Making Tax Digital for Income Tax Self-Assessment (MTD ITSA)

Introduction to Making Tax Digital for Income Tax Self-Assessment

The landscape of tax reporting for self-employed individuals and landlords in the UK is undergoing its most significant transformation in decades with the introduction of Making Tax Digital for Income Tax Self-Assessment, or MTD ITSA. This initiative by HM Revenue and Customs (HMRC) aims to modernise the tax system, making it more efficient, accurate, and easier for businesses to manage their tax affairs digitally. While MTD for VAT has been operational for some time, MTD ITSA extends these principles to income tax, requiring a fundamental shift from annual paper-based submissions to real-time digital record keeping and quarterly reporting.

Starting 6 April 2026, MTD ITSA becomes mandatory for self-employed businesses and landlords with qualifying income over £50,000. This initial phase will be followed by a reduction in the income threshold to £30,000 from April 2027, and further to £20,000 from April 2028, as announced in the March 2025 Spring Statement. This phased rollout means a growing number of individuals will need to adapt to the new digital requirements. This comprehensive guide will explain the new rules, who is affected, what steps you need to take to prepare, and how AccountsOS can help streamline your compliance, ensuring a smooth transition to the digital tax era.

What is Making Tax Digital for Income Tax Self-Assessment (MTD ITSA)?

Making Tax Digital for Income Tax Self-Assessment, or MTD ITSA, is a government initiative to digitalise the tax system for millions of self-employed individuals and landlords across the UK. It represents a significant departure from the traditional annual Self-Assessment process, which typically involves submitting a single tax return once a year. The core principle of MTD ITSA is to make tax administration more efficient, reduce errors, and provide taxpayers with a clearer, more real-time view of their tax position.

Under MTD ITSA, affected businesses and landlords will be required to keep digital records of their income and expenditure using HMRC-approved software. Instead of an annual tax return, they will submit summaries of their financial data to HMRC on a quarterly basis. These quarterly updates are not final tax calculations, but rather in-year snapshots designed to give HMRC and the taxpayer a clearer picture of their tax liability as the year progresses.

At the end of the tax year, an End-of-Period Statement (EOPS) will be submitted to finalise the business or property income figures, followed by a final annual declaration that consolidates all income sources, including employment income, pensions, and other investments, replacing the current Self-Assessment tax return. This comprehensive digital approach aims to create a more integrated and transparent tax system for everyone involved.

The Evolution of MTD: From VAT to ITSA

Making Tax Digital began its journey with MTD for VAT, which became mandatory for most VAT-registered businesses in April 2019, and for all VAT-registered businesses from April 2022. The experience gained from MTD for VAT has informed the development and rollout of MTD ITSA. While the principles are similar, digital record keeping and digital submissions, MTD ITSA introduces new complexities due to the nature of income tax, which can involve multiple sources of income and various adjustments.

HMRC's long-term vision for MTD is to create one of the most digitally advanced tax administrations in the world. This involves moving away from an annual compliance event to a system where tax is managed and reported more frequently, integrating seamlessly with day-to-day business operations. The goal is to make tax reporting "part of the rhythm of running a business," reducing the burden of a single, large annual tax submission and enabling businesses to better understand and manage their tax affairs.

Who is Affected by MTD ITSA from April 2026?

The MTD ITSA rules will be introduced in phases, starting with those with the highest qualifying income. It is crucial for self-employed individuals and landlords to understand if and when they will be impacted.

Initial Rollout: £50,000+ Earners from April 2026

From the start of the tax year commencing 6 April 2026, MTD ITSA will become mandatory for:

• Self-employed individuals who have income from one or more businesses.
• Landlords who receive income from UK property.

The key trigger for mandatory participation in this initial phase is having total gross income from these sources above £50,000 in a single tax year. This threshold applies to the combined income from all self-employment businesses and all UK property businesses. For example, if you have two self-employment ventures and one property, their combined gross income will determine your MTD ITSA obligation.

Future Threshold Reductions: £30,000 (2027) and £20,000 (2028)

HMRC has announced a clear roadmap for expanding the scope of MTD ITSA:

• From 6 April 2027: The mandatory income threshold will be lowered to £30,000. This means a significantly larger number of self-employed individuals and landlords will need to comply.
• From 6 April 2028: As confirmed in the March 2025 Spring Statement, the threshold will reduce further to £20,000. This will bring the vast majority of self-employed individuals and landlords into the MTD ITSA regime.

