Will Your Small Business Join Making Tax Digital for Income Tax in 2027 or 2028?

Q: Do I need to pay tax quarterly under MTD ITSA?

No, MTD ITSA requires quarterly *updates* of your income and expenses, not quarterly *payments* of tax. Your final tax payment deadline remains 31 January after the tax year, though Payments on Account may still apply.

Making Tax Digital for Income Tax Self Assessment, commonly known as MTD ITSA, represents a significant transformation in how sole traders and landlords report their income and expenses to HMRC. Currently, MTD ITSA applies to those with gross business or property income exceeding £50,000. However, the scope of this initiative is set to broaden considerably over the next two years, impacting a much larger number of small businesses across the UK.

From April 2027, the MTD ITSA threshold will fall to £30,000, bringing many more medium-sized sole traders and landlords into the digital reporting regime. Just one year later, from April 2028, the threshold will drop further to £20,000, encompassing an even greater proportion of the UK's smallest businesses and property owners. This phased rollout means that proactive preparation is crucial for anyone whose income falls within or near these new thresholds. Understanding the requirements, adopting digital record-keeping, and choosing MTD-compatible software are essential steps to ensure a smooth transition and avoid potential penalties. This comprehensive guide will explain everything you need to know about these upcoming changes and how to prepare your business for MTD ITSA.

Year	Threshold	Who is affected
Current (from April 2026)	£50,000+	Sole traders & landlords
From April 2027	£30,000+	More small businesses
From April 2028	£20,000+	Even more small businesses

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

Making Tax Digital (MTD) is a government initiative designed to modernise the UK tax system, making it more efficient, more effective, and easier for taxpayers to get their tax right. MTD for Income Tax Self Assessment (MTD ITSA) is the branch of this initiative specifically targeting individuals who report their income through Self Assessment, primarily sole traders and landlords. It marks a fundamental shift from the traditional annual tax return to a system of digital record-keeping and more frequent, digital updates to HMRC.

The Core Principles of MTD ITSA

Digital Record-Keeping: Businesses and landlords must keep digital records of all their income and expenses using MTD-compatible software. This eliminates the need for paper records and manual data entry.
Quarterly Updates: Instead of a single annual tax return, businesses must submit summaries of their income and expenses to HMRC every three months, known as quarterly updates. These updates provide HMRC with a more real-time view of a business's financial activity.
End of Period Statement (EOPS): After the final quarterly update for the tax year, businesses must submit an End of Period Statement for each income source. This statement allows for final adjustments, claims for capital allowances, and other reliefs specific to that business or property.
Final Declaration: Finally, a single 'Final Declaration' consolidates all income sources, including any non-business income, and allows for personal allowances and reliefs to be applied, calculating the final tax liability for the year. This replaces the Self Assessment tax return.

The aim of MTD ITSA is to reduce errors, provide taxpayers with a clearer picture of their tax position throughout the year, and ultimately simplify the tax process. While it requires a change in habits, the benefits of digital record-keeping and more frequent updates can include better financial management and fewer year-end surprises.

Who is Currently Affected by MTD ITSA?

As of April 2026, MTD ITSA is mandatory for sole traders and landlords with gross business or property income exceeding £50,000 per year. This initial phase targeted larger businesses within the Self Assessment population, allowing HMRC to refine the system and software providers to develop robust solutions. Individuals whose income falls below this threshold are not currently mandated to join but can choose to do so voluntarily.

The Upcoming Threshold Changes: 2027 and 2028

The most significant upcoming changes to MTD ITSA involve the reduction of the income threshold, which will dramatically expand the number of sole traders and landlords required to comply. These changes are part of HMRC's long-term strategy to bring most Self Assessment taxpayers into the MTD regime.

From April 2027: The £30,000 Threshold

Beginning in April 2027, the MTD ITSA threshold will fall from £50,000 to £30,000. This means that if your gross income from one or more businesses or property ventures is £30,000 or more in the preceding tax year, you will be mandated to follow MTD ITSA rules for the tax year starting April 2027.

