Guide to Making Tax Digital 2026

Making Tax Digital 2026: The Complete Guide for UK Small Businesses

Making Tax Digital (MTD) is HMRC’s most ambitious tax reform in a generation — and in 2026, it enters a critical new phase that directly affects hundreds of thousands of sole traders and landlords across the UK. If you’re self-employed or receive income from property, you need to know whether MTD for Income Tax Self Assessment (MTD for ITSA) applies to you, and what you need to do before the deadlines hit.

This guide covers everything: what MTD is, who it applies to, the 2026 and 2027 rollout, what software you need, and how to prepare your business without the headache.

What Is Making Tax Digital?

Making Tax Digital is a government initiative requiring businesses and individuals to keep digital records and submit tax information to HMRC using compatible software — rather than the traditional annual Self Assessment return. The vision is a real-time, digital tax system where HMRC has up-to-date information throughout the year.

MTD has been rolling out in phases since 2019, starting with VAT. The next major stage — MTD for ITSA — covers income tax and brings sole traders and landlords into the digital reporting fold.

Key Point

MTD for ITSA replaces the annual Self Assessment tax return with quarterly digital submissions to HMRC, plus an end-of-year finalisation. This is not optional for those above the income threshold — it is a legal requirement.

MTD for ITSA: The 2026 Rollout

From 6 April 2026, MTD for ITSA became mandatory for sole traders and landlords with qualifying income above £50,000. This is the first wave of a phased rollout:

April 2026 — Wave 1: Income over £50,000

Sole traders and landlords with combined qualifying income (from self-employment and/or property) exceeding £50,000 per year are required to use MTD for ITSA from 6 April 2026. If this applies to you and you have not already signed up or transitioned to MTD-compatible software, you are already behind schedule.

April 2027 — Wave 2: Income over £30,000

From April 2027, the threshold drops to £30,000, bringing a much larger population of sole traders and landlords into MTD for ITSA. Businesses in this band should begin preparing now — software selection, bookkeeping processes, and your accountant’s workflow all need to be ready before the April 2027 deadline.

Future Expansion

HMRC has signalled further expansion of MTD for ITSA beyond 2027, likely bringing in those with income between £10,000 and £30,000. The exact timeline has not yet been confirmed, but sole traders in this bracket should monitor HMRC announcements.

Who Does MTD for ITSA Apply To?

You are in scope for MTD for ITSA from April 2026 if ALL of the following apply:

You are self-employed as a sole trader or receive income from UK property (or both).
Your combined qualifying income from these sources exceeds £50,000 per year.
You are required to complete a Self Assessment tax return.

You are currently exempt if you are: a limited company, a partner in a partnership (separate rules apply later), below the income threshold, or have certain digital exclusion grounds.

Not Sure If You Qualify?

HMRC calculates your qualifying income based on the gross income from self-employment and/or property before deducting expenses. If your turnover is above £50,000 but your profits are lower, you are still in scope. Check your most recent Self Assessment return or speak to your accountant.

What Does MTD for ITSA Actually Require You to Do?

Under MTD for ITSA, you will need to:

1. Keep Digital Records

All income and expenses must be recorded digitally in MTD-compatible software. You cannot use spreadsheets alone — though bridging software that connects spreadsheets to HMRC’s systems is permitted.

2. Submit Quarterly Updates

You must send a summary of your income and expenses to HMRC four times a year, within one month of the end of each quarter. The quarterly periods are:

Q1: 6 April to 5 July — due by 5 August.
Q2: 6 July to 5 October — due by 5 November.
Q3: 6 October to 5 January — due by 5 February.
Q4: 6 January to 5 April — due by 5 May.

These quarterly submissions are not tax returns — they are estimates. You don’t pay tax on them directly. Think of them as regular updates, not bills.

3. Submit an End-of-Period Statement (EOPS)

At the end of the tax year, you confirm that your records are complete and accurate. This is where you add any final adjustments — capital allowances, losses brought forward, and so on.

4. Finalise Your Tax Position

A final declaration replaces the old Self Assessment return, confirming all your income sources and allowing HMRC to calculate your tax bill. The deadline remains 31 January following the end of the tax year.

Choosing MTD-Compatible Software

HMRC maintains a list of MTD for ITSA-compatible software products. The main options used by small businesses and their accountants include:

QuickBooks — popular with sole traders, strong mobile app.
Xero — widely used by SMEs, good accountant integrations.
Sage Accounting — established UK provider with MTD support.
FreeAgent — strong with freelancers and contractors.
Coconut — designed for sole traders, simple interface.

If you already use accounting software, check with your provider that it is fully MTD for ITSA compliant — not just MTD for VAT. These are different programmes with different technical requirements.

Bridging Software

If you use spreadsheets, you can continue to do so with MTD bridging software that connects your spreadsheet data to HMRC’s API. Products like DataDear, Absolute, and TaxCalc offer this. However, this is generally seen as a transitional approach — dedicated bookkeeping software offers more long-term benefit.

How MTD Affects Your Accountant Relationship

MTD for ITSA changes the timing and frequency of work between you and your accountant. Instead of a once-a-year tax return exercise, your relationship will shift to:

Quarterly bookkeeping reviews to ensure data is accurate before submission.
Real-time visibility for your accountant into your business performance.
End-of-year work focused on adjustments and finalisation, rather than data entry.

Many accountants are restructuring their fees around MTD — moving from a one-off annual fee to a monthly retainer. This is worth discussing now if you haven’t already. The benefit: you get year-round advice, not just a January fire-drill.

Penalties for Missing MTD Deadlines

HMRC has introduced a new points-based penalty system for MTD for ITSA:

Each missed quarterly submission earns one penalty point.
When you reach a threshold of points (4 for quarterly filers), a £200 penalty is triggered.
Points expire after 24 months if you maintain a clean compliance record.
Separate late payment penalties apply to any tax paid late.

The points system is designed to be more lenient for occasional misses than HMRC’s previous penalty regime. However, consistent late submissions will accumulate quickly.

How to Prepare: A 5-Step Action Plan

Step 1: Check Your Income Level

Look at your last Self Assessment return. If your gross income from self-employment or property exceeded £50,000, you are in scope from April 2026. If it was between £30,000 and £50,000, prepare now for the April 2027 deadline.

Step 2: Choose and Set Up Compatible Software

If you do not already use MTD-compatible software, select a product and get it set up as soon as possible. Allow at least one quarter to learn the software and ensure your records are accurate before your first submission.

Step 3: Register for MTD for ITSA

You must sign up for MTD for ITSA through your software or through your accountant’s agent services account. HMRC has been issuing joining notices, but do not wait for one — proactive registration is the sensible approach.

Step 4: Migrate Historical Records

If you have paper records or older digital records, migrate them into your new software. At minimum, ensure you have your opening balances correct.

Step 5: Brief Your Team

If you have staff who handle bookkeeping or expenses, ensure they understand the new processes. The biggest risk to MTD compliance is not the software — it is inconsistent data entry.

SME Today Tip

HMRC offers a test environment for MTD for ITSA, allowing you and your accountant to practice submissions before going live. Ask your software provider or accountant how to access this.