These phased introductions mean that even if you are not affected in 2026, it is highly probable you will be in the near future if your income from self-employment or property exceeds £20,000. Early preparation is advisable for all potentially affected individuals.

How is the Income Threshold Calculated?

The income threshold is based on your total gross income from all self-employment activities and all UK property businesses in a tax year.

Example Calculation:

• Business A gross income: £30,000
• Property B gross income: £25,000
• Total gross income: £55,000

In this scenario, with a combined income of £55,000, this individual would be mandated into MTD ITSA from April 2026, as their income exceeds the £50,000 threshold.

It is important to note that the threshold refers to gross income, not profits. This means even if your taxable profits are low due to high expenses, you may still be required to comply with MTD ITSA if your gross income exceeds the relevant threshold.

Exemptions from MTD ITSA

While MTD ITSA aims for broad coverage, certain entities and individuals are currently exempt:

• Companies: Limited companies are subject to Corporation Tax and MTD for Corporation Tax is a separate, future initiative. They are not affected by MTD ITSA.
• Trusts, Estates, and Non-Resident Companies: These entities are generally outside the scope of MTD ITSA.
• Individuals with very low income: Those whose combined gross income from self-employment and property is below the current threshold, for example, £50,000 for 2026/27, £30,000 for 2027/28, £20,000 for 2028/29 onwards, are not mandated to join.
• Those unable to comply digitally: In very specific circumstances, such as genuine digital exclusion or religious objection, individuals may be exempted. These exemptions are rare and require application to HMRC.

Even if you are currently exempt, you may choose to join MTD ITSA voluntarily. This can be a good way to familiarise yourself with the new system and benefit from the efficiencies of digital record keeping before it becomes mandatory for you.

What if my income fluctuates? If your income goes above the threshold in one year, you will generally be required to join MTD ITSA from the start of the next tax year. If your income subsequently drops below the threshold, you may be able to opt out, but you would need to inform HMRC. It's best to consult with an accountant or HMRC directly for specific guidance on fluctuating income.

What are the Core Requirements of MTD ITSA?

MTD ITSA introduces several key obligations that self-employed individuals and landlords must adhere to. These requirements fundamentally change how financial records are kept and how tax information is submitted to HMRC.

Digital Record Keeping

Maintain all business income and expenses digitally.

HMRC-Approved Software

Use compatible software to keep records and submit updates.

Quarterly Updates

Submit income and expense summaries to HMRC every three months.

End-of-Period Statement (EOPS)

Finalise your annual business income and expenses after year-end.

Final Declaration

Submit a final annual declaration, replacing the traditional Self-Assessment tax return.

1. Digital Record Keeping

At the heart of MTD ITSA is the requirement to keep digital records of all business income and expenses. This means that traditional paper ledgers, spreadsheets, or manual records will no longer suffice for mandatory participants. Instead, all relevant transactions must be recorded and stored digitally.

What needs to be recorded digitally includes:

• Income: Details of all sales, services rendered, rental income, and other earnings, including the date, amount, and category.
• Expenses: Records of all business-related outgoings, such as purchases, travel costs, utility bills, and professional fees, again with date, amount, and category.
• Adjustments: Any adjustments for capital allowances, stock valuations, private use of assets, or other tax-specific calculations.

The records must be kept in a "functional compatible software" or a set of software programs that can interact digitally. This means that while you might use an app for capturing receipts, the core financial data needs to reside in software that can connect directly or indirectly to HMRC's systems for reporting. Accuracy and completeness are paramount, as these digital records will form the basis of your quarterly updates and annual declarations.

2. Using HMRC-Approved Software

To comply with MTD ITSA, you must use software that is recognised by HMRC as "functional compatible software." This software must be capable of:

• Recording and storing digital records of income and expenses.
• Preparing and sending quarterly updates to HMRC.
• Preparing and sending the End-of-Period Statement (EOPS).
• Preparing and sending the final annual declaration.

HMRC maintains a list of software providers that offer MTD-compatible solutions. These can range from comprehensive accounting software packages that manage all aspects of your business finances to simpler "bridging software" that takes data from spreadsheets and formats it for HMRC submission.

Choosing the right software is a critical step. AccountsOS is live for VAT MTD today and is building ITSA support ahead of April 2026, offering intuitive tools for digital record keeping and automated expense categorisation.