Impact of the £30,000 Threshold: This change will bring a substantial number of medium-sized sole traders and landlords into MTD ITSA. Many businesses that currently manage their tax affairs with spreadsheets or manual records will need to transition to MTD-compatible software and adopt digital record-keeping practices. This includes a wide range of professionals, tradespeople, freelancers, and property owners whose income, while not at the highest tier, is still significant.

From April 2028: The £20,000 Threshold

Just one year later, from April 2028, the MTD ITSA threshold will be reduced further to £20,000. This will encompass an even broader segment of the UK's self-employed population and landlords. If your gross qualifying income is £20,000 or more in the preceding tax year, you will be required to comply with MTD ITSA for the tax year starting April 2028.

Impact of the £20,000 Threshold: This threshold will capture many small businesses and part-time landlords who may have previously considered their income too low to warrant sophisticated accounting software. It includes a vast array of individuals, from those running small online shops and service businesses to individuals renting out a single property. For many, this will be their first exposure to mandatory digital tax reporting, making early preparation even more critical.

How to Determine if You Meet the Threshold

The key to determining if you are affected by MTD ITSA is your 'gross income' from your business(es) and/or property. This is your total income before any expenses or allowances are deducted.

Sole Traders: This refers to your total turnover from your self-employed business activities.
Landlords: This refers to your total rental income before deducting any expenses like mortgage interest, agent fees, or repairs.
Combined Income: If you have multiple sole trade businesses or multiple property ventures, or a combination of both, you must combine the gross income from all these sources. If the total gross income exceeds the MTD ITSA threshold, then you must comply for all of them.

Example: For the tax year beginning April 2027, you will need to check your gross income from the tax year ending 5 April 2027. If it was £30,000 or more, you will be mandated to join MTD ITSA from April 2027. Similarly, for the tax year beginning April 2028, you will check your gross income from the tax year ending 5 April 2028 against the £20,000 threshold.

Core Requirements of Making Tax Digital for Income Tax

Compliance with MTD ITSA hinges on several key requirements that all affected sole traders and landlords must adhere to. These requirements fundamentally change how financial records are maintained and how tax information is submitted to HMRC.

Digital Record-Keeping

Maintain accurate, up-to-date records of all income and expenses in a digital format.

MTD-Compatible Software

Use software approved by HMRC to record transactions and submit updates digitally.

Quarterly Income Tax Updates

Submit summaries of your business income and expenses to HMRC every three months.

End of Period Statement (EOPS)

Finalise your business income and expenses for the tax year after the last quarterly update.

Final Declaration

Confirm all income sources, claim reliefs, and calculate your final tax liability.

1. Digital Record-Keeping

At the heart of MTD ITSA is the requirement to keep digital records. This means that all relevant business or property transactions, including income and expenses, must be recorded and stored electronically. HMRC's definition of digital records is broad but essentially requires that data is captured and held in a digital format from its origin.

What Records Need to be Kept Digitally? You must keep digital records of all your business income and expenses. This includes the date of the transaction, the amount, and the category of income or expense. For landlords, this means rental income, property repairs, insurance, agent fees, and other allowable costs.
Acceptable Digital Formats: This can include MTD-compatible software, digital spreadsheets (used in conjunction with bridging software), or even digital images of invoices and receipts. The key is that the data itself must be digital and easily transferable.
Importance of Accuracy and Completeness: Digital records must be accurate and complete. Any errors or omissions can lead to penalties. Regular reconciliation of bank accounts with digital records is a good practice to ensure accuracy.
Transitioning from Paper Records: For many, this will involve moving away from traditional paper-based systems. While you don't need to digitise historical paper records, all new transactions from your MTD start date must be recorded digitally. Scanning receipts and invoices into your MTD software is a common approach.

2. MTD-Compatible Software

To meet the MTD ITSA requirements, you must use software that is recognised by HMRC as 'MTD-compatible'. This software serves as the bridge between your digital records and HMRC, allowing for the digital submission of your quarterly updates and other statements.

