Making Tax Digital – Income Tax

 

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) comes into effect progressively for Sole Traders and Landlords from April 2026.

Making Tax Digital for Income Tax (MTD ITSA) is part of HMRCs overall Making Tax Digital programme:

• Making Tax Digital for VAT – from April 2019
• Making Tax Digital for Income Tax – from April 2026
• Making Tax Digital for Corporation Tax – date as yet unspecified

Please be aware that the details around MTD ITSA are still emerging, both as regards HMRC regulations and guidance, and their practical implications. This guide sets out our understanding as of June 2025, but there are still uncertainties, and aspects will change over coming months. We plan to update this page when major changes come through, so check back regularly.

 

Content

• Summary – What Changes Will MTD ITSA Bring in? Who Does It Apply To?
• More Detail – Who Does MDT ITSA Apply To?
• Thresholds and Mandation – When will MTD ITSA Apply From?
• More Detail – Submitting Returns
• More Detail – Multiple Income Streams
• More Detail – Digital Record Keeping
• More Detail – What Goes on the Quarterly Returns
• More Detail – Final Return
• Penalties
• Choosing Software for Digital Record Keeping
• Our Involvement as Your Accountant

 

Summary – What Changes Will MTD ITSA Bring in? Who Does It Apply To?

MTD ITSA comes in from April 2026 for:

• Sole Traders
• Landlords

The introduction dates have been changed and deferred a number of times.  Currently the staging is:

• From April 2026 sole traders and landlords with turnover or rents of £50,000 or more
• From April 2027 sole traders and landlords with turnover or rents of £30,000 or more
• From April 2028 sole traders and landlords with turnover or rents of £30,000 or more (announced Spring Statement 2025)

Partnerships and their partners are currently not mandated – it is expected they will be in due course.  If a business parter has separate income as a sole trader or landlord over the thresholds they will be mandated in respect of that income.

The key obligations brought in by MTD ITSA are to:

• Keep Digital Records
• Submit Quarterly Interim Returns to HMRC digitally one month after quarter end
• Submit final returns to HMRC by 31 January after the end of the tax year

 

More Detail – Who Does MDT ITSA Apply To?

As mentioned above, MTD ITSA applies to:

• Sole Traders
• Landlords

Partnerships and their partners are currently not mandated – it is expected they will be in due course.  If a business parter has separate income as a sole trader or landlord over the thresholds they will be mandated in respect of that income.

Sole Trader includes any form of Self Employment as an individual, including part time businesses or “side hustles”.  Business run via Partnerships or Limited Companies do not fall into this definition, however if company directors or business partners have other businesses or rental in their own name then MTD ITSA obligations apply.

Whilst partnership income does not mandate use of MTD ITSA, if the partnership is a property rental partnership, then it may more correctly be classified as a jointly held rental property rather than a partnership, and hence in the scope of MTD ITSA.   Please take advice if you are part of a property rental partnership.

 

Thresholds and Mandation – When will MTD ITSA Apply From?

Currently the staging is:

• From April 2026 sole traders and landlords with turnover or rents of £50,000 or more
• From April 2027 sole traders and landlords with turnover or rents of £30,000 or more
• From April 2028 sole traders and landlords with turnover or rents of £30,000 or more (announced Spring Statement 2025)

Note this is turnover or gross rent before deduction of expenses, and both business turnover and rents are aggregated to consider the thresholds, eg someone with 2024/25 Self Employment income of £30,000 and rents of £25,000 will breach the £50,000 threshold.

Although the MTD ITSA regime starts from April 2026, the requirement to join the scheme is triggered by previous years Self Assessments.

• The first wave of MTD ITSA, April 2026, £50,000 threshold, will be based on 2024/25 Self Assessment returns, which are due to be filed by 31 January 2026
• The 2025/26 Self Assessment will determine mandation for the second wave in April 2027, £30,000 threshold
• The 2026/27 Self Assessment will determine mandation for the third wave in April 2028, £20,000 threshold

A few points of note:

• If you breached the £50,000 threshold in 2024/25 then you are mandated from April 2026 even if your income decreases sharply.
• If a business runs for part of a year, the thresholds are apportioned – eg If a business started in September 2024, and traded for six months in 2024-25 with a turnover of £26,000, they will have breached the £50,000 threshold.
• For taxpayers in receipt or business income or rental income over the threshold for the first time, we would expect the requirement to enter MTD ITSA to come in from the second year after the thresholds are breached, eg start a business in 2028-29, breach the £20,000 threshold in 2029-30, in MTD ITSA from 2031-32.  Again apportionment of thresholds apply if the first period is less than 12 months.
• If your turnover reduces, it has to be below the threshold for three consecutive tax years in order to come out of MTD ITSA.
• If you have a mixture of sole trader and landlord income, including a share of income from joint properties, then the aggregate income total triggers mandation.  Someone with 2024/25 Self Employment income of £30,000 and rents of £25,000 will breach the £50,000 threshold.