3. Quarterly Updates

One of the most significant changes under MTD ITSA is the requirement to submit quarterly updates of your business or property income and expenses to HMRC. These updates are essentially summaries of your digital records for each quarter of your accounting period.

The standard quarterly periods align with the tax year, ending on 5 July, 5 October, 5 January, and 5 April. However, businesses can opt to use calendar quarters, ending 30 June, 30 September, 31 December, 31 March, if this better suits their accounting cycle. The deadline for submitting each quarterly update is one month and seven days after the end of the quarter.

Quarter Ending (Standard)	Submission Deadline
5 July	5 August
5 October	5 November
5 January	5 February
5 April	5 May

These updates provide HMRC with a more frequent view of your income and expenses, helping to reduce the likelihood of large tax bills at year-end. For taxpayers, it offers a real-time insight into their tax position, facilitating better financial planning and cash flow management. It is important to remember that these are not tax payments, but merely data submissions.

The information submitted in quarterly updates must be consistent with the digital records kept by the business or landlord. While minor adjustments can be made in later updates or the EOPS, the aim is for accuracy throughout the year.

4. End-of-Period Statement (EOPS)

After the final quarterly update for the tax year has been submitted, taxpayers must then send an End-of-Period Statement (EOPS) for each business or property income source. The EOPS serves to finalise the annual figures for that specific income source.

Key functions of the EOPS include:

• Finalising figures: Consolidating all quarterly updates for the year and making any necessary adjustments or corrections.
• Applying accounting adjustments: Including any accounting adjustments not reflected in the quarterly updates, such as capital allowances, stock adjustments, accruals, prepayments, or private use adjustments for assets.
• Claiming reliefs: Ensuring all applicable tax reliefs and allowances for that business or property are correctly claimed.

The EOPS must be submitted by 31 January following the end of the tax year. For example, for the tax year ending 5 April 2027, the EOPS would be due by 31 January 2028. If an individual has multiple income sources that fall under MTD ITSA, a separate EOPS is required for each.

5. Final Declaration

The final step in the MTD ITSA process is the submission of the final annual declaration. This replaces the traditional Self-Assessment tax return (SA100) for individuals mandated into MTD ITSA.

The final declaration consolidates all sources of income for the individual, not just those covered by MTD ITSA. This includes:

• Business and property income figures finalised in the EOPS.
• Employment income, PAYE.
• Pension income.
• Interest, dividends, and other investment income.
• Capital Gains Tax.
• Any other income or reliefs not covered in the EOPS.

The final declaration also calculates the individual's total tax liability for the year, taking into account all personal allowances and reliefs. Once submitted, HMRC will then provide a final tax calculation, and the individual will be notified of their total tax bill and payment deadlines.

The deadline for submitting the final declaration is also 31 January following the end of the tax year, aligning with the current Self-Assessment deadline. This ensures that all tax information is submitted and processed in a timely manner. AccountsOS is designed to assist in compiling the necessary data for this final declaration, building upon the quarterly updates and EOPS submissions.

Timeline for MTD ITSA Implementation

Understanding the phased rollout of MTD ITSA is critical for planning and preparation. HMRC has provided clear dates for when different groups of taxpayers will be mandated to join.

6 April 2026

Mandatory for income over £50,000+. Self-employed businesses and landlords must start keeping digital records and submitting quarterly updates for their Income Tax Self-Assessment.

6 April 2027

Mandatory for income over £30,000+. Self-employed businesses and landlords must start keeping digital records and submitting quarterly updates for their Income Tax Self-Assessment.

6 April 2028 (announced)

Mandatory for income over £20,000+. Self-employed businesses and landlords must start keeping digital records and submitting quarterly updates for their Income Tax Self-Assessment.

Key Dates and Their Implications

• 6 April 2026: This marks the official start date for MTD ITSA for those with qualifying income exceeding £50,000. From this date, all income and expenditure must be recorded digitally using MTD-compatible software. The first quarterly update for the tax year 2026/27 will cover the period 6 April 2026 to 5 July 2026, with a submission deadline of 5 August 2026.
• 6 April 2027: The income threshold drops to £30,000. Businesses and landlords whose income exceeds this new threshold in the 2025/26 or 2026/27 tax years will be mandated to join from April 2027. This significantly expands the number of individuals required to comply.
• 6 April 2028: Following the March 2025 Spring Statement, the threshold will be further reduced to £20,000. This extension aims to bring almost all self-employed individuals and landlords into the MTD ITSA framework. Those exceeding £20,000 in qualifying income in prior tax years will join from this date.
• 31 January Annually: This remains the deadline for both the End-of-Period Statement, EOPS, and the final annual declaration for the preceding tax year. For example, for the tax year ending 5 April 2027, the EOPS and final declaration would be due by 31 January 2028. This also remains the payment deadline for any outstanding tax liability.

