If you’re self-employed or earn rental income in the UK, you’ve likely heard about Making Tax Digital for Income Tax. HMRC’s digital transformation is changing how sole traders and landlords report their earnings, moving away from the once-a-year Self Assessment return towards real-time digital record keeping and quarterly updates.
Understanding these changes early helps you prepare properly and avoid last-minute stress when the new rules apply to your business.
What MTD for Income Tax Actually Means
Making Tax Digital for Income Tax (also known as MTD ITSA or Making Tax Digital for Income Tax Self Assessment) requires eligible taxpayers to keep digital records and submit quarterly updates to HMRC through compatible software. Rather than filing a single tax return after the tax year ends, you’ll provide HMRC with a clearer, more frequent picture of your income and expenses.
The system aims to reduce errors, make tax obligations more transparent throughout the year, and eventually simplify the year-end process. For many business owners, understanding what is MTD for Income Tax is the first step towards adapting your bookkeeping processes before the mandate applies to you.
Who Must Follow MTD for Income Tax?
Not everyone is affected immediately. The rollout is phased based on your income level.
You’re in scope if you’re:
- Self-employed (sole trader or freelancer)
- A landlord with UK property income
- A non-resident landlord with UK property
Your qualifying income matters. This means your gross trading income and property income before expenses. If your combined qualifying income exceeds the threshold, you’ll need to join MTD from a specific date.
The Income Thresholds
HMRC is rolling out MTD in stages:
- From April 2026: Self-employed individuals and landlords with qualifying income over £50,000
- From April 2027: Those with qualifying income over £30,000
These thresholds apply to your total qualifying income across all self-employment and property sources combined.
What Counts Towards the Threshold
Included in qualifying income:
- Turnover from self-employment or freelancing
- Gross rental income from UK property
- Gross rental income from overseas property
Not included:
- Employment income (PAYE)
- State or private pensions
- Dividends
- Savings interest
- Capital gains
This distinction matters. You might earn £70,000 total but only £45,000 from self-employment and property – meaning you wouldn’t be mandated under the current thresholds.
Who’s Currently Exempt
Companies don’t use MTD for Income Tax; they continue with Corporation Tax obligations. Most partnerships, trusts, estates, Lloyd’s underwriters, and foster carers are also out of scope for now, though HMRC may extend the system later.
If you’re below the threshold, you can join voluntarily to get comfortable with the system early, but there’s no obligation yet.
When Does MTD for Income Tax Start?
Your start date depends on your income level and when HMRC determines you cross the threshold.
HMRC looks at your most recent Self Assessment return to decide which year you must start. If your 2024/25 return shows qualifying income over £50,000, you’ll likely need to begin quarterly updates from April 2026.
Important timing considerations:
If you’re a new business, you enter MTD from the first tax year after you exceed the threshold for a full 12 months. Seasonal fluctuations are smoothed over the year – one quiet quarter won’t take you out of scope if your annual income still exceeds the limit.
HMRC has been running a pilot programme, allowing early adopters to test the system and iron out issues before the full rollout. If you’re close to the threshold, joining the pilot can help you adapt gradually.
What Changes Under MTD for Income Tax
The shift from annual Self Assessment to quarterly reporting brings several new obligations.
Digital Record Keeping
You must keep digital records for each business and property income source. These need to show dates, amounts, categories of income and expenses, and VAT where applicable. Acceptable formats include accounting software, spreadsheets, or apps – but whatever you use must link digitally to your submissions.
Key point: Copy-pasting data between disconnected systems breaks the digital link requirement. Your records must flow through an uninterrupted digital journey from entry to submission.
Quarterly Updates
Four times a year, you’ll submit updates showing income and allowable expenses for each source. These aren’t tax calculations – they’re estimates providing HMRC with a running view of your finances.
Standard quarters run:
- 6 April to 5 July (due 5 August)
- 6 July to 5 October (due 5 November)
- 6 October to 5 January (due 5 February)
- 6 January to 5 April (due 5 May)
You can elect to use calendar quarters instead (Jan–Mar, Apr–Jun, etc.), which may align better with your business cycle. Once made, this election stays in place unless you actively cancel it.
