HMRC Making Tax Digital Changes Explained: What’s New and Who’s Affected?

If you’re a sole trader or landlord earning over £50,000 annually, you’ll need to follow HMRC’s Making Tax Digital (MTD) for Income Tax rules from 6 April 2026.

This shift replaces the annual Self Assessment with quarterly digital updates using approved software.

Key changes and what you need to know:

• MTD is mandatory for self-employed individuals and landlords earning over £50,000 from 2026
• Quarterly income and expense updates will replace annual tax returns
• You must use HMRC-approved accounting software
• Penalties will apply for missed submissions after a points-based warning system
• Digital record-keeping becomes compulsory
• Exemptions are available for those who can’t use digital tools
• Implementation phases will continue into 2027 and 2028 for lower income brackets

What is HMRC’s Making Tax Digital and Why is it Changing?

Making Tax Digital (MTD) is HMRC’s long-term strategy for transforming the UK tax system into a more modern, efficient, and digitally focused process.

It aims to make tax administration more accurate, prevent errors, and reduce the tax gap that currently exists due to incorrect filings or avoidable mistakes.

Traditionally, individuals and businesses in the UK submit one annual Self Assessment return to declare income and pay tax.

This can often lead to last-minute filings, rushed calculations, and inaccuracies. With MTD, HMRC is shifting towards a digital-first system where data is submitted in smaller, more manageable chunks throughout the year.

The Purpose Behind MTD

From HMRC’s perspective, this change is about encouraging real-time financial visibility.

According to a senior tax policy professional at HMRC during a compliance briefing:

“Our goal is to support taxpayers with better tools and transparency, not punish them with complexity. Quarterly updates bring tax closer to real life, while reducing the admin burden long term.”

This initiative started with VAT in 2019 and is now being extended to Income Tax through MTD for Income Tax Self Assessment (MTD for ITSA).

Paper-based Self Assessment vs Digital Reporting

Here’s a quick comparison of the current system vs what MTD introduces:

Who Must Follow the New MTD for Income Tax Rules by 2026?

From 6 April 2026, Making Tax Digital for Income Tax becomes mandatory for individuals who earn more than £50,000 a year from self-employment and property income combined.

The implementation is phased over several years to help different income groups adjust.

You’ll fall under MTD for Income Tax if:

• You’re a sole trader or a landlord
• You’re registered for Self Assessment
• Your total combined gross income from self-employment and property exceeds £50,000

This qualifying income must come only from business or property, and does not include employment income, pensions, savings, or dividends.

Thresholds and Timelines

Here’s how the rollout is planned:

The government is taking a staggered approach to ensure software readiness, user familiarity, and support availability.

What Qualifies as Income Under the New Rules?

Qualifying income is your gross business income before expenses.

This includes:

• Earnings from sole trading (self-employment)
• Rental income from UK or overseas property
• Furnished holiday lettings income

It does not include:

• PAYE salary
• Interest and dividend income
• Pensions

You’ll need to calculate your total qualifying income to assess if you fall above the threshold for MTD. HMRC provides a calculator and eligibility checker to assist with this.

What Do You Need to Do to Prepare for Making Tax Digital?

HMRC has outlined five key steps to follow before enrolling in Making Tax Digital. If you’re unsure where to start, these steps offer a clear roadmap.

1. Work out your qualifying income
   • Combine all self-employed and property income
   • Check if you cross the £50,000 threshold
   • Consider income fluctuations year-to-year
2. Check your obligations
   • Use HMRC’s online tool to find out your start date
   • Confirm if you meet all the qualifying criteria
   • Review your Self Assessment registration status
3. Choose compatible software
   • Select from HMRC’s approved list
   • Consider your budget, business size, and integration needs
   • Factor in whether your accountant uses specific software
4. Sign up for MTD for Income Tax
   • You can do this through your government gateway account
   • Sign-up requires details like UTR, accounting period, and software confirmation
5. Start digital record-keeping
   • Begin recording transactions digitally from the next tax year
   • Practice submitting test updates if your software allows it
   • Familiarise yourself with quarterly cycles

Here’s a helpful table that summarises the preparation tasks:

Which Software is Compatible with MTD for Income Tax?