It is important to consider your current income and project potential income for future years to determine when you will be mandated to join MTD ITSA. Even if your income is currently below the £50,000 threshold, given the planned reductions, it is prudent to begin preparing now.

Preparation Steps for Upcoming Mandates

For businesses and landlords nearing these thresholds, proactive steps can ease the transition:

• Identify your start date: Based on your gross income from self-employment and property, determine when MTD ITSA will become mandatory for you.
• Review current accounting practices: Assess how your records are currently kept. If they are not digital, start planning the transition.
• Research MTD-compatible software: Begin exploring software options that meet HMRC's requirements and suit your business needs. AccountsOS offers a tailored solution.
• Understand the new reporting cycle: Familiarise yourself with the concept of quarterly updates, EOPS, and the final declaration.

Early engagement with these changes will help prevent last-minute stress and potential penalties for non-compliance.

How to Prepare for Making Tax Digital for Income Tax Self-Assessment

Preparing for MTD ITSA requires a structured approach to ensure a smooth transition and compliance with the new regulations. Here are the key steps you should take:

1. Assess Your Eligibility and Start Date

The first step is to accurately determine if and when MTD ITSA will apply to you.

• Calculate your gross income: Add up all your gross income from self-employment and UK property businesses for recent tax years. Remember, this is gross income, not profit.
• Identify your mandatory start date:
  • If over £50,000 in 2024/25 or 2025/26, mandatory from April 2026.
  • If over £30,000 in 2025/26 or 2026/27, mandatory from April 2027.
  • If over £20,000 in 2026/27 or 2027/28, mandatory from April 2028.
• Consider voluntary participation: Even if not yet mandated, you might choose to opt-in early to get ahead and familiarise yourself with the system.

Understanding your specific timeline is fundamental to planning your preparation effectively.

2. Review Your Current Record-Keeping Practices

MTD ITSA mandates digital record keeping. This means you need to evaluate your current methods.

• Identify gaps: Are your current records comprehensive and easily accessible? Do you rely heavily on paper receipts or manual spreadsheets?
• Transition to digital: If you are still using paper, you will need to implement a system for digitising invoices, receipts, and bank statements. This could involve scanning documents or using apps that capture data from photos.
• Data integrity: Ensure your current data is accurate and up-to-date, as this will be migrated into your new MTD-compatible software.

Moving from paper to digital records is a significant change for many, but it offers long-term benefits in terms of efficiency and accuracy.

3. Choose MTD-Compatible Software

Selecting the right software is perhaps the most crucial preparation step.

• HMRC-approved list: Refer to HMRC's official list of MTD-compatible software. Ensure any software you consider is on this list.
• Functionality: Look for software that not only keeps digital records but also facilitates quarterly submissions, EOPS, and the final declaration.
• Ease of use: Choose software that is intuitive and easy for you to learn and use. AccountsOS is designed with user-friendliness in mind.
• Integration: Consider if the software integrates with other tools you use, such as bank accounts, payment processors, or e-commerce platforms.
• Support and training: Ensure the software provider offers good customer support and resources to help you get started and troubleshoot issues.

AccountsOS provides automated record keeping and real-time tax estimates. VAT MTD submissions are live today. ITSA quarterly submissions are in development ahead of April 2026.

4. Understand the New Reporting Obligations

Familiarise yourself with the new reporting rhythm and requirements.

• Quarterly updates: Understand what information needs to be submitted each quarter and the specific deadlines.
• End-of-Period Statement, EOPS: Learn about the purpose of the EOPS and the types of adjustments made at year-end.
• Final declaration: Grasp how the final declaration replaces your annual Self-Assessment tax return and what it consolidates.
• Penalties: Be aware of the new penalty system for late or inaccurate submissions under MTD ITSA.

A clear understanding of these new obligations will help you plan your workflow throughout the year.

5. Seek Professional Advice and Training

Don't hesitate to seek help if you feel overwhelmed.