Definition and Features: MTD-compatible software must be able to keep digital records of your business income and expenses, calculate your quarterly summaries, and submit these summaries directly to HMRC via their API (Application Programming Interface). It should also be able to facilitate the End of Period Statement and Final Declaration.
Bridging Software vs. End-to-End Solutions: There are two main types of MTD-compatible software. 'End-to-end' solutions, like AccountsOS, handle all your digital record-keeping, calculations, and submissions in one integrated platform. 'Bridging software' allows you to continue using spreadsheets for your digital records, but then links to HMRC's API to submit the required data, effectively 'bridging' the gap between your spreadsheet and HMRC. While bridging software can be a temporary solution, integrated software often offers more features and streamlines the entire process.
Choosing the Right Software: When selecting software, consider ease of use, cost, features relevant to your business (e.g., invoicing, bank feeds, specific expense categories for landlords), and the level of support offered. AccountsOS is designed to be intuitive for small businesses and landlords, simplifying MTD compliance.

3. Quarterly Income Tax Updates

This is a core component of MTD ITSA. Instead of one annual submission, you will provide HMRC with summaries of your business income and expenses every three months.

Purpose and Frequency: The quarterly updates give HMRC a near real-time view of your earnings and outgoings. This helps to identify potential errors earlier and provides you with a more up-to-date estimate of your tax liability. There are four quarterly updates per tax year, with specific deadlines.
Information Required: Each update requires a summary of your total business income and total business expenses for that quarter. You do not need to submit individual transactions. The software will aggregate the digital records you have maintained.
Submission Process: Your MTD-compatible software will automatically extract the necessary data from your digital records, calculate the summary figures, and submit them directly to HMRC. This process is designed to be seamless and reduces the risk of manual transcription errors.

Worked Example: Quarterly Update

Let's consider a sole trader, Alex, who runs a graphic design business and is mandated for MTD ITSA from April 2027.

Quarter 1 (6 April - 5 July 2027):

Gross Income: £12,500
Allowable Expenses: £3,200 (software subscriptions, office supplies, travel)
Net Profit: £9,300

Alex's MTD-compatible software, like AccountsOS, will automatically compile these totals from the digital records. By 5 August 2027, Alex will review the summary generated by the software and click to submit it to HMRC. The submission will simply state:

Income for Quarter 1: £12,500
Expenses for Quarter 1: £3,200

This process repeats for each quarter, providing HMRC with a rolling picture of Alex's business performance.

4. End of Period Statement (EOPS)

After the fourth quarterly update for the tax year, you must submit an End of Period Statement for each source of business or property income.

What it is and its Purpose: The EOPS allows you to finalise the business or property income and expenses for the entire tax year. This is where you make any accounting adjustments, claim capital allowances, and apply any specific reliefs that couldn't be included in the quarterly summaries.
Adjustments and Claims: Examples include annual investment allowance, writing down allowances, private use adjustments, and any other specific tax adjustments or elections related to your business or property income.
Deadline and Submission: The EOPS must be submitted by 31 January following the end of the tax year. Your MTD-compatible software will assist in generating and submitting this statement.

5. Final Declaration

The Final Declaration is the ultimate step in the MTD ITSA process, replacing the traditional Self Assessment tax return.

Consolidating All Income Sources: This declaration brings together all your income streams, including your business and property income (from the EOPS), employment income, savings interest, dividends, and any other taxable income. It also applies any personal allowances and reliefs not already accounted for.
Calculating Final Tax Liability: Based on all your income and allowances, the Final Declaration calculates your total income tax and National Insurance contributions for the tax year.
Deadline and Payment: Like the EOPS, the Final Declaration must be submitted by 31 January following the end of the tax year. The payment of any tax due for that tax year is also typically due on this date, along with the first payment on account for the subsequent tax year.

MTD ITSA Deadlines and Penalties

Adhering to the new MTD ITSA deadlines is crucial to avoid penalties. The system introduces more frequent submission points than the traditional Self Assessment, requiring a more disciplined approach to record-keeping and reporting.

