Making Tax Digital for Income Tax: Complete Guide for Sole Traders & Landlords (2026)

MTD for Income Tax Self Assessment (MTD ITSA) replaces the annual Self Assessment tax return with quarterly digital updates submitted through compatible software. Instead of gathering a year's worth of records every January and filing a single return, you submit a summary of your income and expenses to HMRC four times per year. The quarterly updates are not full tax returns — they are summaries of your business income and allowable expenses for each three-month period. At the end of the tax year, you submit a Final Declaration that confirms your total income, claims any reliefs or allowances, and calculates your tax liability. This Final Declaration replaces your annual Self Assessment return. Critically, all of this must happen through MTD-compatible software that connects to HMRC's APIs. You cannot submit quarterly updates through the HMRC online portal. Your software maintains your digital records throughout the year and transmits the data directly to HMRC. MTD ITSA applies to self-employment income and UK property income. It does not apply to employment income (PAYE), dividend income, savings interest, or pension income. However, these other income sources are still declared in your Final Declaration.

MTD ITSA affects individuals — not businesses — based on their qualifying income. Qualifying income is your gross self-employment income plus your gross UK property income, combined, calculated before any expenses, allowances, or deductions are applied. This is a crucial distinction. If you are a sole trader with £40,000 gross self-employment income and £15,000 gross rental income, your qualifying income is £55,000 — you are in scope from April 2026, even though neither income source individually exceeds £50,000. The rollout is phased by threshold. From April 2026, individuals with qualifying income of £50,000 or more must comply. From April 2027, the threshold drops to £30,000. From April 2028, it drops to £20,000. HMRC has not announced plans for income below £20,000. If you have multiple self-employments or multiple rental properties, all gross income from these sources is aggregated. You must submit separate quarterly updates for each business or property income source, but the qualifying income threshold is based on the total. Limited company directors are not directly in scope through their company. However, if a director also has personal self-employment income or rental income that, combined, exceeds the threshold — they are personally in scope for MTD ITSA on that income.

MTD ITSA quarterly periods follow the tax year, running from 6 April to 5 April. Each quarter has a submission deadline approximately one month after the period ends. You must submit a summary of your business income and expenses for each quarter by the deadline. Quarter 1 covers 6 April to 5 July, with the update due by 7 August. Quarter 2 covers 6 July to 5 October, due by 7 November. Quarter 3 covers 6 October to 5 January, due by 7 February. Quarter 4 covers 6 January to 5 April, due by 7 May. After the fourth quarterly update, you submit a Final Declaration by 31 January following the end of the tax year. The Final Declaration confirms your total income across all sources (not just self-employment and property), claims personal allowances and reliefs, and calculates your final tax liability. If you have multiple businesses or property income sources, you submit separate quarterly updates for each source — but all follow the same quarterly deadlines. Your software should handle this automatically. For the first mandatory year (2026/27), HMRC has confirmed a soft-landing period. No penalty points will be issued for late quarterly updates during this year. However, the Final Declaration deadline of 31 January 2028 is still subject to the normal penalty regime.

MTD ITSA introduces a points-based penalty system for late submissions, replacing the old fixed-penalty regime. Each time you miss a quarterly submission deadline, you receive one penalty point. When you accumulate four penalty points, HMRC issues a £200 fine. Every subsequent late submission while you are at four points triggers another £200 fine. Penalty points reset to zero after a 24-month period of full compliance — meaning you submit every quarterly update and your Final Declaration on time for 24 consecutive months with no late submissions. Late payment penalties are separate from late submission penalties. If you owe tax and pay late, interest accrues from the due date. A first late payment penalty of 2% applies on tax unpaid after 15 days, rising to 4% after 30 days. If tax remains unpaid after six months, an additional penalty applies. For the 2026/27 tax year (the first mandatory year for the £50,000+ group), HMRC has confirmed a soft-landing period. During this year, no penalty points will accrue for late quarterly updates. This gives taxpayers time to adjust to the new system. However, the Final Declaration is not covered by the soft landing — if you submit your Final Declaration late for 2026/27, normal penalties apply. The soft landing does not extend to MTD for VAT, which has been mandatory since 2022 and carries its own penalty regime.

