connect to the required digital records.
• Send quarterly updates.
• Support each relevant self-employment and property source.
• Add other income required for the final return.
• Submit the completed tax return.

Some bridging products perform only part of the process. A cheap product is not cost-effective if it cannot support the business’s income sources or complete the final submission.

Spreadsheet or Accounting Software?

The most appropriate option depends on the size and complexity of the business.

Spreadsheet and Bridging Software	Accounting Software
May suit a business with few transactions.	Often better for frequent or high-volume transactions.
Can have a lower initial cost.	May automate bank feeds and transaction matching.
Requires a carefully designed spreadsheet.	Can produce invoices and customer statements.
Manual errors may be easier to introduce.	Can capture bills and receipts digitally.
Bridging compatibility must be checked.	May support VAT, payroll and reporting in one system.
May require more year-end work.	Can provide more current financial reports.

A spreadsheet is not automatically the best choice for every small business, just as a full accounting package is not automatically necessary for every sole trader.

The decision should reflect transaction volume, VAT status, income sources, invoicing needs, reporting requirements and who will maintain the records.

Choosing MTD-Compatible Software

Before selecting software, consider whether it can:

• Support MTD for VAT, Income Tax or both, depending on your obligations.
• Handle every self-employment and property income source.
• Maintain income and expense records digitally.
• Send quarterly updates.
• Submit the final Income Tax return.
• Import bank transactions.
• Capture invoices and receipts.
• Support an accountant or bookkeeper.
• Produce useful management reports.
• Export records if you change provider later.
• Provide appropriate user access and security.

HMRC provides separate software-finder tools for MTD for VAT and MTD for Income Tax.

Carter Bookkeeping Services can also help businesses assess and configure suitable accounting software.

Does an Accountant or Bookkeeper Remove the MTD Requirement?

No. Appointing an agent does not remove the underlying MTD obligation.

An authorised accountant or bookkeeper may be able to:

• Help select suitable software.
• Set up income and expense categories.
• Maintain or review digital records.
• Send quarterly updates.
• Prepare year-end adjustments.
• Submit the final return where this forms part of the agreed service.

The division of responsibilities should be agreed clearly.

For example, the business owner may upload invoices and receipts each week while the bookkeeper reviews transactions, completes reconciliation and submits the updates.

Exemptions From Making Tax Digital

Some individuals and businesses may be exempt from Making Tax Digital.

An exemption may apply where it is not reasonable or practical to use digital systems because of matters such as:

• Age.
• Disability.
• Location.
• Religion.
• Lack of suitable internet access.
• Another circumstance creating genuine digital exclusion.

Being unfamiliar with accounting software, having few transactions or facing additional cost is not normally sufficient by itself.

Some MTD for Income Tax exemptions apply automatically, while others require an application to HMRC. Certain specialised tax-return circumstances can also produce temporary exemptions.

Check the current criteria before assuming that an exemption applies:

Making Tax Digital for Income Tax exemptions

Penalties for Missing MTD Deadlines

Late submissions can result in penalty points under HMRC’s points-based system.

For the introductory 2026/27 tax year, HMRC has stated that it will not apply penalty points for late quarterly MTD for Income Tax updates.

However:

• The quarterly updates must still be submitted before the final tax return can be filed.
• Late tax-return penalties can still apply.
• Penalty points are expected to apply to late compulsory quarterly updates after the first year.

After the introductory year, reaching four quarterly-update penalty points can result in a £200 penalty, with further penalties possible for continued failures.

Common Making Tax Digital Misunderstandings

• “Everyone must use MTD for Income Tax now.” The system is being introduced in phases according to qualifying income.
• “The threshold is based on profit.” It is based mainly on gross self-employment and property income before expenses.
• “Quarterly updates are full tax returns.” They are cumulative summaries of recorded income and expenses.
• “Tax must be paid every quarter.” Quarterly updates do not currently create quarterly Income Tax payment deadlines.
• “HMRC receives every receipt and invoice.” Quarterly updates contain category totals, not copies of individual documents.
• “A spreadsheet is no longer allowed.” A spreadsheet can form part of the process when connected to appropriate compatible software.
• “Any accounting software is acceptable.” The product must support the relevant MTD service and required submissions.
• “My bookkeeper will automatically handle everything.” Responsibilities and deadlines should be agreed explicitly.
• “Partnerships had to join in 2025.” Partnerships are not currently required to use MTD for Income Tax, and their timetable has not been announced.
• “MTD for Corporation Tax started in 2026.” No separate MTD for Corporation Tax mandate is currently in force.

Benefits of Maintaining Digital Records

MTD creates additional responsibilities, but a properly designed digital bookkeeping process can also provide practical benefits.

These can include:

• More current income and expense records.
• Fewer missing invoices and receipts.
• Faster bank reconciliation.
• Improved visibility of outstanding customer invoices.
• Earlier estimates of tax liabilities.
• Less work required immediately before the annual deadline.
• Better information for budgeting and cash-flow planning.