Key MTD ITSA Deadlines

The tax year runs from 6 April to 5 April. The deadlines for quarterly updates are fixed regardless of your accounting period.

Submission	Reporting period end	Submission deadline
Quarterly Update Period	5 April	5 May
Quarterly Update Period	5 July	5 August
Quarterly Update Period	5 October	5 November
Quarterly Update Period	5 January	5 February
End of Period Statement	31 January	31 January (after tax year)
Final Declaration	31 January	31 January (after tax year)

Example: For the tax year 2027-2028:

Quarter 1 (6 April - 5 July 2027): Submission due by 5 August 2027.
Quarter 2 (6 July - 5 October 2027): Submission due by 5 November 2027.
Quarter 3 (6 October 2027 - 5 January 2028): Submission due by 5 February 2028.
Quarter 4 (6 January - 5 April 2028): Submission due by 5 May 2028.
EOPS and Final Declaration for 2027-2028: Due by 31 January 2029.

MTD ITSA Penalties for Non-Compliance

HMRC has introduced a new points-based penalty system for MTD ITSA. This system is designed to penalise persistent non-compliance rather than isolated errors, though monetary penalties can still apply.

Scenario	Penalty
Late quarterly submission	Points-based system, then £200
Late End of Period Statement	Points-based system, then £200
Late Final Declaration	Points-based system, then £200
Late payment of tax	Interest + 2.5% on overdue amounts
Inaccurate records/submissions	Up to 100% of unpaid tax

Points-Based System: For each missed submission, you receive a point. Once you reach a certain number of points (e.g., 4 points for annual submissions), you incur a £200 penalty. Points expire after a certain period of compliance.

Late Payment Penalties: These are separate from submission penalties and involve interest charges on overdue tax, plus additional penalties if payment is significantly delayed.

Inaccuracy Penalties: If you submit inaccurate information, you could face penalties of up to 100% of the unpaid tax, depending on whether the inaccuracy was careless or deliberate.

Navigating Specific Scenarios with MTD ITSA

MTD ITSA introduces new considerations for various business and income structures. Understanding these nuances is key to effective compliance.

Fluctuating Income

A common concern for small businesses and landlords is what happens if their income fluctuates around the MTD ITSA thresholds.

If Income Drops Below the Threshold: Once mandated to join MTD ITSA, you generally remain in the system even if your income falls below the threshold in a subsequent year. HMRC's guidance indicates that you must continue to follow MTD rules unless your business ceases or your income remains below the threshold for a sustained period, allowing you to notify HMRC and potentially opt out. It is important to seek specific guidance from HMRC or an accountant in such situations.
If Income Rises Above the Threshold: If your gross income in a tax year exceeds the relevant MTD ITSA threshold, you will be mandated to join MTD ITSA from the start of the following tax year. For example, if your income for the tax year ending 5 April 2027 is £32,000, you would need to join MTD ITSA for the tax year starting 6 April 2027, as it exceeds the £30,000 threshold.

Multiple Income Sources

Many individuals have more than one source of income. MTD ITSA applies to the total gross income from all relevant sources.

Combining Sole Trade and Property Income: If you are a sole trader and also have rental property income, you must add the gross income from your business(es) and your property(ies) together. If this combined total exceeds the MTD ITSA threshold, then both your business income and your property income will need to be reported under MTD ITSA rules.
Separate Businesses: If you run multiple sole trade businesses, the gross income from each is added together to determine if you meet the threshold. If you do, each business will require its own set of quarterly updates and an End of Period Statement.

Landlords: Specific Considerations for Property Income

Landlords are a significant group affected by MTD ITSA. While the core principles apply, there are specific points to note.

Gross Rental Income: The threshold applies to your gross rental income across all your properties, before any expenses like mortgage interest, agent fees, or repairs are deducted. For jointly owned properties, each owner's share of the gross income counts towards their individual threshold.
Allowable Expenses for Property: Landlords can claim a range of allowable expenses to reduce their taxable profit, such as maintenance and repairs, letting agent fees, legal fees for renewals, insurance, and some finance costs. These must be digitally recorded.
Furnished Holiday Lettings (FHL): FHLs have different tax rules and may be treated separately for some aspects, but the MTD ITSA threshold and reporting requirements still apply to their gross income.