• Accountant or tax advisor: If you currently use an accountant, discuss MTD ITSA with them. They can guide you through the transition and ensure compliance. If you don't have one, now might be a good time to consider professional support.
• HMRC resources: Utilise the official guidance and webinars provided by HMRC.
• Software provider training: Take advantage of any tutorials, guides, or customer support offered by your chosen software, like AccountsOS.

Professional guidance can be invaluable in navigating the complexities of MTD ITSA and ensuring you meet all requirements.

Benefits and Challenges of MTD ITSA

While MTD ITSA introduces new obligations, it also brings significant advantages for businesses and landlords. However, like any major change, it comes with its own set of challenges that need to be addressed.

Benefits of MTD ITSA

The move to digital tax reporting is designed to offer several long-term advantages:

• Reduced errors through digital processes.
• Clearer, real-time view of your tax position and cash flow.
• Easier to spot opportunities for tax efficiencies.
• Simplified record keeping with automated categorisation.
• Improved confidence in tax compliance.

By integrating tax reporting into daily operations, MTD ITSA aims to make tax less of a burden and more of an ongoing management tool. The real-time visibility can help businesses make more informed financial decisions throughout the year, rather than just reacting to an annual tax bill.

Challenges and Considerations

Despite the benefits, there are practical challenges that businesses and landlords may face during the transition:

• Initial time investment for setup and learning new software.
• Potential costs for MTD-compatible software.
• Ensuring all staff or partners are trained.
• Maintaining consistent digital record keeping throughout the year.
• Adapting to the new quarterly reporting rhythm.

Overcoming these challenges requires careful planning, investment in appropriate software and training, and potentially seeking professional advice. The key is to view MTD ITSA not just as a compliance burden, but as an opportunity to modernise and improve your financial management practices.

Understanding Income and Expenses for MTD ITSA

Accurate recording and categorisation of income and expenses are fundamental to MTD ITSA compliance. The digital records you keep will directly feed into your quarterly updates and annual declarations.

Recording Income Digitally

For MTD ITSA, all business or property income must be recorded digitally. This includes:

• Sales Revenue: Income from goods or services sold by a self-employed business.
• Rental Income: All rent received from property lettings.
• Other Business Income: Any other earnings related to your self-employment, such as grants, commissions, or compensation.

Each income transaction needs to be recorded with its date, amount, and an appropriate category. MTD-compatible software, like AccountsOS, can automate much of this by linking directly to your bank accounts and categorising transactions as they occur.

You will also need to decide whether to use the cash basis or accruals basis of accounting for your business, if you are eligible for cash basis. The chosen method must be applied consistently to your digital records. Most small businesses and landlords use the cash basis, which records income when received and expenses when paid.

Categorising Allowable Expenses

Identifying and correctly categorising allowable expenses is crucial for reducing your taxable profits. HMRC has specific rules on what can be claimed as a business expense. Generally, an expense is allowable if it is "wholly and exclusively" for the purpose of your trade or property business.

Examples of common allowable expenses include:

• Office costs, for example, stationery, phone, internet
• Travel costs, for example, fuel, public transport, parking, hotel stays
• Staff costs, for example, salaries, National Insurance, pensions
• Purchases for resale, raw materials, or stock
• Legal and professional fees, for example, accountants, solicitors
• Marketing, advertising, and subscription costs
• Financial costs, for example, bank charges, interest on business loans
• Training costs directly related to your business
• Capital allowances for qualifying assets, for example, equipment, vehicles
• Repair and maintenance of business premises and equipment

It is important to differentiate between allowable expenses, non-allowable expenses, for example, entertaining clients, personal use of assets, and capital expenditure, which may qualify for capital allowances instead of being expensed directly.

For landlords, specific rules apply, such as the restriction on finance cost relief, which is now given as a basic rate tax reduction rather than a deduction from rental income. MTD-compatible software helps track these distinctions and apply the correct tax treatment.

Simplified Expenses and Capital Allowances

Many small businesses can use simplified expenses for certain costs, such as vehicles and working from home. These are flat rates that can simplify calculations, though they may not always result in the largest deduction.

Capital allowances allow you to deduct the value of certain assets, such as equipment or vehicles, from your profits before tax. These are typically claimed in the End-of-Period Statement rather than in quarterly updates, as they are annual adjustments. Understanding what qualifies for Annual Investment Allowance, AIA, Writing Down Allowances, or other specific capital allowances is key to optimising your tax position.