Our understanding is that HMRC will send you a notification that you are mandated into MTD ITSA, but you will need to register to use the system on receipt of that notice.  For the first year, April 2026, HMRC cannot send the notification until the 2024-25 Self Assessment has been filed and processed, so possibly as late as February or March 2026, which doesn’t leave a lot of time if you are not already prepared.

More Detail – Submitting Returns

Each trading or property business must submit five returns, being:

• Four quarterly returns, at the end of the next month – HMRC are at pains not to call these “tax returns” and instead refer to them as “Income and Expense Updates”.
  • The intention is these are automated from your software.
  • These returns do not need to be as detailed as a Self Assessment.
  • You will be able to see an updated tax calculation for the year at this stage, although payment timescales are not being changed.
  • These returns are up to 5 July, 5 October, 5 January and 5 April, but tax payers can elect to report to 31 March, 30 June, 30 September and 31 December; no other pattern will be allowed.
• If the business is VAT registered then these returns are in addition to the regular VAT returns, now under MTD for VAT, which remain separate.

The individual then has to submit a Final Return which takes the place of the current Self Assessment, by 31st January after the end of the tax year.  In all respects this is equivalent to the current Self Assessment return – at present it is being referred to by HMRC as a “Simplified Digital Tax Return”, but will probably end up being called “Self Assessment”.

Taking a simple case of a Sole Trader under MTD ITSA, their obligations change as follows:

• Currently – annual Self Assessment by 31 January after tax year end
• Under MTD ITSA
  • Four quarterly returns, one month after quarter end
  • Final return by 31 January
  • Total 5 returns

Taking a more complex case of a Sole Trader who also owns a rental property, their obligations change as follows:

• Currently – annual Self Assessment by 31 January after tax year end
• Under MTD ITSA
  • Four quarterly returns, one month after quarter end for their trading business
  • Four quarterly returns, one month after quarter end for their property business
  • Final return by 31 January
  • Total 9 returns
  • See the section below, “More Detail – Multiple Income Streams”

 

More Detail – Multiple Income Streams

Many taxpayers will simply have Self Employment or Rental Income. However where there are more complex revenue streams, HMRC will expect separate returns for each revenue stream under the following headings:

1. Businesses / Self Employments
2. UK property income other than UK/EEA Furnished Holiday Lettings
3. Overseas property income other than EEA Furnished Holiday Lettings

As the separate tax regime for Furnished Holiday Letting as been abolished, the requirement to report these separately will lapse.

As each income stream needs to be reported separately, you will need separate software for each.   FreeAgent have a cut down landlords package, and doubtless other software supplies will do the same.

 

More Detail – Digital Record Keeping

The expectation is that the major part of your business record keeping system is digitalised and updated regularly, and for links between different data sources to be automated.

As part of the automation there must be “digital links” between different parts of your accounting systems – this sounds daunting, but put simply there must be a minimum of manual keying, or cut and paste. If you are using a programme or app then Digital Links are likely to be inherent, and the major implications here are for businesses using spreadsheets or businesses with more complex systems.

Generally the digitalisation requirement is from the stage that transactions are entered in your accounting system.

• eg – suppose you run a cafe and people mostly pay by cash. You do not have a till. You are not expected to keep a digital record of each customers cash payment, but you must keep a digital record of the daily total from customers within your accounting system.
• eg – as above, but the cafe has a stand alone till. The daily z reading would be the entry to your digital records, not each customer transaction.
• eg – as above but the till is a EPOS system linked directly to your accounting system – the transactions can be entered individually or as a daily summary, either way they are digitally linked.

 

More Detail – What Goes on the Quarterly Returns

HMRCs latest guidance suggests that (a) reporting requirements will broadly mirror the current detail from Self Assessment and (b) where turnover is below the VAT threshold, currently £90,000,  three line accounts can be submitted.

Breaking this down further, currently different income streams require different supplements appended to the Self Assessment.

Trades and professions	SA 103F
UK property	SA 105
Overseas property	SA 106
UK furnished holiday lettings	SA 105
EEA furnished holiday lettings	SA 105

It is anticipated that the reporting dataset under MTD ITSA will follow the requirements of each supplement, save FHLs now go into property income.

The threshold for three line accounts is a replication of the current position where businesses with a turnover below the VAT threshold can submit summary information. However full digital records will still be needed, so really the only relaxation is that expense analysis will be less stringent.  Presumably this will rise to £90,000 in line with the increase in VAT threshold from April 2024.

