Making Tax Digital (MTD) for Income Tax represents the most significant change to how sole traders and landlords manage their tax obligations in decades. Starting from April 2026, this new system will require eligible taxpayers to maintain digital records and submit quarterly updates to HMRC using compatible software.

What Is MTD for Income Tax?

MTD for Income Tax is a new way for sole traders and landlords to record and

report their income and expenses. Rather than the traditional annual self-assessment approach, you’ll submit information to HMRC four times a year through approved software.

The system applies to your “qualifying income” – the gross income (before expenses and tax are deducted) that sole traders and landlords receive in a tax year from self-employment and property combined.

The Three-Phase Implementation Timeline

The government has confirmed a phased approach with three distinct thresholds:

Phase 1: April 2026

– **Who**: Sole traders and landlords with qualifying income above £50,000

– **Based on**: 2024-25 tax year income (reported by 31 January 2026)

– **Estimated impact**: Around 780,000 people

Phase 2: April 2027

– **Who**: Those with qualifying income above £30,000

– **Based on**: 2025-26 tax year income

– **Estimated impact**: A further 970,000 people

Phase 3: April 2028

– **Who**: Those with qualifying income above £20,000

– **Based on**: 2026-27 tax year income

– **Note**: This third phase was confirmed in the 2025 Spring Statement

Key Requirements Under MTD

Once you’re within scope, you’ll need to:

1. **Maintain digital records** using MTD-compatible software or integrated spreadsheets

2. **Submit quarterly updates** within just over a month of each quarter end

3. **File an annual return** after the tax year ends

4. **Use approved software** that connects to HMRC’s systems via their API

Maintaining paper records will no longer meet the legislative requirements for those within scope.

Understanding Qualifying Income

Your qualifying income includes:

– Gross self-employment turnover (before expenses)

– Gross rental income (before deductions)

– Income from multiple trades or properties combined

**Important**: If deductions are made from your income before you receive it, your gross income is the amount before those deductions. For example, if letting agents deduct their fees before paying you, the gross rental amount (before their deduction) counts towards your threshold.

Software Requirements

You’ll need functional compatible software that can access HMRC’s application program interfaces (API) platform. This includes:

– **Purpose-built MTD software**: Packages like Xero, QuickBooks, Sage, or FreeAgent

– **Spreadsheets with bridging software**: Excel or similar, but only if connected to MTD-compatible software

– **Integrated solutions**: Software that combines record-keeping with MTD submission capabilities

An existing spreadsheet on its own will not be sufficient for MTD compliance.

Exemptions and Special Circumstances

The 2025 Spring Statement announced expanded exemptions, including:

– Digitally excluded taxpayers (similar to current MTD for VAT exemptions)

– Those with a Power of Attorney

– Non-UK resident foreign entertainers and sportspeople (with no other qualifying income)

– Ministers of religion, Lloyd’s Underwriters, and recipients of certain allowances (for this Parliament’s duration)

– Foster carers whose only income is qualifying care income

Preparing for MTD

For April 2026 Compliance

If your 2024-25 qualifying income exceeds £50,000:

1. **Register with HMRC**: Sign-up can begin one tax year in advance, so registration opened in April 2025

2. **Choose your software**: Research and select MTD-compatible accounting software

3. **Set up digital records**: Begin maintaining your records digitally

4. **Consider voluntary participation**: You can start providing quarterly updates from April 2025

Agent Considerations

From April 2025, multiple agents can act for a client, with HMRC allowing both main agents and supporting agents to be registered, though they’ll have different access levels.

HMRC emailed agents in mid-March 2025 who may have in-scope clients and are sending letters to potentially affected taxpayers during Spring and Summer 2025.

Testing and Support

HMRC expanded public beta testing from April 2025, allowing voluntary participation before the mandatory deadlines. This provides:

– Early familiarity with new systems and processes

– Access to HMRC’s dedicated MTD Customer Support Team

– Confidence building before mandatory compliance

Looking Ahead

The policy framework for MTD and penalty reform continues to develop, with HMRC engaging with stakeholders before legislation is introduced ahead of April 2026 mandation.

Late payment penalty rates will also increase for taxpayers joining MTD from April 2025 onwards, with new rates of 3% at 15 days overdue, another 3% at 30 days, and 10% per annum for tax overdue by 31 days or more.

Next Steps

The transition to MTD for Income Tax represents a fundamental shift in tax compliance. Whether you’re facing the 2026, 2027, or 2028 deadline, early preparation will ensure a smoother transition and help you maximise the benefits of digital record-keeping.

Review your qualifying income for the relevant tax years, research suitable software options, and consider voluntary participation to gain experience before your mandatory compliance date arrives.