Making Tax Digital for Income Tax: The Complete Guide for UK Business Owners (2025/26)

Making Tax Digital for Income Tax (MTD ITSA) is the biggest change to how UK sole traders, landlords, and partnerships report their income since self-assessment was introduced. If you run a business or let property, this affects you directly. From April 2026, you will no longer file a single annual tax return. Instead, you will send HMRC quarterly digital updates and a final declaration.

This guide is for UK business owners: sole traders, freelancers, contractors, landlords, and partnerships. It is written by ICAEW qualified accountants who work with businesses across every sector. We have helped clients from Shoreditch to the Northern Quarter, from Bristol Harbourside to Glasgow's Merchant City, prepare for this transition. This page gives you everything you need to understand MTD ITSA, assess whether it applies to you, and plan your compliance.

What is Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax (MTD ITSA) is HMRC's programme to digitise the tax system for income tax payers. It requires you to keep digital records of your business income and expenses using MTD-compatible software, and send summary data to HMRC quarterly. At the end of the year, you submit a final declaration to confirm your figures. The annual self-assessment tax return as you know it will be replaced.

MTD ITSA is part of HMRC's broader Making Tax Digital initiative, which already applies to VAT for most businesses with turnover above £90,000. The income tax phase extends the same principles to self-assessment taxpayers.

How MTD ITSA differs from the current system

The current system works like this: you keep your records however you like (spreadsheet, shoebox, or accounting software), then file one annual self-assessment return by 31 January. HMRC receives your data once a year.

Under MTD ITSA, the process changes fundamentally:

• You must maintain digital records throughout the year using MTD-compatible software.
• You send HMRC quarterly updates summarising your income and expenses for each three-month period.
• After the end of the tax year, you submit a final declaration that confirms your figures and claims any reliefs or allowances.
• HMRC can see your business performance in near-real time, rather than waiting for an annual return.

This is not optional. If you are within scope, you must comply. There are no paper exemptions for convenience.

Who is affected by MTD ITSA?

The rules apply to sole traders, self-employed individuals, and landlords who receive gross income from their business or property above certain thresholds. Partnerships are also included, though with a later start date.

Income thresholds and start dates

HMRC is phasing MTD ITSA in by income level. The current timeline is:

Gross income threshold	Mandatory from	Who is affected
£50,000 or more	6 April 2026	Sole traders, self-employed, landlords
£30,000 to £49,999	6 April 2027	Sole traders, self-employed, landlords
£20,000 to £29,999	6 April 2028	Sole traders, self-employed, landlords
Under £20,000	Not yet mandated	Voluntary opt-in possible

Gross income means your total business or property receipts before deducting any expenses or allowances. For a sole trader with a shop in Camden, that is your total sales. For a landlord with a flat in Leeds Dock, that is your total rental income.

If you have both self-employment income and property income, you add them together to check the threshold.

Partnerships

Partnerships are included but with a later start. HMRC has not yet set a specific date for partnerships to join MTD ITSA. Current indications suggest 2027 or later. Each partner will still need to report their share of partnership income through their own MTD ITSA record if their personal income exceeds the relevant threshold.

Limited companies

Directors of limited companies who take a salary and dividends are not directly affected by MTD ITSA. The company pays corporation tax, which is a separate system. However, if you are a director and also have a side business as a sole trader, or let property in your own name, those activities fall within MTD ITSA.

For detailed guidance on corporation tax obligations, see our corporation tax guide.

Who is exempt?

HMRC has confirmed limited exemptions. You may be exempt if:

• You are a practising member of a religious society whose beliefs prevent you from using digital technology.
• It is not reasonably practicable for you to use digital tools due to your age, disability, or location (for example, you live in a remote area without reliable internet).
• You are subject to an insolvency procedure.

Exemptions are not automatic. You must apply to HMRC and provide evidence. Most business owners will not qualify.

What you must do to comply with MTD ITSA

Compliance breaks down into three core activities: digital record keeping, quarterly updates, and the final declaration.

Digital record keeping

You must keep all your business income and expenses in digital form using MTD-compatible software. This does not mean you must use a specific HMRC app. It means your accounting software or spreadsheet must be able to connect directly to HMRC's systems via an API.

You can use:

• Cloud accounting software: Xero, QuickBooks, FreeAgent, Sage Accounting, FreshBooks, Crunch, Hammock, and others that are MTD-compatible.
• Bridging software: if you prefer to use a spreadsheet, you can keep your records in Excel or Google Sheets and use a bridging tool to send the data to HMRC. Several bridging solutions exist, including free options.
• HMRC's own MTD-compatible products: HMRC provides a list of recognised software on GOV.UK.

Your digital records must include:

• Date of each transaction.
• Amount in pounds sterling.
• Category of income or expense (for example, "sales", "rent received", "office costs", "travel").
• For purchases from other businesses, the supplier name.

You do not need to store receipts digitally, though you must keep them as evidence. Most software allows you to attach receipts using tools like Dext or Hubdoc.

