Originally introduced in 2019 for VAT, the Making Tax Digital for income tax (MTD) initiative marked a significant shift in how individuals and businesses managed and reported their taxes. From April 2026, MTD will apply to an even wider group of taxpayers, including millions of sole traders and landlords.
This guide outlines the key changes, timelines, compliance requirements, and links to official resources to help individuals and businesses prepare for upcoming obligations.
What is Making Tax Digital?
Making Tax Digital is a government-led initiative aimed at modernising the tax system, its key objectives being to improve accuracy, reduce the tax gap, and make tax administration more efficient overall.
Under MTD, taxpayers are required to:
- Keep digital records of income and expenses
- Use HMRC-recognised software to maintain records
- Submit tax data directly to HMRC via digital quarterly updates
You might find it useful to check out HMRC’s guide to MTD here.
Making Tax Digital: Key Developments
1. Tighter rules around compliance
MTD for VAT has been a mandatory requirement for all VAT-registered businesses since April 2022, regardless of turnover. However, as of April 2025, HMRC has committed to enforcing the following rules in addition to those already established:
- Strict adherence to digital record-keeping
- Prohibition of manual data entry or copy-and-paste between systems
- Use of digitally linked MTD-compatible software for filing VAT returns
In addition, to ensure compliance, a new points-based penalty system will apply to VAT submissions and payments. A late submission means one point is issued, reaching four points results in a £200 fine, and each subsequent failure to file on time adds another £200 fine. The points will only expire after a period of compliance which is up to 24 months.
2. MTD for Income Tax Self-Assessment (ITSA)
The next major stage of MTD will impact those who are classed as self-employed as well as landlords. The making Tax Digital for Income Tax schedule is as follows:
April 2026: mandated for taxpayers with annual income over £50,000 from self-employment or property
April 2027: threshold changes to £30,000
Future plans: the government is exploring how and when to include those earning between £10,000 and £30,000
Under MTD for ITSA, affected taxpayers must:
- Maintain digital records of income and expenses
- Submit quarterly updates to HMRC
- Provide an End of Period Statement (EOPS)
- File a Final Declaration at the end of the tax year
This will replace the traditional self-assessment tax return process for those affected.
3. HMRC Notifications
Beginning in April 2025, HMRC will be sending letters and emails to individuals identified as being within the scope of MTD for income tax. This determination will be based on income reported on the 2024/25 self-assessment tax return.
These communications will provide guidance on when MTD obligations begin and how to prepare. Taxpayers may also choose to join voluntarily before they are legally required to do so.
Record-Keeping and Joint Property Ownership
For individuals with jointly owned property (a property held in the name of two or more parties who have a relationship between them), HMRC will allow some flexibility. From April 2026, landlords will be permitted to:
- Report joint property income quarterly
- Record expenses annually
- Use consolidated digital records for categories such as maintenance, insurance, and letting fees
This aims to reduce the compliance burden for landlords who share rental properties.
Further guidance is expected from HMRC closer to the implementation date.
Penalties for MTD Non-Compliance
HMRC’s new penalty framework applies to both VAT and Income Tax. It is designed to be more proportionate and consistent.
Key Features:
- Points accrue for each late quarterly update, or Final Declaration
- Once the threshold is met, a fixed financial penalty is applied
- Points expire after a defined period of compliance
In addition, late payments will incur interest at HMRC’s prevailing rate. For reference, the late payment interest rate is set at the base rate (currently 4.25%) plus 4% from April 6th 2025. The repayment interest is the base rate minus 1%, with a lower limit of 0.5%. You can find out more details here.
How to Prepare for MTD
1. Adopt MTD-Compatible Software
Taxpayers must use software approved by HMRC to comply with MTD. This software must support digital record-keeping, quarterly reporting, and the final declaration process.
HMRC has made a handy list of software options so if you want to stay up to date, make sure you check back here.
2. Digitise Your Record-Keeping
Start maintaining records of all relevant income and expenses in a digital format. For example:
- Income from invoices or sales
- Costs such as travel, equipment, subscriptions, and insurance
3. Attend HMRC and Professional Body Webinars
HMRC, regularly hosts webinars and seminars to help businesses and individuals transition to MTD. Topics include software demos, reporting timelines, and managing quarterly updates.
This could be a great way of staying ahead of the curve.
Making Tax Digital Summarised
| Date | Action Required |
| April 2025 | HMRC begins notifying ITSA taxpayers |
| April 2025 | Full MTD for VAT enforcement and new penalties apply |
| April 2026 | MTD for ITSA begins for income over £50,000 |
| April 2027 | MTD for ITSA extends to income over £30,000 |
To ensure compliance, begin reviewing your current record-keeping processes and software solutions. Transitioning early allows you to test systems and avoid last-minute issues.
Get in touch
If you need assistance implementing MTD processes, consider consulting a qualified accountant or tax adviser. Early planning will ensure a smooth transition and help you avoid penalties under the new system.
In all cases, we’d advise doing your research and getting to grips with the changing legislation around MTD sooner rather than later. That way, you won’t be caught out when the time comes for you to submit.