Signing up for MTD ITSA is a separate process from registering for Self Assessment. Even if you already file a Self Assessment return, you must specifically sign up for MTD through your Government Gateway account. To sign up, you need: a Government Gateway user ID with your Self Assessment linked, your National Insurance number, your Unique Taxpayer Reference (UTR), and the date you started your business or acquired your rental property. The sign-up process involves: 1. Go to GOV.UK and search for 'sign up for Making Tax Digital for Income Tax' 2. Sign in with your Government Gateway credentials 3. Confirm your identity and business details 4. Choose your MTD-compatible software (you must have this ready before signing up) 5. Authorise your software to communicate with HMRC on your behalf You can sign up voluntarily before your threshold becomes mandatory. If your qualifying income is £50,000+, you can sign up now and begin submitting quarterly updates for the current tax year. This gives you time to familiarise yourself with the process before it becomes mandatory in April 2026. If you use an accountant or tax agent, they can sign up on your behalf through their agent services account. Your agent will also need to authorise the software they use to submit updates for you.

Under MTD ITSA, you must maintain digital records of all business transactions — income and expenses — using MTD-compatible software. The records must be created and stored digitally; you cannot keep paper records and type them into software at the end of each quarter. For each transaction, your digital records must include: the date of the transaction, the amount, and the category (income type or expense type). For expenses, you should also record the supplier or vendor name and whether VAT was charged. HMRC requires that data flows digitally between systems without manual re-entry. This is the 'digital links' requirement. If you use multiple software products (for example, a bank feed into a spreadsheet, then into accounting software), the data must transfer automatically between them. Copy-and-paste is acceptable as a digital link; manually retyping figures is not. You must retain your digital records for at least five years after the 31 January filing deadline for the relevant tax year. For the 2026/27 tax year, that means keeping records until at least 31 January 2033. Receipts and invoices do not need to be stored digitally — you can keep paper originals. However, the transaction data extracted from those receipts must be recorded digitally. Many businesses find it simpler to photograph or scan receipts and store everything digitally.

You need software that is recognised by HMRC as MTD-compatible for Income Tax Self Assessment. This means the software must connect to HMRC's APIs to submit quarterly updates and your Final Declaration. You cannot submit MTD ITSA updates through the HMRC online portal. HMRC maintains a list of MTD-compatible software on GOV.UK. This list is updated regularly as new providers are approved. When choosing software, look for: - Direct submission to HMRC (not via bridging software, which adds complexity) - Bank feed integration to automatically import transactions - Automatic categorisation of income and expenses - VAT support if you are also VAT-registered - Receipt capture and storage - Multi-business support if you have multiple income sources If you prefer spreadsheets, you can continue using them — but you must use bridging software that connects your spreadsheet to HMRC's API. The spreadsheet must maintain digital links (no manual retyping between systems). Bridging software is functional but adds an extra step to every submission. AccountsOS is MTD-compatible and connects directly to HMRC. It maintains your digital records, categorises transactions using AI, and submits quarterly updates and your Final Declaration via API — without you needing to log into the HMRC portal.

HMRC provides exemptions from MTD ITSA in limited circumstances. You may be exempt if you cannot use software or digital tools due to age, disability, remoteness of location, or religious beliefs that prevent you from using electronic communications. To claim an exemption, you must apply to HMRC and explain why you cannot reasonably comply with the digital requirements. HMRC assesses each application individually. If granted, you continue filing through the existing Self Assessment process. The following groups are not in scope for MTD ITSA (and therefore do not need an exemption): - Individuals with qualifying income below the current threshold (currently £50,000, dropping to £30,000 in 2027 and £20,000 in 2028) - Individuals with no self-employment or UK property income (e.g. employed individuals with only PAYE income) - Limited companies (Corporation Tax MTD is cancelled) - Partnerships (HMRC has not announced a date for partnerships to join MTD ITSA) - Trusts and estates - Non-UK residents with no UK self-employment or property income Foster carers who use the qualifying care relief scheme and have no other self-employment income may also be outside MTD ITSA, depending on how their income is calculated. HMRC guidance on this specific case is still being finalised. If your qualifying income fluctuates around the threshold, you are assessed based on the previous tax year's qualifying income. If your 2025/26 qualifying income is £50,000+, you must comply from April 2026.