Quarterly updates

Every three months, you send HMRC a summary of your income and expenses for that period. The quarters end on:

• 5 July (period 1: 6 April to 5 July)
• 5 October (period 2: 6 July to 5 October)
• 5 January (period 3: 6 October to 5 January)
• 5 April (period 4: 6 January to 5 April)

You have until the end of the month following each quarter to submit the update. So the first quarterly update for the period ending 5 July 2026 is due by 5 August 2026.

The quarterly update is not a tax calculation. It is a data submission. HMRC uses it to build a picture of your income throughout the year. You do not pay tax at this point. Your tax payments remain due on the usual dates: 31 January and 31 July.

Final declaration

After the end of the tax year (5 April), you submit a final declaration. This replaces the self-assessment tax return. In the final declaration, you:

• Confirm the quarterly updates are correct.
• Add any year-end adjustments (for example, capital allowances, business use of home, private use adjustments).
• Claim reliefs and allowances.
• Declare other income not covered by MTD ITSA (for example, employment income, bank interest, dividends).

HMRC then calculates your total tax liability based on the final declaration. The deadline for the final declaration is 31 January following the end of the tax year, the same as the current self-assessment deadline.

Worked example: Sarah, a freelance graphic designer in Manchester

Sarah runs a freelance graphic design business from her home in Manchester's Northern Quarter. Her gross income for 2025/26 is £63,400. She also lets out a small flat in the city centre, generating £8,200 in rental income. Her total gross income is £71,600.

Because her combined gross income exceeds £50,000, Sarah must comply with MTD ITSA from April 2026.

Sarah uses FreeAgent for her accounting. She already uses it for her business records, so the transition is straightforward. She connects FreeAgent to HMRC's MTD service through the software's built-in integration.

Throughout 2026/27, Sarah records all her business income and expenses in FreeAgent as she always has. The software automatically categorises transactions and stores them digitally.

Every quarter, FreeAgent prompts Sarah to submit her quarterly update. She reviews the figures, makes any corrections, and clicks "submit". The software sends the data directly to HMRC.

At the end of the tax year, Sarah completes her final declaration in FreeAgent. She adds her year-end adjustments: £1,200 for business use of home, £450 for professional subscriptions, and a capital allowance claim of £2,800 for a new computer. She also enters her rental income and expenses separately. FreeAgent calculates her total tax liability, and Sarah pays the balance by 31 January 2028.

Sarah's experience is typical. For someone already using accounting software, MTD ITSA adds little extra work. The quarterly updates take her about 15 minutes each.

Software choices for MTD ITSA

Choosing the right software is the most important practical decision you will make. Your software must be MTD-compatible, meaning it has been approved by HMRC to send data via the MTD API.

Cloud accounting software

Most cloud accounting platforms are MTD-ready or will be by April 2026. Popular options include:

• Xero: widely used, strong integrations, good for sole traders and landlords.
• QuickBooks: user-friendly, good for small businesses, offers a self-employed version.
• FreeAgent: excellent for freelancers and contractors, includes bank feeds and invoicing.
• Sage Accounting: robust, well-suited to growing businesses.
• FreshBooks: good for service-based businesses.
• Crunch: designed for contractors and small businesses, includes payroll.
• Hammock: built specifically for landlords.

Each has different pricing, features, and ease of use. If you are unsure which to choose, speak to your accountant. Many firms, including ours, have preferences based on what works best with their workflow. See our services page for how we help clients with software selection.

Spreadsheets with bridging software

If you prefer to keep your records in a spreadsheet, you can still comply. You will need bridging software that takes data from your spreadsheet and sends it to HMRC. Bridging tools include:

• HMRC's own free bridging software (available from GOV.UK).
• Third-party bridging tools from software providers.
• Some accounting software packages include bridging functionality.

Bridging software is a legitimate option. However, it adds an extra step. You must ensure your spreadsheet is structured correctly so the bridging tool can read it. Most accountants recommend cloud software for ease and accuracy.

What about paper records?

Paper records alone will not be sufficient. You can keep paper receipts and invoices, but you must digitise the key data (date, amount, category) in your software. HMRC does not require you to scan every receipt, but you must be able to produce them if asked.

Timeline and key dates

Knowing the timeline helps you plan. Here are the critical dates for MTD ITSA:

• 6 April 2026: MTD ITSA becomes mandatory for sole traders, self-employed, and landlords with gross income of £50,000 or more.
• 5 August 2026: first quarterly update deadline for the period 6 April to 5 July 2026.
• 6 April 2027: MTD ITSA extends to those with gross income of £30,000 to £49,999.
• 6 April 2028: MTD ITSA extends to those with gross income of £20,000 to £29,999.

If you are in the first wave, you should start preparing now. Waiting until March 2026 will leave you rushed.

How MTD ITSA affects your tax payments

One common concern is whether MTD ITSA changes when you pay tax. The short answer is no. Your tax payment dates remain the same.

