Making Tax Digital for Income Tax

The UK tax system is undergoing one of its most significant updates in many years. Starting in April 2026, self-employed individuals and landlords will begin transitioning to Making Tax Digital for Income Tax Self-Assessment (MTD ITSA). The initiative is designed to modernise the tax process, cut down on mistakes, and give taxpayers clearer and more immediate insight into their tax position.

What is MTD for Income Tax?

MTD for ITSA replaces the traditional annual Self-Assessment tax return with a digital submission process for landlords and self-employed taxpayers. Individuals over the required income threshold must:

• maintain digital financial records
• send quarterly updates to HMRC
• complete a Final Declaration after the tax year ends

Who is affected?

Anyone whose combined self-employment and property income exceeded £50,000 in the 2024/25 tax year must comply with MTD ITSA unless they qualify for an exemption.

The threshold will fall to £30,000 from April 2027 (for 2025/26 income) and then to £20,000 from April 2028 (for 2026/27 income).

Exemptions

Exemptions fall into two main groups: automatic exemptions and those requiring an application.

Automatic exemptions apply to certain categories, including companies, partnerships, and individuals who lack the mental or physical ability to comply. Some groups—such as Ministers of Religion, Lloyd’s underwriters, and those receiving specific allowances (e.g., Blind Person’s Allowance or Married Couple’s Allowance)—remain exempt until at least Summer 2029. If these exemptions are not recorded on the 2024/25 tax return, the taxpayer will need to apply formally.

A one-year deferral to April 2027 applies for some taxpayers with income above £50,000, including those with trust or estate income, individuals submitting residence pages, people making averaging claims, and those using qualifying care relief (e.g., foster carers).

Other groups, such as non-resident entertainers and those who are digitally excluded, must apply directly to HMRC for their exemption.

Applying for exemptions

Exemption requests can be submitted by phone or post, either personally or through an agent. Taxpayers required to join MTD in April 2026 are encouraged to submit applications promptly.

HMRC generally replies within 28 days, and until written confirmation is issued, the taxpayer must continue to meet all digital obligations.

Leaving MTD for Income Tax

You may exit the MTD ITSA regime if:

• your qualifying income falls below the threshold for three consecutive tax years, or
• you stop all self-employment or property letting activity, or
• you joined voluntarily and decide to withdraw

If cessation occurs in the 2024/25 return, no additional steps are needed. If the activity ends later, MTD duties may continue until the relevant quarterly period closes, and HMRC must be notified to remove you from the system.

Falling under the income threshold alone does not immediately free a taxpayer from MTD unless the business or property activity has ended, due to the three year rule.

Digital record keeping

MTD ITSA requires landlords and the self-employed to keep a digital record of every transaction, including the date, value, and category. Any recorded expenses must qualify under existing HMRC rules.

Two categories of software can be used:

• Bridging software: Links to a spreadsheet where transactions can be entered manually each quarter.
• Bookkeeping software (e.g., Xero, Sage, Freeagent, QuickBooks): Creates records automatically, often by connecting to bank feeds.

More information is available on the government website and the best choice will depend on usability, pricing, and personal preference.

Simplification options

HMRC has introduced several measures to make reporting easier:

• “Three-line accounts” are allowed where annual turnover is below the £90,000 VAT threshold.
• Joint property owners can submit quarterly gross income only, delaying expenses until the Final Declaration.
• Retail businesses may report daily gross takings instead of each individual sale.
• From 6 April 2024, the cash basis became the default, meaning income and expenses are recorded when money is actually received or paid.

Landlords may still face complications, such as dealing with jointly owned properties or managing overseas income.

How should you prepare?

Preparing ahead of time will make the transition easier.

• Register for MTD via your Government Gateway account if you meet the threshold before April 2026.
• Consider having a separate business bank account to simplify expense categorisation.
• Choose MTD-Compatible Software that fits your workflow.

What happens if you miss deadlines?

HMRC will operate a points-based penalty system for late submissions, with different penalties for late payments.

There will be no penalties for late quarterly submissions in the first year, provided the Final Declaration is submitted correctly.

How can we help?

Our team can support you throughout the transition to MTD ITSA. We also offer solutions to help prepare and submit your digital reports. Contact us if you’d like more information.