Making Tax Digital (MTD) is a UK government initiative aimed at simplifying and modernising the tax system. By transitioning from paper-based processes to digital record-keeping and tax filing, MTD seeks to make tax administration more efficient and accurate.
The initiative covers various aspects of tax submission, including the requirement for businesses and individuals to use compatible software to keep digital records, and tax returns also need submitting through compatible software. The ultimate goal is to reduce errors, improve compliance, and streamline the tax process for everyone involved.
The scheme has been rolled out slowly, with the first rollout being in April 2019 covering VAT. However, in April 2026 Making Tax Digital will be coming into effect for income tax.
Who Does it Impact and When?
Making Tax Digital (MTD) for income tax will affect self-employed individuals and individuals receiving property income with an annual gross income of more than £30,000 from their self-employment and property letting when fully in place.
The government plans for this scheme for Income Tax to eventually apply to most individuals who are self-employed and/or receive property income.
Originally, MTD was set to become mandatory in April 2024. However, in December 2022, the government announced a delay and conducted a review of the new rules, which was completed in 2023. The updated timeline for mandatory MTD compliance is as follows:
- From 6 April 2026: For those with an annual gross income of over £50,000 from self-employment and/or property letting.
- From 6 April 2027: For those with an annual gross income between £30,000 and £50,000 from self-employment and/or property letting.
The government has confirmed that the income threshold will be kept under review, although it is expected to remain at £30,000 for at least the next few years.
If you are self-employed and also receive property income, the gross annual income threshold applies to the combined total from both sources.
Each year, HMRC will review information on self-assessment tax returns. If your return shows gross income exceeding the relevant threshold from self-employment and/or rental income, HMRC will notify you that you must comply with requirements from 6 April, following the 31 January filing deadline for your self-assessment tax return. Alternatively, an exemption can be applied for from MTD, which we explain further in the section on exemptions below.
The first year that self-assessment tax returns will be reviewed for this purpose is 2024/25. Therefore, if your gross income from self-employment and/or rental income exceeds £50,000 on your 2024/25 tax return, you will need to follow the new rules starting from 6 April 2026, which is the first 6 April after the 31 January 2026 filing deadline for the 2024/25 tax returns (unless you successfully apply for an MTD exemption).
It will be possible to voluntarily join the new scheme before you are required to do so.
Gross Income
When calculating your gross income from self-employment or property letting activities, note that if any deductions for expenses are made before you receive the income, your gross income is the amount before those deductions. Below are examples to illustrate this:
Example – Gross Income When Self-Employed
Steve is a self-employed as a cycle delivery rider. He receives regular payments from the platform he works through, after they deduct their charges. In March 2024, £1,300 was deposited into his bank account, after the platform deducted £200 in fees. His actual earnings were as follows:
- Earnings: £1,500
- Platform Fees: £200
- Received in Bank: £1,300
Steve’s gross income is £1,500. The platform fees of £200 are a business expense that can be claimed in his self-employed accounts later.
Example – Gross Income When Letting Property
Abigail rents out a property in the UK, managed by letting agents. Each month, she receives payment from the agents, which is the rental income after deducting their fees. In March 2024, Abigail received a payment of £820, as follows:
- Rent Paid by Tenant: £1,000
- Letting Agent Fees: £180
- Received in Bank: £820
Abigail’s gross income is £1,000. The letting agent fees of £180 are an expense to be claimed in her property rental accounts later.
Digital Requirements
If you fall under the MTD for income tax regime, you will be required to:
1. Keep Digital Records
Records must be maintained on specific accounting software, apps, or spreadsheets to record your business transactions digitally. While many software companies are still developing products to meet MTD requirements, a list of currently available products can be found on the gov.uk website. HMRC will not provide free software but anticipates that some commercial providers will eventually offer free options. For more details, see our “Digital Records” section below.
2. Submit Quarterly Updates
Submitting quarterly updates to HMRC is required, reporting your business or property income and expenses for each period. These reports are essentially additional tax returns similar to the self assessment return currently required to be submitted once a year. The ability to submit these should be available from the record-keeping system used. However, as with any record keeping system, the information coming from reports is dependent on the accuracy of the information input into it. They will ultimately be used for assessing tax liabilities, and so ensuring the information is appropriate for tax purposes needs considering before submitting. The update periods are cumulative, with submissions due for the following periods each tax year:
- 6 April to 5 July (due by 7 August)
- 6 April to 5 October (due by 7 November)
- 6 April to 5 January (due by 7 February)
- 6 April to 5 April (due by 7 May)
As shown above, the due date for submitting each quarterly update is the 7th of the following month. Each submission replaces the previous one.
If more convenient, you can choose to align the update periods with month-end dates, in which case the periods would be:
- 1 April to 30 June (due by 7 August)
- 1 April to 30 September (due by 7 November)
- 1 April to 31 December (due by 7 February)
- 1 April to 31 March (due by 7 May)
Note that the submission due dates remain unchanged.
3. Submit a Final Declaration
At the end of the tax year, a final declaration needs to be submitted, detailing your business’s taxable profit for the accounting period and any other taxable income for the year. This would equate to the final tax return submission currently required each year, hence again the accuracy of this submission and appropriateness of it being used to assess tax liabilities should be carefully considered and assessed.
The Benefits of Switching to Digital Tax Filing
Switching to digital tax filing offers numerous benefits, including increased accuracy in tax reporting. Digital records can significantly reduce errors that often occur with manual entry, leading to more precise tax submissions.
Additionally, digital tax filing can save time and enhance efficiency. Automated processes and real-time data updates mean less time spent on paperwork and more time focusing on core business activities.
Exemptions
You will not be required to comply with Making Tax Digital (MTD) for Income Tax in the following situations:
- No UK National Insurance Number: If you do not have a UK National Insurance number, you will not be required to comply with MTD. However, if you later obtain an NI number and fall within the scope of MTD, you will be expected to comply.
- Foster Carers and Shared Lives Carers: If your only income is from qualifying care activities, such as fostering or shared lives care, you are exempt from MTD.
Additionally, an exemption can be applied for from MTD if you are digitally excluded. Examples of digital exclusion include:
- Unreliable broadband connection
- Disabilities that prevent the use of computers
- Living in a remote area with poor broadband access
According to the law, a person is considered digitally excluded if, for any reason (such as age, disability, or location), it is not reasonably practicable for them to use electronic communications or maintain electronic records.
An exemption can also be applied for if you are a practising member of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records.
While HMRC is reviewing an exemption application, there is no requirement to comply with MTD rules.
The process for claiming an exemption has not yet been finalised by HMRC. However, it is expected that applications will be accepted from around April 2025. We will update this page with more details as they become available.
HMRC’s current guidance on applying for an exemption from MTD is available on GOV.UK.
How to Prepare Your Business for Making Tax Digital
To prepare for MTD, businesses should consider how electronic records are going to be compiled, and who is to do that, either internally or externally through, for example, an accountant. Additionally, who is to submit the required quarterly tax submissions needs to be assessed and planned for.
Need Support?
If you need support with setting up or choosing the right system for your business, or indeed wish to pass on the responsibility to maintain the records, please get in touch with one of our accountants. We are helping lots of our clients to prepare for the changes and ensure they are compliant in the most effective and efficient way.
