UK Self Assessment From Scratch — Part 7: Making Tax Digital for Income Tax

Quick answer

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is the biggest operational change to UK Self Assessment in decades. From 6 April 2026, sole traders and landlords with qualifying income over £50,000 must:

1. Keep digital records in HMRC-compatible software.
2. Submit four quarterly updates to HMRC throughout the tax year.
3. Submit a year-end declaration by 31 January (replacing the current annual Self Assessment return).

The thresholds drop in subsequent years:

This is Part 7 of 8 in our Self-Assessment From Scratch series.

What "qualifying income" means

It's the gross turnover or rental income — not the net profit. A sole trader with:

• £55,000 gross turnover, £20,000 expenses, £35,000 net profit → qualifying income £55,000 → MTD applies.
• £45,000 gross turnover, £5,000 expenses, £40,000 net profit → qualifying income £45,000 → MTD doesn't apply from April 2026 (but will from April 2027).

This catches some people out — high-turnover, low-margin businesses might be in scope despite modest profits.

What stays the same

• 31 January annual deadline still exists — it's the year-end declaration.
• 31 July payment on account still applies (covered in Part 6).
• Tax rules unchanged — same rates, allowances, expenses.
• CGT 60-day reporting unchanged.
• PAYE untouched — MTD ITSA applies only to self-employed and rental income.

What changes

1. Digital record-keeping mandatory

You must keep your business income and expenses in HMRC-compatible software. Recording on paper, in a spreadsheet alone, or in a non-compatible app is not enough.

2. Four quarterly updates

For the standard tax year (April–April), quarter ends are:

Each update submits summary totals of income and expenses by category — not individual transactions.

You can also align quarters to standard calendar quarters (Jan-Mar, Apr-Jun, etc.) if you elect to.

3. Year-end declaration replaces SA return

By 31 January after the tax year, you submit a final declaration confirming:

• The quarterly updates are accurate.
• Final adjustments (capital allowances, year-end stock, etc.).
• Total profit calculation.
• Any non-MTD income (PAYE, dividends, savings interest) added as before.

The output is similar to a current Self Assessment return — just compiled from your software-tracked figures.

Software requirements

You need HMRC-recognised MTD software. Common UK options:

If you prefer spreadsheets, you can keep using them — but you need bridging software to submit the quarterly updates from the spreadsheet to HMRC. Several free / cheap bridging tools exist (Avalara MTD Filer, VitalTax, 123 Sheets MTD).

What the quarterly update actually looks like

Each quarter, you submit:

• Total turnover for the period.
• Expenses by category (motoring, advertising, premises, supplies, wages, professional fees, repairs, etc.).
• Total expenses.
• Period profit/loss.

You don't submit individual transactions — just category totals. The software pulls these from your bookkeeping records automatically.

Quarterly updates are estimates — they don't have to be perfect. The year-end declaration is where final adjustments happen.

Penalty system — points-based

MTD ITSA brings a new points-based late-filing penalty system:

• Each late quarterly update: 1 penalty point.
• 4 points accumulated: £200 fine.
• Each additional late filing: £200 more.
• Points reset to zero after a clean period (24 months).

Late payment penalties are separate and existing:

• 30 days late: 5% surcharge.
• 6 months late: another 5%.
• 12 months late: another 5%.
• Plus 7.5% interest throughout.

The points system is more lenient on occasional slip-ups than the current £100 immediate penalty. But hardens up for serial late-filers.

Worked example — Tom, plumber, qualifies for MTD from April 2026

Tom is a sole-trader plumber. 2024/25 turnover: £62,000. Above the £50,000 threshold.

Pre-MTD (current):

• Bookkeeping: paper invoices in shoebox, totalled annually by accountant in January.
• Annual Self Assessment return filed by 31 January.

Post-MTD (from April 2026):

1. Tom signs up for FreeAgent (free via his NatWest business banking).
2. He uses the FreeAgent mobile app to photograph receipts and enter income as it happens.
3. End of each quarter, he reviews and submits the update via FreeAgent in ~10 minutes.
4. By 31 January 2027, he reviews the year and submits the final declaration.

Outcome:

• He's working with much better real-time visibility into his profit through the year.
• His January 2027 work is shorter (data already entered, just review and finalise).
• His accountant fee should drop because the year-end work is less.
• But he's now committed to four submission deadlines instead of one.

For some sole traders this is a clear upgrade. For others (especially those who've used paper records for decades), it's a real adjustment.

Who's exempt

Some categories are exempt or have delayed entry:

• Partnerships — MTD ITSA delayed for partnerships; original April 2025 date pushed back, no confirmed start.
• Trustees — exempt.
• Pension administrators — exempt.
• Non-UK resident foreign entertainers — exempt.
• People with genuine digital exclusion (rare, must apply to HMRC for exemption).

Currently no income-based exemption other than the £20k/£30k/£50k thresholds.

Voluntary early adoption

You can volunteer to start MTD ITSA before your mandatory date. HMRC has been running a voluntary pilot since 2024 — sign up via the HMRC software list on gov.uk.

Reasons to volunteer:

• Practice before mandatory entry.
• Better business insight from real-time bookkeeping.
• Smoother accountant relationship — fewer end-of-year fire-drills.

Reasons not to:

• Comfort with current process — if it ain't broke.
• Software cost — £100-£200/year you don't currently pay.

How to prepare if MTD applies to you from April 2026

1. Check now if you're above the £50k qualifying income threshold based on 2024/25.
2. Choose software — pilot it in late 2025/early 2026 to find one you like.
3. Migrate any historical bookkeeping into the software before 6 April 2026.
4. Get familiar with the quarterly submission process before the first Q1 deadline (5 August 2026).
5. Talk to your accountant if you have one — they should already have an MTD ITSA service.

Common concerns

"I only have one rental property — why do I need this?"

If your qualifying income (gross rent) exceeds the threshold, MTD applies even for a single property. The threshold is total qualifying income, not per property.

"My income is from PAYE plus a small side business — does MTD apply?"

Only the self-employed/rental income counts toward the threshold. PAYE doesn't. So a £45,000 PAYE worker with £8,000 of side-business income has qualifying income of £8,000 — not in MTD scope from April 2026 (or April 2027). Becomes in scope from April 2028 if threshold falls to £20,000 (currently £8k still below it).

"What if my income drops below threshold mid-year?"

Threshold tested annually based on prior-year qualifying income. You don't drop out mid-year. If your qualifying income for 2026/27 was over £50k, MTD applies for 2027/28 even if 2027/28 income is lower.

"Will I have to pay tax quarterly?"

No. The current payment schedule (31 January and 31 July) is unchanged. Quarterly updates are informational; quarterly payments are not part of MTD ITSA.

Coming next — final part

• Part 8: After you file — refunds, audits, amendments

That wraps up the Self-Assessment From Scratch series.

Sources

• HMRC: Making Tax Digital for Income Tax
• HMRC: Find software for Making Tax Digital
• HMRC: Sign up voluntarily for Making Tax Digital for Income Tax
• HMRC: Penalty points for late submissions
• HMRC: Making Tax Digital: an evaluation