Each update must be submitted within one month after the quarter ends. Missing deadlines triggers points under the new penalty system – accumulate enough points and you face fixed penalties.
End of Period Statement (EOPS)
After the tax year ends, you complete an EOPS for each trade and property business. This is where you make adjustments – switching from cash to accruals basis, claiming capital allowances, adding business mileage, and declaring use of home as office.
If you run two separate trades and have rental property, you’ll submit three EOPS – one per income source.
Final Declaration
The final declaration replaces the old SA100 tax return. It brings together your finalised profits from all sources, along with any non-MTD income (employment, pensions, dividends), calculates your total tax liability, and confirms payments on account.
You still pay tax in the same way: two payments on account (31 January during the tax year and 31 July after) plus a balancing payment by 31 January following the tax year end.
Choosing MTD-Compatible Software
HMRC maintains a list of recognised software that meets digital link requirements. Not all accounting software is compatible, so check before committing.
Full Accounting Software vs Bridging Solutions
Full accounting software (like Xero, QuickBooks, FreeAgent, or tools like ANNA Money) handles everything: invoicing, expense tracking, bank reconciliation, and direct submission to HMRC. These suit businesses wanting an all-in-one solution.
Bridging software connects spreadsheets to HMRC’s systems. You maintain records in Excel or Google Sheets, then the bridge software formats and submits your data. This works if you’re comfortable with spreadsheets and want minimal disruption to existing workflows.
Choosing between them:
Full software offers automation (bank feeds, receipt scanning, rules-based categorisation) but requires learning a new system and often costs more. Bridging is cheaper and familiar but leaves manual reconciliation work to you.
Must-Have Features
Look for:
- Bank feeds that import transactions automatically
- Receipt capture via mobile app
- Multi-business support if you have several trades or properties
- Agent access if you work with an accountant
- Property schedules for landlords
Tools like ANNA Money make it easier for small business owners to manage finances, issue invoices, track expenses in real time, and stay compliant with tax regulations – all from a single platform designed for UK sole traders and freelancers.
Whatever you choose, ensure it offers secure backups, user permissions, encryption, and GDPR compliance. Two-factor authentication is essential for protecting sensitive financial data.
How to Sign Up for MTD for Income Tax
Signing up involves a few straightforward steps.
What you need before enrolling:
- Government Gateway user ID and password
- Unique Taxpayer Reference (UTR)
- National Insurance number
- Compatible software chosen and ready
- Recent Self Assessment data
The sign-up process:
- Choose and set up your MTD-compatible software
- Log into HMRC’s MTD sign-up service via your Government Gateway
- Confirm your details and income sources
- Link your software to HMRC
- Begin submitting quarterly updates from your mandation date
If you work with an accountant or tax agent, they can manage the entire process on your behalf. You’ll need to authorise them through HMRC’s agent services, allowing them to submit updates and declarations using their software.
Joining the HMRC pilot before your mandation date lets you test workflows, identify issues, and spread the learning curve. Many businesses find this reduces stress when the requirement becomes compulsory.
Record Keeping Rules in Practice
Keeping compliant records doesn’t require complex systems, but it does need discipline.
Self-Employment Records
Track all sales and income (invoices, cash sales, online payments), allowable expenses by category (stock, materials, subcontractors, marketing, professional fees, travel), business mileage if you use a personal vehicle, and capital assets purchased with their dates and costs.
Property Income Records
Maintain separate records for UK and overseas property businesses. Record rental income received, allowable expenses (repairs, insurance, agents’ fees, ground rent), and mortgage interest separately (due to tax relief restrictions). If you own multiple properties, HMRC treats them as one property business unless they’re furnished holiday lettings.
Multiple Trades or Properties
Keep distinct records for each separate trade. Mixing income and expenses across different businesses creates compliance headaches and makes EOPS submissions unnecessarily complicated.
Reconcile your bank regularly – weekly or monthly – and attach evidence (invoices, receipts, bank statements) to transactions. Even with bank feeds doing the heavy lifting, spot-check that everything flows correctly.
Key Dates and Deadlines
Staying on top of deadlines avoids penalties.
