Making Tax Digital UK 2026: What Businesses and Sole Traders Need to Know

What Is Making Tax Digital?

Making Tax Digital is the UK government's programme to modernise the tax system by requiring businesses, sole traders, and landlords to maintain digital records and submit returns using HMRC-compatible software. The programme has been rolling out in phases since 2019, beginning with VAT and now extending into income tax self assessment.

HMRC's stated goal is to reduce the tax gap - the difference between tax owed and tax collected - by minimising errors that arise from manual record-keeping and paper filing. The agency estimates that avoidable mistakes account for billions of pounds of lost revenue annually, and MTD is designed to address this at source.

For most businesses that are already VAT-registered and using accounting software, MTD for VAT is already embedded in daily operations. The more significant change now approaching affects a much wider group: sole traders and landlords who have historically filed annual self-assessment returns through the HMRC online portal.

Who Does MTD Apply To?

The scope of MTD has expanded across three main areas:

• MTD for VAT: Mandatory for all VAT-registered businesses since April 2022, regardless of turnover. Businesses below the VAT threshold that registered voluntarily are also included.
• MTD for Income Tax Self Assessment (MTD ITSA): Applies to self-employed individuals and landlords with annual gross income above 50,000 pounds from April 2026. Those with income above 30,000 pounds follow from April 2027. A further extension to those above 20,000 pounds is proposed for April 2028, subject to confirmation.
• MTD for Corporation Tax: Still in consultation phase. No mandatory start date has been confirmed for limited companies as of 2026.

Partnerships are currently excluded from the MTD ITSA rollout but HMRC has signalled they will be brought into scope in a later phase. The income thresholds refer to gross income - turnover before expenses - not profit. A landlord with rental income above 50,000 pounds but significant allowable costs may still be within scope even if their taxable profit is considerably lower.

What Software Is Required?

Businesses must use HMRC-recognised software to comply with MTD. HMRC maintains a published list of approved software providers at gov.uk. The categories available include:

• Full accounting packages: Comprehensive cloud-based accounting tools that handle bookkeeping, invoicing, payroll, and direct HMRC submission in one platform.
• Bridging software: Tools that sit between an existing spreadsheet and HMRC's systems, allowing users who prefer to keep records in Excel or similar to submit digitally without changing their record-keeping process entirely.
• HMRC free tools: HMRC offers limited free software for those with very simple affairs, though these are not suitable for complex businesses.

The software must be capable of keeping digital records of income and expenses, performing the required calculations, and submitting quarterly updates and a final declaration directly to HMRC via its API. Manual re-keying of data from one system into an HMRC portal does not meet the digital links requirement.

Key MTD ITSA Deadlines

The current confirmed and proposed schedule for MTD for Income Tax Self Assessment is:

• April 2026: Mandatory for self-employed and landlords with gross income above 50,000 pounds per year.
• April 2027: Extends to those with gross income above 30,000 pounds per year.
• April 2028: Further extension to those above 20,000 pounds per year (proposed, subject to legislation).

HMRC has previously delayed MTD ITSA rollouts on multiple occasions in response to representations from accountancy bodies and small business groups. Anyone approaching a threshold should monitor the HMRC MTD timeline at gov.uk for any further changes.

Quarterly Reporting Under MTD ITSA

One of the most operationally significant changes under MTD ITSA is the move from a single annual self-assessment return to quarterly reporting. Under the new system, affected taxpayers must submit four quarterly updates to HMRC during the tax year, followed by a final end-of-year declaration.

The quarterly updates report cumulative income and expenses for the period. They are not tax payment dates - the timing of payments on account and balancing payments remains on the existing self-assessment schedule. The change is about reporting frequency rather than payment frequency.

HMRC has stated that more frequent reporting will give taxpayers a clearer, more current picture of their likely tax liability throughout the year, potentially reducing the shock of a large balancing payment in January.

Penalties for Non-Compliance

HMRC has introduced a points-based late submission penalty regime that applies across MTD. The system works as follows:

• Each missed submission earns one penalty point.
• Once a cumulative threshold is reached - which varies depending on submission frequency - a fixed financial penalty of 200 pounds is charged.
• Points expire after a period of sustained compliance, meaning taxpayers who miss a submission but subsequently file on time can reduce their points total back to zero over time.

Separate late payment penalties also apply for tax paid after the due date. These are percentage-based and calculated on the unpaid amount. HMRC has published full details of both penalty regimes at gov.uk.

How to Prepare for MTD

Businesses and sole traders approaching the MTD threshold should take the following steps ahead of their mandatory start date:

• Confirm whether gross income is above the relevant threshold for the upcoming April start date.
• Review the HMRC-approved software list and select a package appropriate to the complexity of the business.
• Speak to an accountant or tax adviser, particularly if income comes from multiple sources or involves property alongside self-employment.
• Sign up for MTD ITSA through the Government Gateway before the relevant deadline - signing up early is permitted and can help identify any issues with software compatibility.
• Ensure all current records are in a format that can be migrated or connected to the chosen MTD software.

MTD and Landlords

Landlords with property income above the threshold face the same MTD ITSA requirements as sole traders. This includes keeping digital records of rental income and allowable expenses for each property and submitting quarterly updates. Landlords with both self-employment and property income above the threshold must report both income streams through their MTD software.

HMRC has confirmed that the 50,000 pound threshold refers to combined gross income from both self-employment and property where a taxpayer has both sources. A landlord earning 35,000 pounds in rent and 20,000 pounds from freelance work would have combined income of 55,000 pounds and would be in scope from April 2026.

What does Making Tax Digital mean for sole traders in 2026?

Sole traders with gross income above 50,000 pounds must comply with MTD for Income Tax from April 2026. They must keep digital records using HMRC-approved software and submit quarterly updates rather than a single annual self-assessment return.

Is MTD for VAT already mandatory?

Yes. MTD for VAT has been mandatory for all VAT-registered businesses since April 2022 regardless of turnover. Businesses must use compatible software to file VAT returns and keep digital records.

What happens if I miss an MTD deadline?

HMRC operates a points-based penalty system. Missing a submission earns a penalty point. Once a points threshold is reached, a fixed 200 pound penalty applies. Points can expire after a sustained period of on-time compliance.

Does MTD apply to limited companies?

MTD for VAT applies to all VAT-registered companies. MTD for Corporation Tax is still in consultation with no confirmed mandatory start date as of 2026. The current MTD ITSA rules apply to sole traders and landlords only.

What is the MTD income threshold for 2027?

From April 2027, MTD for Income Tax Self Assessment extends to self-employed individuals and landlords with gross income above 30,000 pounds per year. From April 2028, the threshold is proposed to drop further to 20,000 pounds.