Making Tax Digital (MTD) Guides UK | AccountingStack

Making Tax Digital (MTD) is HMRC's programme to digitise the UK tax system. MTD for VAT is already mandatory for all VAT-registered businesses. From 6 April 2026, Making Tax Digital for Income Tax Self Assessment (MTD ITSA) becomes mandatory for sole traders and landlords with gross income over £50,000. This changes how you keep records, report to HMRC, and file your tax return.

What is Making Tax Digital?

MTD replaces paper records and the traditional annual Self Assessment return with a system of digital record-keeping and more frequent reporting. Under MTD, you use HMRC-compatible software to keep records of income and expenses throughout the year, then send quarterly summaries to HMRC. A final year-end submission replaces the annual tax return.

The stated aims of MTD are to reduce errors, make tax obligations clearer throughout the year, and modernise the UK's tax administration. Businesses and individuals who have already moved to cloud accounting platforms have found the adjustment relatively straightforward; those relying on paper records or annual spreadsheets face the most significant change.

Making Tax Digital for Income Tax (MTD ITSA)

MTD ITSA applies to sole traders and landlords. It does not apply to employees (taxed through PAYE) unless they also have self-employment or property income above the threshold.

Under MTD ITSA, you must:

1. Keep digital records of all business income and expenses (or rental income and expenses) using HMRC-compatible software.
2. Submit a quarterly update to HMRC summarising your income and expenses for each three-month period.
3. Submit an End of Period Statement (EOPS) for each income source at the end of the tax year.
4. Submit a Final Declaration (replacing the traditional Self Assessment return) confirming your total income and any additional tax adjustments.

This means five separate submissions to HMRC per year instead of one annual return. HMRC will use the quarterly data to provide an estimate of your in-year tax liability.

MTD ITSA rollout timeline

If you have both self-employment income and rental income, these are added together to determine whether you meet the threshold — you are not assessed on each source separately. HMRC typically uses the income figure from two years prior to determine whether you are mandated for a given tax year.

What counts as qualifying income?

Qualifying income for MTD ITSA is your gross (before expenses) income from:

• Self-employment as a sole trader (all trades combined if you have more than one)
• UK rental income (residential and commercial property)

Income from employment, pensions, savings, dividends, or capital gains does not count towards the MTD ITSA qualifying income threshold. If you earn £45,000 from employment and £15,000 from a side business, only the £15,000 counts — you would not currently be mandated for MTD ITSA (though the 2028 threshold will capture you).

Use gross income, not net profit. Expenses are deducted separately when you calculate your profit — do not subtract them to determine whether you meet the MTD threshold.

Quarterly updates explained

Quarterly updates are summaries of your income and expenses, submitted digitally to HMRC four times per year. They are not tax returns and do not trigger a payment — they provide HMRC with an in-year picture of your financial activity and allow them to estimate your tax liability.

The four quarterly periods and submission deadlines are:

Quarterly updates require you to categorise income and expenses against HMRC's standardised categories. The level of detail is similar to what you would provide on your Self Assessment return, spread across four submissions instead of one.

End of Period Statement and Final Declaration

At the end of the tax year, you submit an End of Period Statement (EOPS) for each income source (each business or property). The EOPS is where you make any claims — capital allowances, basis period adjustments, loss claims — that affect your taxable profit for the year. You confirm that the data submitted during the quarterly updates is complete and correct.

After submitting EOPS for all income sources, you submit the Final Declaration. This consolidates your total income from all sources, including employment income, savings, dividends, and capital gains. The Final Declaration calculates your total tax liability for the year and confirms what you owe. The Final Declaration deadline is 31 January following the end of the tax year — the same as the traditional Self Assessment deadline.

MTD-compatible software

HMRC does not provide free software for MTD ITSA (unlike MTD for VAT, where HMRC's own tool is available for simpler cases). You must use software that HMRC has approved as compatible. Options range from full cloud accounting packages to simpler apps specifically designed for sole traders and landlords.

Popular options include:

• Full accounting software: Xero, QuickBooks, Sage, FreeAgent — comprehensive platforms for businesses with invoicing, expenses, and payroll.
• Sole trader and landlord apps: TaxCalc, Coconut, Hammock, QuickFile — simpler interfaces designed for MTD ITSA compliance without the full accounting feature set.
• Bridging software: If you prefer to keep records in a spreadsheet, bridging software (such as MTD Filer or Data Docks) can connect your spreadsheet to HMRC's MTD API for submission.

Spreadsheets alone are not MTD-compliant — there must be a digital link between your records and the submission to HMRC. Manually typing spreadsheet figures into an online portal does not meet the digital link requirement.

MTD for VAT

MTD for VAT has been mandatory for all VAT-registered businesses since April 2022. You must keep digital VAT records and submit VAT returns using HMRC-compatible software. The VAT return cannot be submitted through HMRC's old online portal — it must go through MTD-compatible software or bridging software.

For VAT, HMRC provides a free tool called "Making Tax Digital for VAT" that works for businesses with simpler VAT affairs. For businesses already using cloud accounting, VAT returns are typically submitted directly from the accounting software.

Exemptions from MTD

You may apply for an exemption from MTD ITSA if:

• You genuinely cannot use digital tools due to age, disability, or location (areas with no reliable broadband)
• It would be unreasonable to require compliance given your circumstances
• You are subject to insolvency proceedings

Exemptions must be applied for in advance. HMRC grants them on a case-by-case basis and expects applicants to have made a genuine attempt to comply before claiming exemption on grounds of digital exclusion.

What to do before April 2026

If your gross self-employment and/or rental income exceeds £50,000, you should already be preparing for MTD ITSA. Key steps:

1. Check your qualifying income. Review your 2023/24 and 2024/25 tax returns to confirm whether you exceed the £50,000 threshold. HMRC will use income from the 2023/24 return to determine whether you are mandated from April 2026.
2. Choose your software. Select and sign up to HMRC-approved software before April 2026. Begin using it now to familiarise yourself with the interface before submissions are mandatory.
3. Sign up to MTD ITSA through HMRC. You must register through your Government Gateway account before the MTD start date. Do not wait until April — HMRC recommends signing up well in advance.
4. Transition your record-keeping. If you currently use paper records or a spreadsheet that is not digitally linked to submission software, begin the transition to a compliant system now.
5. Speak to your accountant. Your accountant's workflows will change significantly under MTD. Discuss how the quarterly reporting will work, who will submit updates on your behalf, and how to authorise them as your agent in HMRC's MTD system.