Making Tax Digital: Your Essential Guide

Making Tax Digital for Income Tax is coming, and this time it's happening. After years of delays and speculation, the government and HMRC have confirmed the timetable. If you're a sole trader or landlord above the income thresholds, fundamental changes to how you report your tax are just months away.

Here's everything you need to know to prepare properly.

Will it actually happen this time?

The short answer is yes. The Spring Statement 2025 provided clear confirmation of the rollout dates, and all indications from HMRC and professional bodies point to MTD for Income Tax proceeding as planned. With the first wave starting in April 2026, there's no last-minute reprieve coming.

The three key components

MTD for Income Tax has three core requirements:

1. Keeping digital accounting records - Paper records and basic spreadsheets won't meet your obligations
2. Filing quarterly updates with HMRC - Four times a year instead of one annual return
3. End of year finalisation - A digital declaration that finalises your tax position

These changes represent the biggest shift to UK tax administration since Self Assessment was introduced over 30 years ago.

Does it impact you?

MTD for Income Tax is mandatory for the self-employed and landlords with gross qualifying income above specific thresholds. Note that these thresholds are measured before deducting expenses. If you have both self-employment and rental income, it's the combined total that counts.

From April 2026:
Qualifying income over £50,000 from self-employment or property
First quarterly filing due by 7 August 2026

From April 2027:
Qualifying income over £30,000 from self-employment or property
First quarterly filing due by 7 August 2027

From April 2028:
Qualifying income over £20,000 from self-employment or property
First quarterly filing due by 7 August 2028

Your qualifying income is assessed based on the most recently filed tax return. This means your 2024-25 return determines whether you're in MTD for the 2026-27 tax year.

Important for joint property owners: If you own property jointly, qualifying income means your share of gross rents. For example, if you and your spouse jointly own a property generating £26,000 rental income, you're each treated as having £13,000 qualifying income.

Preparation point: Check your 2024-25 tax return to see if you'll be mandated from April 2026. Don't wait for HMRC to write to you - it's your responsibility to check and comply.

Who is not in scope?

MTD for Income Tax does not yet apply to partnerships or limited liability partnerships, though they're expected to join eventually. Individual partners fall outside MTD for partnership income, but will be within scope if they have separate self-employment or property income above the thresholds.

Automatic exemptions apply to:

• Foster carers and shared lives carers
• Non-resident companies
• Trustees and personal representatives
• Anyone without a National Insurance number on 31 January before the tax year

Exemptions you can apply for include digital exclusion, though HMRC's definition is strict and applies only in exceptional circumstances. Other exemptions are available for those with Power of Attorney arrangements, non-UK resident foreign entertainers and sportspeople, and those for whom HMRC cannot provide a digital service.

Deferred entry applies to recipients of Married Couple's Allowance and Blind Person's Allowance, ministers of religion, Lloyd's Underwriters, and those needing to submit residence/remittance pages (SA109) until April 2027.

What's changing and what's not

MTD for Income Tax introduces major changes. It's difficult to overstate how significant they are.

Changing: How you interact with HMRC

Information must flow from your digital accounting records to HMRC systems in an uninterrupted digital process, with no manual input. This is the same requirement as MTD for VAT.

Preparation point: You'll need MTD-compatible record-keeping in place. If you're not already using digital records, we can advise on the best approach. If you already use software, check your provider has a suitable package for MTD for Income Tax.

Changing: How often you interact with HMRC

Instead of filing one end-of-year Self Assessment return, you'll make four quarterly filings plus a two-part end-of-year finalisation. If you have multiple trades or both property and trading income, quarterly filings are needed for each separate income stream.

Preparation point: A dedicated business bank account will dramatically reduce your quarterly workload. If you use a bank feed to link with MTD software, this maximises efficiency by eliminating manual transaction entry.

Changing: Workload and yearly timetable

HMRC wants MTD to push record-keeping into real time. Records must be kept up to date regularly and quarterly as a minimum. This represents a fundamental shift for many businesses. Quarterly reporting will change the peaks and troughs of your workload throughout the year.

