What Is Making Tax Digital?
Making Tax Digital (MTD) is HMRC's programme to modernise the UK tax system. The goal is straightforward: replace the annual Self Assessment tax return with quarterly digital updates submitted through compatible software.
Rather than tallying up a full year's income and expenses in January, MTD requires taxpayers to keep digital records and send summary updates to HMRC every three months. At the end of the tax year, you submit a final declaration — effectively replacing the traditional Self Assessment return.
The programme started with MTD for VAT back in 2019, which required VAT-registered businesses to keep digital records and submit VAT returns using compatible software. MTD for Income Tax Self Assessment (MTD for ITSA) is the next phase, and it affects sole traders and landlords directly.
Who Does MTD for Income Tax Affect?
MTD for ITSA applies to individuals who earn income from self-employment or property (or both). However, not everyone is affected at the same time. HMRC is phasing in the requirements based on income thresholds:
- From April 2026: Sole traders and landlords with annual gross income of £50,000 or more must comply with MTD for ITSA.
- From April 2027: The threshold drops to £30,000 or more in annual gross income.
- Below £30,000: HMRC has indicated plans to bring smaller earners into MTD eventually, but no firm date has been set for those below the £30,000 threshold.
It is important to note that the threshold is based on gross income (turnover), not profit. If your total self-employment and property income exceeds the threshold — before deducting any expenses — you are within scope.
Partnerships
General partnerships were originally included in the early rollout plans, but HMRC has deferred their inclusion. Partnerships will not need to comply until at least April 2028 at the earliest. Limited companies are not affected by MTD for ITSA — they fall under Corporation Tax, which has its own digital reporting requirements.
What Are Quarterly Updates?
Under MTD for ITSA, each tax year (6 April to 5 April) is divided into four standard quarters:
| Quarter | Period |
|---|---|
| Q1 | 6 April – 5 July |
| Q2 | 6 July – 5 October |
| Q3 | 6 October – 5 January |
| Q4 | 6 January – 5 April |
For each quarter, you must submit a summary of your income and expenses to HMRC through MTD-compatible software. You have roughly one month after the end of each quarter to submit.
These quarterly updates are not tax returns — no tax calculation is made at this stage. They simply give HMRC a running picture of your business performance throughout the year. Think of them as digital bookkeeping checkpoints.
If you want to understand the step-by-step process for actually submitting one of these updates, read our guide on how to submit a quarterly update to HMRC.
End of Period Statement and Final Declaration
After your four quarterly updates, there are two more steps:
-
End of Period Statement (EOPS): You confirm that the figures you submitted during the year are complete and accurate. This is done for each source of income (e.g., one for your sole trade, one for your rental property).
-
Final Declaration: This replaces the Self Assessment tax return. You include any additional information — such as personal allowances, Gift Aid donations, student loan repayments, or other adjustments — and submit a final declaration. HMRC then calculates your tax liability.
The deadline for the Final Declaration is 31 January following the end of the tax year, the same deadline as the current Self Assessment return.
What Software Do You Need?
HMRC requires that you use MTD-compatible software to keep digital records and submit quarterly updates. You cannot submit updates through the HMRC website — it must be done through approved third-party software.
The software must be able to:
- Store digital records of income and expenses
- Submit quarterly updates to HMRC via their API
- Submit your Final Declaration
There are many options available at different price points. Some are full accounting packages with features you may never need. Others, like ClearMTD, are designed specifically for MTD compliance — letting you enter your numbers and submit without unnecessary complexity.
If you are comparing options, our guide to the cheapest MTD software in the UK breaks down what is available and what each option costs.
Digital Record Keeping
MTD requires you to keep digital records of all your business transactions. This does not necessarily mean scanning every receipt — it means maintaining a digital log of:
- All amounts received (income/turnover)
- All amounts spent (allowable expenses)
- The date of each transaction
- The category of each transaction
You can use software to record these directly, or you can maintain records in a spreadsheet — as long as there is a digital link to the software you use for submission. Importantly, you cannot simply type figures into the submission software from paper records. The records themselves must be digital.
How Is MTD Different from Self Assessment?
If you currently file a Self Assessment tax return, here are the key differences under MTD:
| Self Assessment | MTD for ITSA | |
|---|---|---|
| Frequency | Once a year | Four quarterly updates + final declaration |
| Submission method | HMRC website or paper | MTD-compatible software only |
| Record keeping | Can be paper-based | Must be digital |
| Deadline | 31 January | Quarterly deadlines + 31 January for final declaration |
| Tax calculation | On submission | After final declaration |
The overall tax you owe does not change — MTD is about how and when you report, not how much you pay.
How to Prepare for MTD
If your gross income is above £50,000, MTD for ITSA is already in effect from April 2026. Here is what you should do:
-
Choose compatible software. Look for something that handles quarterly submissions without unnecessary complexity. ClearMTD is built specifically for this purpose.
-
Start keeping digital records. If you are still using paper records or a basic spreadsheet without a digital link to submission software, now is the time to switch.
-
Understand your quarters. Know the deadlines and set reminders. Late submissions may result in penalties under HMRC's new points-based penalty regime.
-
Sign up for MTD with HMRC. You need to register for MTD for ITSA through your Government Gateway account. Your software provider can guide you through this.
-
Connect your software to HMRC. Most MTD software uses OAuth to securely connect to your HMRC account. This is a one-time setup.
Penalties Under MTD
HMRC has introduced a new points-based penalty system for late submissions and late payments:
- Late submission: You receive one point for each missed deadline. Once you reach the penalty threshold (currently 4 points for quarterly obligations), you receive a £200 penalty for each subsequent late submission.
- Late payment: Interest accrues from the due date. If payment is 15 days late, a penalty of 2% of the outstanding amount applies. At 30 days, a further 2% penalty is charged. After 30 days, a daily penalty accrues at 4% per annum.
Staying on top of quarterly deadlines is therefore important — not just for compliance, but to avoid accumulating penalty points.
Frequently Asked Questions
Do I still need to file a Self Assessment tax return under MTD?
No. The Final Declaration submitted through your MTD software replaces the Self Assessment tax return. However, during the transition period, some taxpayers may need to complete both for the first year if they have other income sources not covered by MTD.
What if my income is below £50,000?
If your gross self-employment and property income is below £50,000 but above £30,000, you will need to comply from April 2027. If it is below £30,000, there is no obligation yet, though you can sign up voluntarily. Voluntary sign-up lets you get familiar with the process before it becomes mandatory.
Can I use a spreadsheet instead of software?
You can use a spreadsheet for record keeping, but it must be digitally linked to MTD-compatible submission software. You cannot submit quarterly updates from a spreadsheet alone — the data must flow digitally into the submission software, which then sends it to HMRC.
What happens if I miss a quarterly deadline?
You receive a late submission penalty point. Points accumulate over a 24-month period. Once you reach the threshold of 4 points, each further late submission triggers a £200 penalty. You can reset your points to zero by submitting on time for a period of 24 months.
Does MTD apply to my PAYE income?
No. MTD for ITSA only applies to self-employment income and property income. If you are employed and your employer deducts tax through PAYE, that income is not affected. However, if you have both PAYE and self-employment income, you still need to report the self-employment portion through MTD if you meet the threshold.
Getting Started
MTD for ITSA is now a reality for higher-earning sole traders and landlords. The sooner you set up compatible software and establish a routine for digital record keeping, the smoother the transition will be.
ClearMTD is designed to make quarterly submissions simple — enter your income and expenses, connect to HMRC, and submit. No accounting jargon, no bloated features. Just straightforward MTD compliance from £9 per month.