Making Tax Digital (MTD) for Income Tax is a transformative initiative by HM Revenue and Customs (HMRC) to modernize the UK tax system. By requiring digital record-keeping and quarterly submissions, MTD aims to make tax reporting more efficient, reduce errors, and help close the tax gap. This guide provides a detailed overview of how MTD for Income Tax works, when it starts, who it affects, and how to prepare, based on the latest official information.

MTD for Income Tax is a government program that mandates certain taxpayers to maintain digital records of their business and property income and expenses and submit updates to HMRC quarterly. This replaces the traditional annual Self Assessment tax return with a digital, more frequent reporting system. The initiative is part of HMRC’s broader Tax Administration Strategy to streamline tax processes and improve compliance.

MTD for Income Tax applies to:

• Self-employed individuals: Those running their own businesses, such as freelancers or sole traders.
• Landlords: Individuals earning income from property letting.

The requirement is based on qualifying income, which includes:

• Gross income from self-employment (before deducting expenses).
• Gross income from property letting (before deducting expenses).

It does not include:

• Income from employment (PAYE).
• Partnership income (except for specific cases like disguised investment management fees or carried interest).
• Dividends, including those from your own company.

HMRC assesses qualifying income using the Self Assessment tax return from the previous tax year. For example, for the 2026-2027 tax year, HMRC uses the return due by 31 January 2026 (for the 2024-2025 tax year).

Income Thresholds

The initiative applies to taxpayers whose total annual qualifying income exceeds the following thresholds:

Income Threshold	Tax Year Assessed	MTD Start Date
Over £50,000	2024-2025	6 April 2026
Over £30,000	2025-2026	6 April 2027
Over £20,000	2026-2027	6 April 2028 (pending legislation)

Business partnerships will also be required to use MTD, but the timeline for partnerships has not yet been specified.

Special Cases

• New Businesses: If you start a new business after 6 April 2025, MTD is not required until your tax return includes the new business income. For example, a business started in May 2026 would require MTD from 6 April 2028, after the return due by 31 January 2028.
• Jointly Owned Property: Your share of the property income counts toward the threshold. For example, if a property generates £50,000 and is equally shared, each owner’s qualifying income is £25,000.
• Non-UK Tax Residents: UK property income and declared UK self-employment income count, but undeclared foreign income (e.g., from a Spanish sole trader business) does not.
• Trusts and Other Arrangements: Income from bare trusts or interest in possession trusts counts toward qualifying income, as do certain trade profits under specific UK tax rules.

When Does MTD for Income Tax Start?

The implementation of MTD for Income Tax is phased based on income levels:

• 6 April 2026: Mandatory for those with qualifying income over £50,000 in the 2024-2025 tax year.
• 6 April 2027: Mandatory for those with qualifying income over £30,000 in the 2025-2026 tax year.
• 6 April 2028: Mandatory for those with qualifying income over £20,000 in the 2026-2027 tax year, subject to legislation.

Taxpayers are not required to start using MTD until after submitting their first Self Assessment tax return. However, you can sign up early to familiarize yourself with the system. A voluntary testing phase is available for the 2025-2026 tax year, allowing eligible taxpayers to try MTD without penalties for missing quarterly update deadlines.

How Does MTD for Income Tax Work?

MTD for Income Tax involves three main steps:

1. Keep Digital Records:
   • Use MTD-compatible software to record all income and expenses digitally. Options include full accounting packages, simplified packages for smaller businesses, spreadsheets with bridging software, or mobile apps.
   • HMRC does not provide its own software, so you must choose a third-party solution. A list of compatible software is available on GOV.UK.
2. Submit Quarterly Updates:
   • Send updates to HMRC every quarter, covering your income and expenses for that period. The default quarters are:
     • 6 April to 5 July (due by 7 August)
     • 6 April to 5 October (due by 7 November)
     • 6 April to 5 January (due by 7 February)
     • 6 April to 5 April (due by 7 May)
   • Alternatively, you can elect to use calendar quarters (e.g., 1 January to 31 March) with the same due dates, provided you make this choice before your first update.
   • Quarterly updates are submitted through your MTD-compatible software.
3. Submit an Annual Tax Return:
   • At the end of the tax year, finalize your tax position using your software, which replaces the traditional Self Assessment process.
   • Tax payments are still due on 31 January and 31 July (for those on payments on account).

Testing Phase

For the 2025-2026 tax year, HMRC offers a voluntary testing phase. This allows taxpayers to try MTD, test their software, and access specialist HMRC support. There are no penalties for missing quarterly update deadlines during this phase, though penalties for late tax returns or payments still apply.

Exemptions from MTD for Income Tax

Certain taxpayers are exempt from MTD requirements:

• Automatic Exemptions:
  • Individuals without a UK National Insurance number by 31 January of the previous tax year.
  • Foster carers and shared lives carers whose only income is from qualifying care relief.
  • VAT-registered businesses exempt from MTD for VAT.
• Applied Exemptions:
  • Those who are digitally excluded (e.g., due to poor broadband access, disability, or other barriers).
  • Individuals whose religious beliefs conflict with using digital services.

The application process for these exemptions will be available from October 2025. If you are automatically exempt, no application is needed. Check GOV.UK for more details.

How to Prepare for MTD for Income Tax

To comply with MTD, follow these steps:

1. Determine Your Qualifying Income:
   • Review your income from self-employment and property letting to see if you meet the thresholds. Use HMRC’s online tool at GOV.UK to confirm eligibility.
2. Choose MTD-Compatible Software:
   • Select software that suits your needs, such as accounting packages, spreadsheets with bridging tools, or apps. Ensure it is compatible with MTD requirements.
3. Sign Up for MTD:
   • Register for MTD for Income Tax using the online service at GOV.UK. You can sign up early, even before it becomes mandatory.
4. Start Keeping Digital Records:
   • Begin recording your income and expenses digitally using your chosen software.
5. Submit Quarterly Updates:
   • Once MTD is mandatory for you, submit quarterly updates as required. Ensure your software is connected to your HMRC online services account.

Penalties and Support

• Penalties: New penalties apply for missing deadlines for submitting your annual tax return or paying tax bills. During the 2025-2026 testing phase, there are no penalties for missing quarterly update deadlines.
• Support: HMRC provides detailed guidance, including step-by-step instructions for individuals and agents. For software-related issues, contact your software provider. Additional support is available through HMRC’s dedicated MTD support services.

Making Tax Digital for Income Tax is a significant step toward a more digital and efficient tax system in the UK. By understanding who it affects, when it starts, and how it works, self-employed individuals and landlords can prepare effectively for compliance. The phased implementation and voluntary testing phase provide opportunities to adapt to the new system. For the most accurate and up-to-date information, refer to HMRC’s official guidance on GOV.UK or talk to our experts at CMA Accountancy.