Making Tax Digital for Income Tax: What's Changing, Who's Affected, and How to Prepare

If you're a sole trader or a landlord with rental income, Making Tax Digital for Income Tax is now live and is fundamentally altering the way higher-income earners report their earnings to HMRC. It's called Making Tax Digital for Income Tax — often shortened to MTD for ITSA — and it represents the biggest shake-up to the Self Assessment system in decades.

It's not optional, it's not going away, and if you're above the threshold, you need to act now. Here's everything you need to know.

What Is Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax is part of the government's wider programme to move the UK tax system onto a fully digital footing. The core idea is simple — instead of filing a single Self Assessment tax return once a year, affected taxpayers will be required to keep digital records and send quarterly updates to HMRC throughout the year using compatible software.

The intention behind it is to reduce errors, give taxpayers a more accurate and up-to-date picture of their tax position, and bring the reporting of income closer to real time. Whether you see that as a positive step or an additional burden probably depends on how well-organised your bookkeeping already is.

Who Does It Apply To?

MTD for Income Tax applies to individuals — not companies. Specifically, it affects sole traders and landlords whose gross income from self-employment and property combined exceeds the relevant threshold.

The rollout is being phased in based on income levels. From April 2026, it applies to sole traders and landlords with a combined gross income exceeding £50,000. From April 2027, the threshold drops to include those with a combined gross income exceeding £30,000. From April 2028, it extends further to include those with a combined gross income exceeding £20,000.

HMRC has indicated that further expansion to even lower income thresholds may follow in future years, but no confirmed dates have been set beyond the three phases above.

It's worth noting that this is based on gross income — meaning total turnover or rental income before any expenses are deducted. Many people assume the threshold applies to profit, but it doesn't. You could be well above the threshold even if your actual taxable profit is relatively modest.

If you're a director of a limited company and your only income is through salary and dividends from that company, MTD for Income Tax does not currently apply to you. It's specifically aimed at unincorporated income — the kind reported through Self Assessment.

What Will You Need to Do Differently?

Under MTD for Income Tax, there are three key obligations that replace or sit alongside the current Self Assessment process.

First, you'll need to keep your records digitally. Paper records, manual spreadsheets, and shoeboxes of receipts will no longer be acceptable for anyone within the MTD threshold. You'll need to use HMRC-compatible software to record your income and expenses as they happen.

Second, you'll be required to submit quarterly updates to HMRC. These aren't full tax returns — they're summary reports of your income and expenses for each quarter of the tax year. The quarters follow a fixed pattern: April to June, July to September, October to December, and January to March. Each update must be submitted by the deadline set for that quarter.

Third, at the end of the tax year, you'll submit a final declaration — which effectively replaces the current Self Assessment tax return. This is where you'll confirm your total income, claim any remaining reliefs or allowances, and finalise your tax position for the year. The deadline for this final declaration will be 31 January following the end of the tax year, the same deadline that currently applies to online Self Assessment returns.

What Software Will You Need?

You'll need software that is recognised by HMRC as compatible with Making Tax Digital for Income Tax. At the time of writing, several major platforms are already preparing MTD-compatible products, including Xero, QuickBooks, FreeAgent, and others.

HMRC also offers its own free software for those with straightforward affairs, but for most people with any degree of complexity — multiple income sources, rental properties, or significant expenses — a dedicated accounting platform managed by a professional will be far more practical and reliable.

The key point is that whatever software you use must be capable of storing your digital records, generating the quarterly updates, and submitting them directly to HMRC through their API. You won't be able to simply log into the HMRC website and type the numbers in manually as you might do now with Self Assessment.

What Happens If You Don't Comply?

HMRC has confirmed that there will be a penalty regime in place for late submissions and late payments under MTD for Income Tax. The new system uses a points-based approach — each time you miss a quarterly deadline, you receive a penalty point. Once you've accumulated a set number of points, a financial penalty is triggered.

For quarterly obligations, the threshold is four points — meaning you'd need to miss four deadlines before a penalty is issued. After that, each further missed deadline triggers an automatic £200 penalty. Points can be reset by meeting a period of sustained compliance, but the system is designed to be less forgiving for repeated non-compliance.

Late payment penalties will also apply, with interest charged on overdue amounts from the date the payment was due.

The message from HMRC is clear — this is not something you can afford to ignore or leave to the last minute.

How Is This Different From MTD for VAT?

If you're already VAT-registered, you may already be familiar with Making Tax Digital through the MTD for VAT programme, which has been in place since April 2019. The concept is the same — digital record-keeping and electronic submission — but the scope is different.

MTD for VAT applies to your VAT-registered business and covers your VAT returns. MTD for Income Tax applies to you personally and covers the income you report through Self Assessment. They're separate obligations, and being compliant with one doesn't automatically mean you're compliant with the other.

If you're a sole trader who is also VAT-registered, you'll potentially need to meet both sets of requirements, which makes having the right software and professional support even more important.

What Should You Be Doing Now?

Even if your income is currently below the threshold, the direction of travel is clear — Making Tax Digital is coming for virtually everyone who files a Self Assessment return, and the sooner you get your processes in order, the smoother the transition will be.

Start by getting your bookkeeping into digital shape. If you're still working from bank statements and spreadsheets, now is the time to move to a proper cloud accounting platform. The sooner you're comfortable with digital record-keeping, the less disruption you'll face when MTD becomes mandatory for you.

Review your income levels. Remember, it's gross income that counts, not profit. If your combined self-employment and rental income is anywhere near the £50,000, £30,000, or £20,000 thresholds, assume you'll be within scope and plan accordingly.

Talk to your accountant. If your accountant isn't already discussing MTD for Income Tax with you, that's a conversation you need to have sooner rather than later. The transition will affect how you work together, and getting aligned early will save a lot of stress down the line.

How We Can Help

At Companies999, we're already helping sole traders and landlords across the UK prepare for Making Tax Digital for Income Tax. Our accountancy services include MTD setup and ongoing quarterly submission management — and if you're a landlord or contractor, we have specialist packages tailored to your situation. Whether you're well above the threshold or just approaching it, we'll make sure you're ready when the time comes.

We'll set up and manage MTD-compatible software for you, handle your quarterly updates and submit them to HMRC on your behalf, prepare and file your final declaration at year end, ensure your digital records meet HMRC's requirements from day one, and keep you informed of any changes to deadlines, thresholds, or regulations as they develop.

The transition to MTD doesn't have to be stressful — but it does need to be planned. Get in touch with us today and let us take the complexity out of it for you.