Currently, self-assessment taxpayers make payments on account on 31 January and 31 July, with a balancing payment on the following 31 January. Under MTD ITSA, this system continues. The quarterly updates do not trigger payments. Only the final declaration generates your tax bill.

However, HMRC has indicated it may move to a more frequent payment system in the future. For now, there is no change.

Penalties for non-compliance

HMRC is introducing a new penalty system for MTD ITSA, separate from the existing self-assessment late-filing penalties.

The new system is points-based. You receive a penalty point for each late quarterly update or late final declaration. Once you reach a certain number of points, you receive a financial penalty. The thresholds are:

• 4 points for annual filers (most businesses).
• 2 points for quarterly filers (some businesses may be on a different schedule).

Each point carries a £200 penalty once the threshold is reached. Points expire after a period of compliance.

There are also penalties for late payment of tax, which remain separate from the points system.

The best way to avoid penalties is to submit on time. Most software will remind you when a quarterly update is due.

Action checklist: preparing for MTD ITSA

Here is what you should do now, broken down by your income level.

If your gross income is £50,000 or more

1. Check your software. If you use accounting software, confirm it is MTD-compatible. Most major providers are, but check with them directly. If you use spreadsheets, identify a bridging solution.
2. Set up your digital records. Ensure all your business transactions are recorded digitally from 6 April 2026. If you currently use paper or manual records, start transitioning now.
3. Register for MTD ITSA. You will need to sign up through your software or via HMRC's online service. Your software provider will guide you through this.
4. Talk to your accountant. Your accountant should be preparing for MTD ITSA on your behalf. If they are not, ask them. We can help, contact us to discuss your situation.
5. Review your record keeping. Are your expenses categorised consistently? Do you have a system for capturing receipts? MTD ITSA rewards good habits.

If your gross income is between £30,000 and £49,999

1. Start planning now. You have until April 2027, but early preparation avoids a last-minute scramble.
2. Consider moving to cloud software. If you use spreadsheets, moving to cloud accounting now gives you a year to get comfortable before MTD ITSA becomes mandatory.
3. Check your income level each year. If your income grows and crosses the £50,000 threshold earlier than expected, you will need to comply sooner.

If your gross income is under £30,000

1. Monitor your income. If you are close to the threshold, plan for the possibility of crossing it.
2. Consider voluntary opt-in. You can choose to join MTD ITSA voluntarily. Some businesses find the quarterly discipline helpful for managing cash flow and tax planning.

For a full breakdown of your tax obligations as a sole trader, see our sole trader and self-employment guide.

Common questions about MTD ITSA

Do I need to submit quarterly updates for my property income if I only let one property?

Yes. If your total gross income from property (combined with any self-employment income) exceeds the threshold, you must submit quarterly updates for your property business. The rules apply regardless of how many properties you own.

Can I use the same software for my VAT and income tax MTD obligations?

Yes. Most cloud accounting platforms handle both VAT and income tax MTD. If you already use MTD-compatible software for VAT, you are likely already set up for income tax. See our VAT and MTD guide for more on the VAT side.

What happens if I make a mistake in a quarterly update?

You can correct errors in subsequent updates or in the final declaration. HMRC does not expect perfection in each quarterly update. The final declaration is your opportunity to get everything right.

Do I still need to file a self-assessment tax return?

Once you are within MTD ITSA, the annual self-assessment return is replaced by the final declaration. However, you may still need to report other income (employment, dividends, bank interest) through the final declaration. The process is similar to the current return but done through your MTD software.

What if I am both a sole trader and a director of a limited company?

Your limited company activities are not affected by MTD ITSA. Your sole trader activities are. You will need to manage both systems separately. Your company continues to file corporation tax returns as before. For director-specific guidance, see director pay and dividends.

Can my accountant handle the quarterly updates for me?

Yes. Many accountants will manage the quarterly updates on your behalf. You still need to provide them with your digital records. Some firms, including ours, offer MTD compliance as part of their ongoing service. Speak to your accountant about their approach.

Why this matters for your business

MTD ITSA is not just a compliance change. It is a shift in how HMRC interacts with small businesses. Quarterly reporting means HMRC will have a much clearer picture of your income throughout the year. That has implications for:

• Tax investigations: HMRC can spot anomalies sooner. Consistent, accurate records reduce your risk of enquiry.
• Cash flow planning: Quarterly updates give you a regular snapshot of your profitability. You can estimate your tax liability more accurately and set aside the right amount.
• Business decisions: Real-time financial data helps you make better decisions about pricing, investment, and growth.

For businesses already using good accounting software, MTD ITSA is a minor adjustment. For those still using paper records or basic spreadsheets, it is a bigger change. Either way, the time to act is now.

If you are unsure about your obligations, or want help choosing software and setting up your digital records, get in touch. We work with businesses across the UK, from sole traders in Edinburgh's Leith to partnerships in Birmingham's Jewellery Quarter. We can help you navigate MTD ITSA with confidence.

For a broader overview of how your business structure affects your tax obligations, start with our fundamentals page.