Quarterly update deadlines (standard quarters):
- Q1: 5 August
- Q2: 5 November
- Q3: 5 February
- Q4: 5 May
Year-end deadlines:
- EOPS for each source: 31 January following the tax year
- Final declaration: 31 January following the tax year
Payment deadlines:
- First payment on account: 31 January during the tax year
- Second payment on account: 31 July after the tax year
- Balancing payment: 31 January following the tax year
If cash flow is tight, HMRC offers Budget Payment Plans and Time to Pay arrangements – contact them before deadlines pass.
Penalties, Interest, and Compliance
MTD introduces a points-based penalty system for late submissions.
Each time you miss a quarterly update, EOPS, or final declaration deadline, you accumulate a point. Reach the penalty threshold (usually four points for quarterly obligations) and you receive a £200 fixed penalty. Further defaults add more penalties.
Late payment penalties kick in separately: 30 days late adds 5% of the outstanding tax, then further penalties at 6 and 12 months overdue. Interest runs daily on unpaid amounts.
Correcting mistakes:
You can amend quarterly updates anytime before submitting the EOPS for that year. After the EOPS, amendments go through your final declaration. If you spot an error after filing the final declaration, contact HMRC or submit an amendment through your software.
Always keep an audit trail showing what changed and why.
Exemptions and Reasonable Excuses
Some taxpayers can apply for exemption from MTD.
Grounds for exemption include:
- Digital exclusion (no internet access, low digital skills, remote location)
- Religious beliefs incompatible with digital record keeping
- Age, disability, or other circumstances making digital compliance unreasonable
If your income falls below the threshold after initially being mandated, you can opt out. However, monitor your income annually – crossing back above the threshold means re-entry into MTD.
To apply for exemption, complete HMRC’s application form with supporting evidence. Decisions typically take several weeks. If refused, you can appeal.
Basis Period Reform and MTD
Since April 2024, all businesses report on a tax year basis (6 April to 5 April) rather than accounting periods. This aligns with MTD’s quarterly updates.
If your business previously used a different year-end (say, 31 December), the 2023/24 tax year was transitional. You may have had overlap profits or transitional adjustments to report.
Common pitfalls:
- Forgetting to claim overlap relief from earlier years
- Mismatching EOPS periods with tax year dates
- Continuing to use old accounting periods in your head
Make sure your software is set to tax year basis and any transitional items were sorted in 2023/24 returns.
Benefits and Drawbacks of MTD for Income Tax
Potential benefits:
- Better visibility of tax liability throughout the year (no nasty surprises in January)
- Improved accuracy from regular reconciliation
- Clearer cash flow planning when you know quarterly figures
- Reduced year-end panic with work spread across the year
Potential drawbacks:
- Software subscription costs (typically £10–30 per month)
- Learning curve for new software
- More frequent submission deadlines to track
- Potential penalties if you miss updates
Tips to reduce admin burden:
Automate wherever possible (bank feeds, receipt OCR, recurring transactions), reconcile little and often rather than leaving it to year-end, and use your accountant strategically – many offer affordable monthly bookkeeping packages that take MTD obligations off your plate entirely.
Leaving MTD or Changing Circumstances
Business circumstances change. Here’s what happens in common scenarios.
Ceasing or selling your business:
Submit a final EOPS covering the period up to cessation, include any closing adjustments (stock, work in progress, capital allowances balancing charges), and file a final declaration for that tax year. Keep records for at least five years after the 31 January submission deadline.
Incorporating your business:
Your sole trade ends on incorporation date. Submit a final EOPS and declaration as above. Your new limited company starts Corporation Tax reporting – MTD for Income Tax no longer applies to that income (though you’ll still need MTD if you personally have property income above the threshold).
Dropping below the threshold:
You can apply to leave MTD if your income falls below £30,000 and stays there. HMRC reviews your status annually, so if income rebounds above £30,000, you’ll re-enter the system.
How MTD for Income Tax Differs from MTD for VAT
If you’re already VAT registered, you’ve dealt with MTD for VAT since 2019 (or later for smaller businesses). The concepts are similar but not identical.