How AccountsOS Handles Income and Expenses

AccountsOS streamlines the process of managing income and expenses for MTD ITSA:

• Bank Feeds: Securely connect your bank accounts for automatic import of transactions.
• Smart Categorisation: Our AI-powered system suggests categories for your transactions, learning from your habits to ensure accuracy.
• Receipt Capture: Easily upload or snap photos of receipts, linking them directly to transactions for robust digital records.
• Real-Time Updates: As you record income and expenses, your MTD ITSA figures are updated in real time, giving you a continuous view of your tax position.
• MTD VAT Reporting, Live Now: AccountsOS compiles your records for VAT MTD submission today. On HMRC's list of MTD VAT software. ITSA quarterly updates, EOPS, and Final Declaration are in development ahead of April 2026.

By automating these processes, AccountsOS significantly reduces the manual effort and potential for errors associated with MTD ITSA compliance.

Worked Examples: MTD ITSA in Practice

To illustrate how MTD ITSA works, let's consider two common scenarios: a self-employed graphic designer and a landlord with a rental property. These examples will demonstrate the quarterly update process and the concept of the End-of-Period Statement.

Example 1: Self-Employed Graphic Designer

Sarah runs a graphic design business as a sole trader. Her gross income is consistently above £50,000. She uses AccountsOS for her digital record keeping.

Tax Year 2026/27, Quarterly Updates

Sarah's accounting period aligns with the tax year, 6 April to 5 April.

Quarter	Period End	Submission Due	Gross Income	Allowable Expenses	Net Profit (Estimate)
Q1	5 July 2026	5 August 2026	£14,000	£2,500	£11,500
Q2	5 October 2026	5 November 2026	£16,500	£3,200	£13,300
Q3	5 January 2027	5 February 2027	£15,000	£2,800	£12,200
Q4	5 April 2027	5 May 2027	£18,000	£4,000	£14,000

End-of-Period Statement, EOPS, and Final Declaration

After 5 April 2027, Sarah will prepare her EOPS. Suppose she identifies the following annual adjustments:

• Capital allowance claim for new computer: £1,500
• Use of home as office adjustment: £312, simplified expenses
• Adjustments for minor errors in quarterly submissions: Net £50 increase in expenses

Her annual business figures would be:

• Total Gross Income: £14,000 + £16,500 + £15,000 + £18,000 = £63,500
• Total Allowable Expenses, before EOPS adjustments: £2,500 + £3,200 + £2,800 + £4,000 = £12,500
• EOPS Adjustments: £1,500, capital allowance + £312, home office + £50, error correction = £1,862
• Total Allowable Expenses, final: £12,500 + £1,862 = £14,362
• Final Net Profit for business: £63,500 - £14,362 = £49,138

Sarah submits her EOPS for her graphic design business by 31 January 2028.

She then compiles her final declaration, including her business profit, any other income, for example, bank interest, and personal allowances. This final declaration is also submitted by 31 January 2028, and her overall tax liability is calculated by HMRC.

Example 2: Landlord with Rental Property

David owns a single rental property and his gross rental income is £60,000 per year. He is mandated for MTD ITSA from April 2026.

Tax Year 2026/27, Quarterly Updates

David receives £5,000 rent per month, and his expenses vary.

Quarter	Period End	Submission Due	Gross Income	Allowable Expenses	Net Profit (Estimate)
Q1	5 July 2026	5 August 2026	£15,000	£1,800	£13,200
Q2	5 October 2026	5 November 2026	£15,000	£2,500	£12,500
Q3	5 January 2027	5 February 2027	£15,000	£1,900	£13,100
Q4	5 April 2027	5 May 2027	£15,000	£2,100	£12,900

End-of-Period Statement, EOPS, and Final Declaration

David's property generates £60,000 gross rental income. His total expenses for the year before EOPS adjustments are £8,300.

For his EOPS, David needs to account for:

• Mortgage interest, finance costs: £4,000, this is not an allowable expense but gives a basic rate tax reduction
• Replacement of a washing machine: £500, this is a replacement of domestic items relief, not a capital allowance

His annual property figures would be:

• Total Gross Rental Income: £60,000
• Total Allowable Expenses, before EOPS adjustments: £8,300
• EOPS Adjustments: £500, replacement of domestic items relief
• Total Allowable Expenses, final: £8,300 + £500 = £8,800
• Final Net Profit for property: £60,000 - £8,800 = £51,200

David submits his EOPS for his property business by 31 January 2028.