Partnerships

Partnerships are also part of the MTD programme, but their rollout has a different timeline.

Current Status: Currently, MTD ITSA does not apply to general partnerships. However, MTD for partnerships is planned to be introduced at a later date, with details to be confirmed by HMRC. It is anticipated that similar digital record-keeping and quarterly reporting requirements will eventually extend to partnerships.
Impact on Individual Partners: While the partnership itself may not be under MTD ITSA yet, if an individual partner also has sole trade or property income that meets the MTD ITSA threshold, they will need to comply for those individual income sources.

Preparing Your Small Business for MTD ITSA

The transition to MTD ITSA requires foresight and planning. Starting your preparations early can significantly ease the process and help you avoid unnecessary stress and penalties.

Step-by-Step Preparation Guide

Step 1: Assess Your Income: Review your gross income from all sole trade businesses and property ventures for the current and previous tax years. Determine if you are likely to exceed the £30,000 threshold in 2027 or the £20,000 threshold in 2028. This will tell you your mandatory start date.
Step 2: Review Current Record-Keeping: Evaluate your existing system. Are you using paper receipts, spreadsheets, or basic accounting software? Identify areas that need to be digitised to meet MTD requirements. Consider how you currently track income and expenses and where improvements can be made.
Step 3: Research MTD-Compatible Software: Explore the market for MTD-compatible software solutions. Look for software that suits your business size, complexity, and budget. Consider features like bank feeds, expense categorisation, invoicing, and direct submission to HMRC. AccountsOS offers an intuitive platform specifically designed for MTD ITSA compliance for small businesses and landlords.
Step 4: Digitize Your Records: Once you have chosen your software, begin transitioning your record-keeping to a digital format. Start recording all new income and expenses directly into your MTD software. Consider scanning and attaching receipts to transactions for a fully digital audit trail.
Step 5: Understand the Reporting Cycle: Familiarise yourself with the quarterly reporting periods and deadlines. Set up reminders in your calendar or use software with built-in deadline notifications, like AccountsOS. Regular, timely updates are key to avoiding penalties.
Step 6: Consider Professional Advice: If you are unsure about any aspect of MTD ITSA, consider consulting with an accountant or tax advisor. They can provide tailored advice, help you choose suitable software, and even manage your MTD submissions on your behalf.
Step 7: Start Early (Voluntary Compliance): Even if you're not yet mandated, consider joining MTD ITSA voluntarily. This allows you to get used to the new system without the pressure of strict deadlines and potential penalties, ensuring a smoother transition when it becomes mandatory for your income level.

Benefits of MTD ITSA Beyond Compliance

While MTD ITSA is a compliance requirement, adopting digital practices can bring tangible benefits to your business:

Real-Time Financial Overview: Digital records and quarterly updates provide a much clearer, up-to-date picture of your business's financial health, helping with better decision-making.
Improved Accuracy: Automated data entry and reduced manual intervention lead to fewer errors in your financial records and tax submissions.
Easier Tax Planning: With regular updates and real-time tax estimates, you can anticipate your tax bill throughout the year, allowing for better cash flow management and tax planning.
Reduced Stress: Spreading the tax reporting workload across the year, rather than a single annual rush, can significantly reduce year-end stress and the burden of Self Assessment.

Exemptions and Opting Out

While MTD ITSA is becoming mandatory for many, there are certain exemptions.

Who is Exempt? HMRC provides exemptions for individuals who are genuinely unable to comply with MTD due to reasons such as age, disability, remote location with no internet access, or religious beliefs that prevent the use of computers. There is also an exemption for insolvency.
How to Apply for an Exemption: If you believe you qualify for an exemption, you must apply to HMRC. Each application is considered on a case-by-case basis. It is important not to assume you are exempt without confirmation from HMRC.

Voluntary MTD ITSA for Smaller Businesses

Even if your income is below the upcoming £20,000 threshold, you can still choose to join MTD ITSA voluntarily.