FeatureMTD for VATMTD for Income TaxReporting frequencyQuarterly or monthly VAT returnsQuarterly updates plus year-end EOPS and final declarationWhat you reportVAT collected and paidIncome and expenses by sourceDigital linksRequiredRequiredSubmission deadlineOne month and seven days after periodOne month after quarter; 31 Jan for EOPS/finalSoftware overlapSome software does bothCheck compatibility for both regimes
Being MTD VAT compliant doesn’t automatically mean you’re ready for Income Tax MTD – though many platforms (including ANNA Money) support both, streamlining your obligations across regimes.
Common Scenarios and Examples
Scenario 1: Sole trader with £55,000 turnover, no property
You exceed the £50,000 threshold, so you’ll start MTD from April 2026. You’ll submit four quarterly updates showing income and expenses, complete one EOPS at year-end for your trade, and file a final declaration by 31 January 2027.
Scenario 2: Landlord with £35,000 rental income starting 2027/28
Your property income is over £30,000, so you begin MTD in April 2027. Quarterly updates cover rent received and allowable expenses, with mortgage interest reported separately. One EOPS for your UK property business finalises the year, then you file your final declaration.
Scenario 3: £28,000 trading income and £22,000 property income
Combined qualifying income is £50,000, so you’re in scope from April 2026. You’ll submit quarterly updates for both sources (trade and property) – eight updates total per year – then complete two EOPS (one for trade, one for property) and one final declaration pulling everything together.
Scenario 4: Jointly owned rental property
If you own property 50/50 with a partner, each of you reports your 50% share of income and expenses. Both must register for MTD if your individual shares exceed the threshold. Expenses are split according to ownership share unless you’ve formally agreed otherwise.
Glossary of Key MTD Terms
MTD ITSA: Making Tax Digital for Income Tax Self Assessment – alternative name for the system.
EOPS: End of Period Statement – year-end finalisation adjusting from quarterly estimates to actual profits.
Final declaration: The submission replacing the SA100 tax return, confirming total tax due.
Qualifying income: Gross trading and property income before expenses; determines whether you’re mandated.
Digital links: Uninterrupted digital connection between where you record transactions and where you submit them to HMRC.
Bridging software: Software connecting spreadsheets to HMRC without full accounting features.
Points-based penalties: System where late submissions accumulate points leading to fixed penalties.
Calendar quarters election: Choice to report Jan–Mar, Apr–Jun, Jul–Sep, Oct–Dec instead of standard quarters.
Sources and Where to Get Help
Official guidance:
- HMRC’s MTD for Income Tax guidance at gov.uk
- HMRC helpline: 0300 200 3310
Software vendor support:
- Most MTD-compatible software providers offer onboarding help, webinars, and tutorials.
Professional bodies:
- Institute of Chartered Accountants in England and Wales (ICAEW)
- Association of Chartered Certified Accountants (ACCA)
- Association of Taxation Technicians (ATT)
Your accountant or tax adviser remains your best resource for personalised advice on MTD compliance.
Frequently Asked Questions
Do I still need to keep paper receipts once I store records digitally?
HMRC accepts digital copies if they’re clear and complete. Scanning or photographing receipts is fine – you can dispose of originals once digitised, but keep backups of the digital files.
Does overseas property income count toward the MTD threshold?
Yes. Overseas property income is included in qualifying income and must be reported quarterly if you’re mandated. It’s treated as a separate property business from UK property.
Can I use spreadsheets only, without bank feeds, and stay compliant?
Yes, provided you use bridging software to submit digitally and maintain the digital link. Manual entry is allowed – bank feeds aren’t mandatory, just helpful for reducing workload.
If I use the cash basis, do my quarterly updates also have to be on a cash basis?
Yes. The basis you choose applies throughout the year. You can’t switch mid-year – the choice applies to the whole tax year.
Making Tax Digital for Income Tax represents a significant shift in how self-employed individuals and landlords manage their tax affairs. By understanding the requirements early, choosing appropriate software, and establishing solid digital record-keeping habits, you’ll be well-prepared when your mandation date arrives.
The change brings compliance challenges but also opportunities for better financial visibility and control throughout the year.