There are some easements on the quarterly reporting for landlords with jointly owned properties:

• The taxpayers share of income from a jointly owned property can be entered as one single entry each quarter rather than on receipt of each rent payment
• The taxpayers share of expenses from a jointly owned property can be reported once a year instead of each quarter
• These easements are connected with the practicalities of shared record keeping for a jointly owned property, where one of the owners will normally keep the records and provide details periodically to the other co-owners.

 

More Detail: Final Return

As well as the quarterly returns in respect of business and rental income, a final return must be submitted.

• This takes the place of the existing Self Assessment return – at present HMRC refer to it as “Simplified Digital Tax Return” but it will probably end up being called “Self Assessment”.
• Will include final year end adjustments for self employment and property income to move the sum of the four quarters to the final position.
• The content and time-scales will be for all practical purposes the same as the current Self Assessment.
• Sources of income not reported quarterly, eg employment income, dividends, investment income, need to be included.
• Must be submitted digitally using MTD compatible software – submission on paper or via HMRC website is not permitted.  It is anticipated that we will submit this for our clients using our professional software, importing clients quarterly submissions where appropriate.

 

Penalties

A points based penalty system will apply for late submissions, similar to VAT.  Broadly each late return attracts a penalty point, and if four penalty points are accrued then a fixed £200 penalty is charged.  Penalty points expire after two years.

The full ambit of other HMRC penalties, eg failure to register, error/mistake/under declaration, still apply.

Choosing Software for Digital Record Keeping

There are a few choices in respect of software for MTD ITSA:

• Our recommendation to clients wanting an accounting package is normally FreeAgent – which we believe gives a good mix of functionality verses usability for most smaller businesses. We are able to offer our clients a negotiated discount against normal prices.
• Other options for desktop / cloud programmes and apps include Sage, Xero and Quickbooks.
• Feature bank accounts are available that combine banking with record keeping – our review of these suggests a mixed position with some a viable alternative to other software, others needing more development.
• Spreadsheets – it should be possible to keep records with a well designed and maintained spreadsheet, which connects with HMRC via Bridging Software.
• There are various other systems coming to market, and its worth following trends as we expect to see various MTD compliant systems will be launched during coming years – however be aware, and sceptical about, of free offerings which come and go and may not be reliable or robust – you tend to get what you pay for.

As a firm we are “open platform” so will work with your choice of software where possible.

We expect our clients to make available logins and passwords for us to access their cloud system if asked, and to meet the costs of any software supplier charges for accountants logins (some software companies charge, some don’t).

Please keep in mind each income stream will need a separate software subscription, eg one for Self Employment and one for UK Property even if the property income is small.

It was announced in Spring Statement 2025 that the final tax return, in all probability still to be called “Self Assessment”, will need to be filed via MTD software where the taxpayer is mandated into MTD for Income Tax, and HMRC will not be providing a filing functionality, software or web base, itself.  The existing web based Self Assessment services will remain for taxpayers not in MTD.   It is expected that what ever software you are using for record keeping and quarterly returns, this will export data to our software for preparing the final return which will work on similar time-scales and dataset to the current non MTD Self Assessment regime.

 

Our Involvement as Your Accountant

As you would expect, we are planning ahead.

• We are aware that the support needs of our clients will vary, and in some cases the changes coming in are quite daunting.
• It is clear that both ourselves and our clients will need to plan ahead for the implementation of Digital Record Keeping, including transition, training and support.

In terms of our fees our plan is a stratified approach with three levels of service:

1. A Year End only service at similar fee levels to existing. We would submit the annual year end reconciling return – the simpler quarterly returns you prepare and submit yourself.
2. A Quarterly Check service – where we check and submit the quarterly returns as well as doing the year end reconciling returns – expect additional fees for this to be roughly £50 to £100/quarter plus vat.
3. A “Brown Envelope” service where we can take over all data entry and submission – this will be bespoke pricing, as a guide would typically range between £50 and £250/m + vat.

For 1 and 2 you will need to budget for software / apps on top of this; with 3 we can incorporate the software into our agreement with you. We are “open platform” as a firm, so will work, where possible, with your choice of software, but in the absence of any other preference guide clients toward FreeAgent.

In March 2023 we published a Position Statement on how Making Tax Digital for Income Tax may affect the services we offer, and our charges.
Making Tax Digital for Income Tax – Position Statement on Prospective Fee and Service Changes

This is for information and to give a direction of travel – nothing is yet finalised. However we are planing ahead for April 2026, to ensure we and our clients are prepared.