If you’ve received a letter or email from HMRC telling you that you need to use Making Tax Digital for Income Tax (MTD), you may be wondering what you actually need to do.
The good news is that MTD doesn’t fundamentally change how your income is taxed. What it changes is how you keep your accounting records and how frequently information is sent to HMRC.
Here’s our practical guide.
Making Tax Digital for Income Tax is being introduced in stages.
From 6 April 2026, it applies to individuals with qualifying income from self-employment and property of more than £50,000 a year.
From 6 April 2027, the threshold reduces to £30,000, bringing many more sole traders and landlords into the system.
A further expansion is planned from April 2028 for those with qualifying income above £20,000.
Importantly, the test looks at your gross qualifying income rather than your profit.
For example, if you have £35,000 of self-employed turnover and £20,000 of gross rental income, your combined qualifying income is £55,000. You could therefore fall within MTD even though neither source individually exceeds £50,000.
There are three main changes.
1. Keep digital records
You’ll need to keep records of your business or property income and expenses digitally using compatible software.
That doesn’t necessarily mean complicated accounting software or that you need to become an expert bookkeeper. The important thing is to establish a system that complies with the MTD requirements and works for you.
2. Send quarterly updates to HMRC
Instead of HMRC only receiving information through your annual tax return, information about your self-employment or property business will be submitted periodically during the year.
These quarterly updates are based on the digital records you’ve maintained.
3. Complete the year-end process
Quarterly reporting doesn’t mean that your tax affairs are finalised four times a year.
There is still a year-end process during which adjustments can be made and your overall tax position finalised.
In most cases, yes – although exactly what you need will depend upon your circumstances.
Compatible software is needed to maintain the required digital records and communicate the necessary information to HMRC.
For a straightforward landlord or sole trader, the solution can be relatively simple. A larger business may benefit from a more comprehensive bookkeeping system with bank feeds, automated transaction processing and management reporting.
The objective shouldn’t simply be to comply with MTD. Done properly, digital bookkeeping should also give you much better information about how your business is performing.
Broadly, you need digital records supporting your business or property income and expenditure.
The important change is that leaving everything until the end of the tax year and handing your accountant a bag of receipts, bank statements or a spreadsheet is increasingly unlikely to be an appropriate way of dealing with your tax affairs.
Regular bookkeeping becomes much more important.
For many businesses, that’s actually a benefit. Keeping records up to date throughout the year means fewer surprises and better visibility over profitability, cash flow and likely tax liabilities.
No.
This is one of the most common misconceptions about MTD.
The quarterly updates provide HMRC with information from your digital records. They aren’t four miniature tax returns and don’t necessarily require all of the tax and accounting adjustments that would normally be made when finalising your annual figures.
Your final tax position is dealt with through the year-end process.
Don’t ignore it.
The appropriate action will depend on why the update was missed and your individual circumstances. HMRC’s MTD penalty regime is different from the traditional Self Assessment late-filing penalty system.
If you believe you’ve missed a deadline, it’s worth dealing with it promptly rather than allowing several outstanding obligations to accumulate.
Yes.
An accountant can help you choose and establish appropriate software, maintain or review your bookkeeping and deal with the necessary submissions to HMRC.
You don’t necessarily need to outsource everything.
For example, you might maintain your own bookkeeping while your accountant reviews the records periodically, deals with the MTD submissions and completes your year-end tax work.
Alternatively, you can outsource the bookkeeping and compliance process entirely.
The right solution depends upon the size and complexity of your affairs and how involved you want to be.
Potentially, yes.
MTD isn’t restricted to traditional businesses. Income from property can count towards your qualifying income.
This is particularly important for landlords who have historically regarded their tax affairs as relatively straightforward and only considered them once a year when completing their tax return.
It is also possible for your property and self-employment income to be combined when determining whether you exceed the MTD threshold.
Start by checking four things:
Don’t buy software simply because you’ve received an HMRC letter. Establish what you actually need first.
If you’re unsure what you need to do, we can help.
SWLA Accounting can confirm whether you are caught by Making Tax Digital, explain your deadlines and help you put an appropriate bookkeeping and reporting system in place.
The aim isn’t simply to satisfy HMRC. It’s to make your accounting simpler, more automated and more useful to you.
Talk to SWLA Accounting about Making Tax Digital.