Benefits of Voluntary Compliance: Voluntary participation allows you to familiarise yourself with the MTD system at your own pace, without the immediate pressure of penalties. It can also help you develop better financial habits, gain a clearer understanding of your tax position, and take advantage of the benefits of digital accounting before it becomes mandatory for you.
How to Sign Up: You can sign up for MTD ITSA voluntarily through HMRC's website or by using MTD-compatible software that supports voluntary sign-up. Ensure your chosen software is fully compliant and can handle all MTD ITSA submissions.

How AccountsOS Simplifies MTD ITSA Compliance

AccountsOS is built from the ground up to support UK small businesses and landlords in meeting their MTD ITSA obligations, making the transition seamless and stress-free.

Seamless Digital Record-Keeping

Easily record all income and expenses, ensuring your data is MTD-compliant from the start.

Automated Quarterly Updates

Generate and submit your quarterly income and expense summaries directly to HMRC with ease.

Real-Time Tax Estimates

See your estimated tax liability update throughout the year, helping you plan and avoid surprises.

Simplified EOPS & Final Declaration

AccountsOS helps compile the necessary figures for your End of Period Statement and Final Declaration.

Deadline Management

Receive timely reminders for all MTD ITSA submission deadlines, keeping you on track.

Support for Sole Traders & Landlords

Tailored features to manage both business and property income, meeting specific MTD requirements.

Conclusion

The expansion of Making Tax Digital for Income Tax Self Assessment to include businesses and landlords with income above £30,000 from April 2027 and £20,000 from April 2028 marks a pivotal moment for tax reporting in the UK. These changes will bring hundreds of thousands of additional small businesses into the digital tax regime, necessitating a shift towards digital record-keeping and MTD-compatible software.

While the prospect of new compliance requirements can seem daunting, preparing early and embracing the right tools can transform MTD ITSA from a burden into an opportunity. Digital accounting not only ensures compliance but also offers significant benefits in terms of financial clarity, efficiency, and reduced stress. By understanding the upcoming thresholds, familiarising yourself with the core requirements, and leveraging intuitive software like AccountsOS, your small business can navigate these changes confidently and thrive in the digital age of tax.

Frequently asked questions

What is the difference between MTD ITSA and Self Assessment?

MTD ITSA replaces the traditional annual Self Assessment tax return for income tax for businesses and landlords above the threshold. It requires digital record-keeping and quarterly updates to HMRC, rather than a single annual submission.

Do I need to pay tax quarterly under MTD ITSA?

No, MTD ITSA requires quarterly updates of your income and expenses, not quarterly payments of tax. Your final tax payment deadline remains 31 January after the tax year, though Payments on Account may still apply.

What if my income falls below the MTD threshold after I've joined?

If your income consistently falls below the threshold, you may be able to opt out of MTD ITSA. However, once mandated to join, you generally remain in the system unless your circumstances change significantly and permanently.

Can I use spreadsheets for MTD ITSA?

Yes, you can use spreadsheets, but they must be combined with 'bridging software' to submit your quarterly updates to HMRC. The entire record-keeping process must be digital, without manual re-entry of data.

What if I have both sole trade and property income?

If the combined gross income from all your businesses and property exceeds the MTD ITSA threshold, you will need to comply with MTD for all relevant income streams. AccountsOS can help manage both types of income.

What happens if I make a mistake in a quarterly update?

You can make corrections in a subsequent quarterly update or in your End of Period Statement. It's important to correct errors promptly to ensure your final tax calculation is accurate and to avoid potential penalties.

Is there an exemption for digital exclusion?

Yes, HMRC offers exemptions for individuals who are genuinely unable to comply with MTD ITSA due to age, disability, remote location, or religious beliefs, and for whom it is not reasonably practicable to do so.

When should I start preparing for MTD ITSA?

It is highly recommended to start preparing well in advance of your mandatory start date. This includes reviewing your current record-keeping, researching MTD-compatible software, and understanding the new reporting requirements.