Preparation point: If you'd prefer not to handle digital record-keeping yourself, consider using a bookkeeper. We can discuss the options and how you'd like to tackle quarterly filings - whether filing yourself or having us submit on your behalf.

Changing: End of year procedures

Early publicity suggested MTD meant the "death of the tax return". In reality, there's still an important end-of-year process to complete after your fourth quarterly update. This digital tax return will be pre-populated with data from your quarterly filings.

At this stage, you'll adjust the quarterly data for accounting and tax purposes, claim capital allowances, and make private use adjustments. The second part involves reporting other income sources like bank interest, dividends or PAYE income, and claiming reliefs such as pension contributions or Gift Aid donations.

Not changing: Year-end filing deadline

The filing deadline remains 31 January following the end of the tax year.

Not changing: Payment dates

Tax payment dates stay the same under MTD. Tax remains payable by 31 January following each tax year. Payments on account, where relevant, are payable by 31 January during the tax year and 31 July following it.

However, note that a new penalty system applies. Late filings attract penalty points, with financial penalties when thresholds are reached. Late payment penalties will be higher than at present.

Digital record-keeping: what does it mean?

You'll need either MTD-specific software or MTD-enabled spreadsheets. Paper records alone won't comply with your obligations. In your digital records, you must capture the amount and date of income and expenses, and (except in certain simplified circumstances) the category they fall into.

If you currently use accounting software or spreadsheets, you may be able to continue using existing systems by adding bridging software that works with MTD for Income Tax. Alternatively, you might take this opportunity to invest in a new system.

The basic requirement is quarterly filings from functional compatible software able to access HMRC's application programming interfaces (APIs). If you use spreadsheets, they must be API-enabled or used with MTD-compatible software allowing data to pass to and from HMRC's systems.

Digital links are essential: If you use multiple software products or spreadsheets, there must be digital links between them. From the point transactions are recorded, any data transfer must be digital, not manual. This extends to quarterly filings with HMRC, error corrections, and year-end declarations.

If you transfer business records to a bookkeeper or adviser, these transfers must also use digital links. Copy and paste or manual retyping don't qualify as digital links. Email, memory sticks, and importing data are acceptable methods.

Choosing software

All MTD-compatible software is listed on GOV.UK - search for "Find software that works with Making Tax Digital for Income Tax". The number of products has been limited until recently, but more are coming to market.

HMRC won't provide software, but the government has undertaken that basic free products will be available. Some commercial providers also offer free versions.

Important consideration: Not all software products do the same job. Until recently, it was expected HMRC would offer an online facility for end-of-year filings. This will not happen - all filings must be made via software. As the market stands, not all products can submit both quarterly updates and end-of-year returns. Some handle only quarterly filings. Check this before committing.

Some products are specialised for particular markets, such as landlords. We're happy to discuss the position fully and advise on what will work best for your business.

Preparation point: Speak to us before investing in software. We can help you choose a product that meets both your current needs and supports your end-of-year filing requirements.

Simplifications that might apply to you

Three-line accounts: If your business or property income is below the VAT registration threshold (currently £90,000), you can record individual items without assigning them to categories. You simply report total income and expenses at quarter end. Landlords can use this approach, but must also show residential finance costs separately.

Retail businesses: You can record a single daily gross takings figure rather than each individual transaction.

Joint property owners: Only your individual share of income and expenses for jointly owned property needs recording digitally. For quarterly returns, you can report just your gross rental income each quarter and leave expenses until year-end. Alternatively, report both income and expenses quarterly.

Quarterly filing dates

Quarterly filings are made cumulatively to standard quarters:

• 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 report to calendar quarters:

• 1 April to 30 June (due by 7 August)
• 1 April to 30 September (due by 7 November)
• 1 April to 31 December (due by 7 February)
• 1 April to 31 March (due by 7 May)

Note that electing calendar quarters doesn't change the filing deadlines.