He then completes his final declaration, including his property profit, his restricted finance costs, for the tax reduction, and any other income or allowances. This final declaration, along with any tax payments, is due by 31 January 2028.

Penalties for Non-Compliance with MTD ITSA

HMRC is introducing a new penalty system for MTD ITSA, which will apply to both late submissions and late payments. This new system is designed to be fairer and more proportionate than the current Self-Assessment penalty regime.

New Points-Based Penalty System for Late Submissions

Instead of immediate fixed penalties, a points-based system will apply to late quarterly updates, EOPS, and the final declaration.

• Points for Late Submissions: For each late submission, quarterly update, EOPS, or final declaration, you will receive one point.
• Penalty Trigger: Once you reach a certain number of points, a financial penalty will be issued. The threshold for points will depend on your submission frequency, for example, quarterly, annually.
• Penalty Amount: A fixed penalty will be charged once the point threshold is reached. For example, for quarterly submissions, the threshold might be 4 points, triggering a £200 penalty.
• Points Expiry: Points will expire after a certain period of compliance, for example, 24 months of continuous on-time submissions.

This system aims to penalise persistent non-compliance rather than isolated errors. However, continuous late submissions will quickly lead to penalties.

Penalties for Late Payments

HMRC is also revising the system for late payment penalties. This will involve:

• First Penalty: A percentage-based penalty if tax is not paid within a certain period after the due date, for example, 15 days.
• Second Penalty: An additional penalty if tax remains unpaid after a further period, for example, 30 days.
• Interest: Interest will be charged on any unpaid tax from the original due date until it is paid in full. The interest rate is typically the Bank of England base rate plus 2.5%.

The new penalty regime for late payments is designed to encourage earlier payment and reduce the need for HMRC to chase outstanding tax.

Penalties for Inaccurate Submissions

Penalties for inaccurate submissions will continue to apply, similar to the current regime. The severity of the penalty depends on the reason for the inaccuracy:

• Careless Error: If an inaccuracy is due to a lack of reasonable care, a penalty of up to 30% of the extra tax due may apply.
• Deliberate but not concealed: Up to 70% of the extra tax.
• Deliberate and concealed: Up to 100% of the extra tax.

HMRC may reduce penalties if you proactively disclose inaccuracies and cooperate with their investigations. The use of MTD-compatible software and maintaining accurate digital records can significantly reduce the risk of inaccuracies.

Crucial Note: The new penalty systems for late submissions and payments are expected to align with the start dates of MTD ITSA. It is vital to stay informed about the precise details of these penalty regimes as they are finalised by HMRC.

What if My Income Drops Below the MTD ITSA Threshold?

It is possible for your gross income from self-employment or property to fluctuate year-on-year. If you are mandated into MTD ITSA and your income subsequently falls below the relevant threshold, HMRC has provisions for this scenario.

Opting Out of MTD ITSA

If your total gross income from self-employment and property businesses falls below the current MTD ITSA threshold for two consecutive tax years, you may be able to opt out of the MTD ITSA requirements.

• Monitoring Income: You will need to monitor your income to determine if you qualify to opt out.
• Notification to HMRC: If you meet the criteria, you would need to inform HMRC that you wish to cease MTD ITSA reporting. They will then confirm if you can revert to traditional Self-Assessment.
• Voluntary Continuation: Even if you qualify to opt out, you might choose to continue with MTD ITSA voluntarily. Many businesses find the digital record keeping and real-time insights beneficial for managing their finances, regardless of the mandatory threshold.

It is important to remember that the threshold is based on gross income, not profit. Therefore, even if your profits are low, your gross income might still keep you within the mandatory scope of MTD ITSA.

How HMRC Monitors Income Thresholds

HMRC will use the data submitted in your quarterly updates and End-of-Period Statements to monitor your gross income. This ongoing data stream will allow them to identify individuals who meet or fall below the thresholds.

• If your income consistently stays above the threshold, you will remain in MTD ITSA.
• If your income drops below the threshold, HMRC may contact you to confirm your status or you may need to proactively communicate with them if you wish to opt out.

The transparency of digital reporting means that your eligibility for MTD ITSA will be regularly assessed based on the information you provide.