These benefits depend on records being entered accurately and reviewed regularly. Automating an incorrect process can allow errors to accumulate more quickly.

Preparing for MTD for Income Tax

Sole traders and landlords approaching a future threshold should prepare before their compulsory start date.

1. Check your qualifying income. Add together gross self-employment and property income from the relevant tax return.
2. Confirm your start date. Determine whether the £50,000, £30,000 or £20,000 threshold applies.
3. Review possible exemptions. Do not assume that an exemption applies without checking the current rules.
4. Choose compatible software. Confirm that it supports all business and property sources.
5. Set up digital categories. Income and expenses should be recorded consistently.
6. Connect bank accounts carefully. Imported transactions still require review and reconciliation.
7. Organise supporting documents. Establish a system for invoices, receipts and property records.
8. Agree responsibilities with your agent. Decide who records transactions, performs checks and sends submissions.
9. Sign up before the start date. Authorise the software and agent access where required.
10. Record the quarterly deadlines. Do not rely solely on software reminders.

Making Tax Digital Checklist

• Confirm whether you are VAT registered.
• Confirm whether MTD for VAT applies.
• Calculate gross self-employment and property income.
• Identify the MTD for Income Tax start date.
• Check whether any exemption applies.
• Select software recognised by HMRC.
• Check that all income sources are supported.
• Establish digital record-keeping procedures.
• Reconcile bank and financial accounts regularly.
• Retain invoices and supporting records.
• Record quarterly submission deadlines.
• Continue planning for the annual tax payment.
• Review the final records before submitting the tax return.

How Carter Bookkeeping Services Can Help

Carter Bookkeeping Services helps sole traders, landlords and small businesses establish reliable digital bookkeeping processes.

Support can include:

• Reviewing existing bookkeeping systems.
• Helping businesses select suitable MTD-compatible software.
• Setting up income and expense categories.
• Configuring bank feeds and digital document capture.
• Maintaining regular bookkeeping records.
• Reconciling bank, card and payment-provider accounts.
• Maintaining digital VAT records.
• Preparing financial information for quarterly updates.
• Preparing organised year-end records for accountants and tax advisers.
• Completing a holistic bookkeeping review of existing records, software and processes.

The exact service and responsibility for submitting returns should be agreed before work begins. Complex tax adjustments and specialist tax advice may require support from an appropriately qualified accountant or tax adviser.

Frequently Asked Questions

When Did MTD for Income Tax Start?

It became compulsory from 6 April 2026 for qualifying sole traders and landlords with gross self-employment and property income above £50,000 in 2024/25.

Is the MTD Threshold Based on Turnover or Profit?

It is based mainly on gross income before expenses, which is closer to turnover than taxable profit.

Do Employment and Dividend Income Count?

No. Employment, dividends, pensions and savings income do not normally count towards the qualifying-income threshold, although they may still need to be reported in the final return.

Do I Need to Pay Income Tax Quarterly?

No. Quarterly updates do not currently create quarterly Income Tax payment deadlines. Existing Self Assessment payment deadlines continue to apply.

Can I Use a Spreadsheet?

Yes. A spreadsheet can form part of the digital system when it is connected to appropriate compatible bridging software.

Do Quarterly Updates Need to Be Completely Accurate?

The records should be maintained carefully, but accounting and tax adjustments do not normally need to be made before each quarterly update. Corrections can be reflected in later cumulative updates and the year-end process.

Do Partnerships Need to Use MTD?

Partnerships do not currently need to use Making Tax Digital for Income Tax. HMRC has not yet published their compulsory implementation date.

Do Limited Companies Need MTD for Corporation Tax?

No separate MTD for Corporation Tax mandate is currently in force. However, companies generally need commercial software to file Company Tax Returns with HMRC following the closure of the former HMRC online service.

Can My Bookkeeper Submit the Updates?

An appropriately authorised bookkeeper or accountant may submit updates on your behalf where this is included in the agreed service.

Prepare Before Your First Digital Deadline

Making Tax Digital is no longer a future proposal for VAT-registered businesses and higher-income sole traders and landlords.

The most effective preparation is to establish accurate digital records before the first compulsory update period begins. Choosing compatible software, organising receipts and agreeing responsibilities early can prevent rushed corrections and missed deadlines.

Contact Carter Bookkeeping Services to discuss MTD-compatible bookkeeping, software setup or a review of your current financial records.

Official HMRC Guidance

• Making Tax Digital for VAT
• Making Tax Digital for Income Tax: step-by-step guidance
• Check if and when MTD for Income Tax applies
• Work out your qualifying income
• Quarterly update periods and deadlines
• Choose MTD for Income Tax software
• Find MTD-compatible VAT software
• MTD for Income Tax exemptions
• Commercial software for Company Tax Returns