Getting ready: your action plan

MTD for Income Tax represents a major change, and early preparation makes all the difference. Here's what to do now:

1. Confirm your position
Check your qualifying income from recent tax returns. Use HMRC's online checker to confirm when you need to start using MTD.

2. Review your current systems
Are you keeping digital records already? If not, transitioning now makes the mandatory switch much easier. If you use software or spreadsheets, verify they're MTD-compatible or can be made compatible with bridging software.

3. Separate your business finances
Set up a dedicated business bank account if you haven't already. This dramatically reduces the administrative burden of quarterly reporting.

4. Research software options
Look at the software products available and consider which suits your business size and complexity. Remember to check whether products handle both quarterly updates and year-end returns.

5. Consider your support needs
Decide whether you'll handle record-keeping and quarterly filings yourself, or whether you'd prefer professional support. There's no right or wrong answer - it depends on your circumstances, confidence with technology, and available time.

6. Talk to us
We can assess your specific situation, recommend appropriate software, and discuss how best to structure your transition to MTD. Whether you need full support or just guidance on the right approach, we're here to help.

How Eaves & Co can support you

We've been advising businesses on tax compliance for over 20 years. MTD for Income Tax is a significant change, but with proper preparation and the right support, the transition can be smooth.

We're helping clients prepare for MTD by:

• Assessing whether you're in scope and confirming your start date
• Recommending appropriate software for your specific circumstances
• Supporting your transition from annual to quarterly reporting
• Setting up digital record-keeping systems and ensuring digital links are properly established
• Handling quarterly submissions and year-end finalisation on your behalf, or providing guidance if you prefer to file yourself
• Ensuring full compliance whilst identifying opportunities to maintain tax efficiency

Our specialist tax team understands the technical requirements and practical implications of MTD. More importantly, we understand your business and can tailor our approach to what works best for you.

If MTD for Income Tax applies to you, we'll contact you to discuss the options available. However, don't wait for us to get in touch - if you think you might be affected, reach out now. The earlier you start preparing, the smoother your transition will be.

Final thoughts

Making Tax Digital is not optional for businesses above the income thresholds. The changes are significant, but they're also manageable with the right preparation and support.

Many businesses find that once they've adapted to quarterly reporting, having regular touchpoints with their tax position brings valuable clarity. The initial transition requires effort, but the discipline of maintaining current records often reduces year-end stress.

The key is starting early, choosing the right tools, and getting professional advice tailored to your circumstances.

We look forward to working with you to ensure your MTD transition is as straightforward as possible.

Frequently asked questions

What happens if I don't comply with MTD when I'm supposed to?
You'll face penalties under the new penalty system. Late filings attract penalty points with financial penalties once thresholds are reached. Late payment penalties are higher than current Self Assessment penalties. It's your responsibility to check your obligations and comply on time.

Can I continue working with my accountant under MTD?
Absolutely. Many clients will continue working with their accountants or tax advisers, who will manage quarterly submissions on their behalf. Your adviser will need access to your MTD-compatible software.

What if my income drops below the threshold after I've joined MTD?
Once you're in MTD, you generally continue using it even if your income falls below the threshold. However, if you cease trading entirely, MTD requirements would no longer apply.

Do partnerships need to use MTD for Income Tax?
Not yet. MTD currently applies only to sole traders and landlords. The position for partnerships is still being developed.

Is support available for people who struggle with technology?
Yes. If you're genuinely unable to use digital systems due to age, disability, location, or other barriers, you can apply for a digital exclusion exemption. HMRC has published detailed guidance, though the criteria are strict and apply only in exceptional circumstances.

Will I need different software for quarterly updates and year-end returns?
It depends on the product you choose. Not all MTD software handles both functions. This is crucial to check before purchasing. We can advise on products that meet all your requirements.

Can I sign up for MTD voluntarily before I'm mandated?
Yes. HMRC is running a public testing phase throughout 2025-26. Voluntary sign-up lets you familiarise yourself with the system without penalties for missed updates. It's a risk-free way to prepare.

Making Tax Digital applies to you sooner than you think. Contact Eaves & Co today to discuss your preparation plan and ensure a smooth transition.