Impact on Other Income Sources

Even if your self-employment or property income falls below the MTD ITSA threshold and you opt out, you would still need to report other income sources, for example, employment, pensions, dividends, through the standard Self-Assessment process or via PAYE, as applicable. The final annual declaration under MTD ITSA consolidates all income, so if you opt out, you would revert to the traditional SA100 form for all your income.

The flexibility to opt out if your income decreases provides a safety net, but the general trend is towards increased digitalisation of tax, making it beneficial to embrace MTD principles regardless of current thresholds.

How AccountsOS Helps with MTD ITSA Compliance

AccountsOS is purpose-built to simplify Making Tax Digital for Income Tax Self-Assessment, ensuring you meet HMRC's requirements with ease and confidence.

Automated Digital Record Keeping

Connect your bank accounts and AccountsOS automatically imports and categorises your transactions, creating a complete digital record of your income and expenses, ready for MTD ITSA.

Seamless Quarterly Updates

Our software compiles your digital records into the required quarterly summaries and allows for direct, compliant submission to HMRC, eliminating manual data entry for reporting.

Real-Time Tax Estimates

See your estimated income tax liability update throughout the year as you record transactions, helping you plan for your tax bill and avoid year-end surprises.

Simplified End-of-Period Statements

AccountsOS helps you prepare your End-of-Period Statements by collating annual figures and prompting for necessary adjustments, ensuring accuracy before your final declaration.

Comprehensive Expense Tracking

Our intelligent categorisation and receipt capture features ensure you claim all eligible business expenses, reducing your taxable profit and maximising your tax efficiency.

Deadline Reminders and Alerts

Stay on top of all MTD ITSA deadlines with automated reminders for quarterly updates, EOPS, and your final declaration, helping you avoid late submission penalties.

User-Friendly Interface

Designed for small businesses and landlords, AccountsOS provides an intuitive interface that makes managing your finances and complying with MTD ITSA straightforward, even if you're new to digital accounting.

Integration with HMRC

AccountsOS is HMRC-recognised for VAT MTD, with a direct API connection. ITSA submission support is in development ahead of April 2026.

Frequently asked questions

What is the primary goal of Making Tax Digital for Income Tax Self-Assessment?

The primary goal is to modernise the tax system by making it digital, reducing errors, and providing taxpayers with a more real-time view of their tax position. It aims to integrate tax reporting into routine business operations, moving away from a single annual submission.

Do I need to pay tax every quarter under MTD ITSA?

No, the quarterly updates are for reporting your income and expenses, not for making tax payments. Your actual tax liability will be calculated after your End-of-Period Statement and final declaration, with payment deadlines remaining consistent with the current Self-Assessment system.

What if I have multiple self-employment businesses or properties?

If you have multiple self-employment businesses or properties, you will need to keep digital records and submit separate quarterly updates for each business. You will then submit a separate End-of-Period Statement for each business or property income source before submitting a single final declaration covering all your income.

Can I use a spreadsheet for MTD ITSA?

You can use a spreadsheet to keep your digital records, but it must be combined with 'bridging software' that can digitally send the required information to HMRC. The spreadsheet itself is not sufficient, it must be part of a 'functional compatible software' solution.

What happens if I miss a quarterly update deadline?

HMRC is introducing a new points-based penalty system for late submissions under MTD ITSA. Each late submission will incur a point, and once a certain threshold of points is reached, a financial penalty will be issued. Points expire after a period of compliance.

Will MTD ITSA affect my ability to claim expenses?

No, the rules around what constitutes an allowable business expense remain unchanged under MTD ITSA. The difference is that you must keep digital records of these expenses and report them through MTD-compatible software.

What if my business is seasonal and income fluctuates significantly?

MTD ITSA's quarterly updates are designed to reflect the fluctuating nature of business income. You simply report your actual income and expenses for each quarter. The system provides a cumulative view, so periods of lower income will balance out with periods of higher income over the year.

Is there any support available for transitioning to MTD ITSA?

Yes, HMRC provides extensive guidance and resources on its website. Additionally, MTD-compatible software providers like AccountsOS offer support, tutorials, and customer service to help you set up and manage your MTD ITSA obligations. Professional accountants and tax advisors can also provide tailored assistance.

Related guides

• Making Tax Digital Hub
• Self-Assessment Guide
• All Tax Deadlines
• AccountsOS Features
• HMRC MTD ITSA Guidance
• Find MTD Software