HMRC requires individuals under MTD to use compatible software that can:

• Digitally store and categorise records
• Connect to HMRC’s systems
• Submit quarterly updates and the final declaration

The software must be approved by HMRC and support full MTD functionality. Currently, there are multiple options available:

• QuickBooks
• Xero
• FreeAgent
• Sage Business Cloud
• Zoho Books
• Capium
• 123 Sheets (for bridging software)

Bridging Software for Spreadsheets

If you prefer spreadsheets for bookkeeping, you can still use them with bridging software. These tools act as a bridge between your spreadsheet and HMRC’s portal. However, spreadsheets alone are not compliant.

Here’s a comparison of a few software options:

I use FreeAgent myself and found it easy to set up and understand, especially for invoicing and expense tracking. It synced well with my bank and helped reduce human error in tax summaries.

How Will Quarterly Reporting Work Under MTD?

The shift from one annual return to multiple submissions is the biggest practical change under MTD.

You’ll need to submit:

• Four quarterly updates each year, spaced evenly across the tax year
• One final end-of-year declaration, where you confirm income and make adjustments

Digital Record-keeping Explained

Instead of keeping a physical ledger or spreadsheets, all income and expenses must be recorded using MTD-compliant software. The software then formats and submits quarterly reports to HMRC.

Each report includes:

• Business income
• Allowable business expenses
• Property income
• Property expenses

Here’s how the reporting cycle is structured:

These updates provide HMRC with real-time visibility into your tax position. They do not require payment each quarter, only reporting.

What Happens if You Miss Deadlines or Don’t Comply?

MTD will introduce a points-based penalty system that’s more flexible and progressive than flat fines. The idea is to encourage compliance without punishing occasional errors.

Points are accumulated for each missed deadline. When a set number of points is reached, a fine is triggered.

How Penalty Points Work:

You’ll receive reminders and notices before any penalties are charged. HMRC also offers a 12-month “soft landing” period for first-time users of MTD for Income Tax starting in April 2026.

In a recent HMRC support webinar, a tax operations advisor commented:

“We’re focused on education over enforcement, especially in the first year. Our intention isn’t to penalise but to help people adapt gradually.”

Who Can Apply for an Exemption?

If you cannot use digital tools due to:

• Age
• Disability
• Location (no internet access)
• Religious reasons

You may apply for a digital exclusion exemption. This needs to be submitted well in advance with supporting documentation.

How Will These Changes Affect Sole Traders and Landlords?

As someone who has managed my own tax returns for years, I understand the frustration when systems change.

Learning a new software, changing how you store receipts, and understanding new compliance rules can all feel like unnecessary hassle.

However, after trialling MTD-style reporting with FreeAgent over the last year, I’ve noticed several benefits:

• I caught expense claim errors I would have missed
• It forced me to be consistent with my bookkeeping
• I could project my tax bill months in advance

Still, I know not everyone has time to learn new tools. I’d recommend starting early and not waiting until the 2026 deadline. The initial effort is offset by the reduced year-end panic.

If you have an accountant, speak with them now to find out which software they recommend and whether they’ll be managing submissions on your behalf.

Conclusion

Making Tax Digital for Income Tax marks a major shift in how sole traders and landlords manage their finances. With mandatory changes arriving from April 2026, preparing early is key.

Choosing the right software, understanding the reporting process, and staying compliant with HMRC’s requirements can ease the transition.

While the change may seem daunting, it ultimately brings greater accuracy and visibility. By adapting now, you’ll be in a stronger position to manage your tax with confidence in the digital era.

Frequently Asked Questions About Making Tax Digital

Do I still need to file a Self Assessment return under MTD?

Yes, you must submit a final declaration at the end of the year, similar to a traditional tax return.

Is MTD mandatory for PAYE employees or pensioners?

No, MTD only applies to individuals with income from self-employment or property above the threshold.

Can I continue using spreadsheets under MTD?

Yes, but only if they are used with bridging software approved by HMRC.

What if I earn under £50,000 — do I need to do anything yet?

No immediate action is required, but it’s wise to start preparing, especially if your income is close to the threshold.

Are partnerships included in MTD for Income Tax?

Not yet, partnerships are currently excluded from the 2026 rollout but will be included in future phases.

How much will MTD software cost?

It varies. Some providers offer basic plans for around £10/month, while others may be higher depending on features.

Can my accountant or tax adviser manage MTD for me?

Yes. Agents can submit quarterly updates and manage your MTD obligations using approved agent software.