Making Tax Digital for Income Tax: What Self-Employed Must Do

Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) is the most significant change to how self-employed people report their income to HMRC in a generation. If you run your own business, work as a freelancer, or earn rental income, the way you file tax information is changing — and the rules are already in force for higher earners.

This guide explains exactly what MTD for ITSA means, who it affects and when, what you need to do to comply, and how the 2026/27 tax rates interact with your new reporting obligations.

What Is Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax Self-Assessment replaces the annual Self Assessment tax return for most self-employed people and landlords. Instead of submitting one return per year by 31 January, you will:

1. Keep digital records of your business income and expenses throughout the tax year
2. Submit quarterly updates to HMRC using MTD-compatible software
3. Submit a final declaration after the tax year ends to confirm your total income and claim any reliefs or allowances

The aim is to make tax more accurate and up to date, reducing the large end-of-year bills that catch many self-employed people by surprise. HMRC also expects MTD to reduce errors that arise from annual paper-based record keeping.

Who Must Sign Up and When

MTD for ITSA is being introduced in phases based on gross income — not profit, but total turnover before expenses.

From April 2026: Self-employed individuals and landlords with gross income above £50,000 from self-employment or property must comply.

From April 2027: Those with gross income above £30,000 must comply.

From April 2028: Those with gross income above £20,000 must comply.

If your gross income falls below £20,000 you are currently exempt, though HMRC has indicated it will review this threshold in future. Partnerships are also excluded from the current rollout but are expected to be brought in at a later date.

The Four Quarterly Submissions Explained

Under MTD for ITSA, the tax year is divided into four quarters:

• Quarter 1: 6 April – 5 July (submission deadline: 7 August)
• Quarter 2: 6 July – 5 October (submission deadline: 7 November)
• Quarter 3: 6 October – 5 January (submission deadline: 7 February)
• Quarter 4: 6 January – 5 April (submission deadline: 7 May)

Each quarterly update contains a summary of your income and expenses for that period. These are not tax payments — they are reporting submissions. HMRC uses them to provide you with an in-year tax estimate so you can see roughly what you owe as the year progresses.

After the tax year ends, you submit a final declaration by 31 January (the same deadline as the old Self Assessment return). This is where you confirm all your income sources, claim reliefs such as the Trading Allowance or overlap relief, and finalise your tax position. Your balancing payment remains due on 31 January.

Payments on account — the advance tax payments self-employed people make in January and July — continue under MTD for ITSA. Your in-year quarterly estimates may make it easier to plan for these.

Software: What You Need

You cannot submit MTD for ITSA returns manually or via HMRC's own online portal. You must use HMRC-recognised MTD-compatible software. HMRC maintains a list of approved products on its website.

Popular options include:

• QuickBooks Self-Employed / QuickBooks Online — cloud-based, widely used
• Xero — strong for businesses with employees or VAT
• FreeAgent — popular with freelancers and small businesses
• Sage Accounting — established accounting platform
• Coconut — designed specifically for self-employed and freelancers

If you currently keep records in a spreadsheet, you can continue to do so, but you will need bridging software that connects your spreadsheet to HMRC's API. This adds cost and complexity, so most self-employed people find it simpler to move to dedicated accounting software.

Look for software that offers:

• HMRC recognition for MTD for ITSA
• Automatic bank feeds (saves manual data entry)
• VAT submission if your turnover exceeds £90,000
• Mobile app support for capturing receipts on the go

Many providers offer free trials. If you already use accounting software, check whether your current version is MTD for ITSA compatible — not all older versions are.

2026/27 Tax Rates: What Self-Employed People Pay

Understanding your MTD obligations also means knowing what tax your quarterly figures will translate into. Here are the key 2026/27 rates for self-employed individuals.

Income Tax on profits:

• Personal Allowance: £12,570 (tapers away above £100,000 income, fully withdrawn at £125,140)
• Basic rate 20%: profits between £12,571 and £50,270
• Higher rate 40%: profits between £50,271 and £125,140
• Additional rate 45%: profits above £125,140

National Insurance for self-employed:

• Class 2 NI: £3.45 per week (£179.40 per year) if annual profits exceed £6,725
• Class 4 NI: 6% on profits between £12,570 and £50,270, then 2% on profits above £50,270

Unlike employed workers, self-employed people pay both income tax and Class 4 NI on the same slice of profit. At profits of £30,000, for example, you pay 20% income tax plus 6% Class 4 NI on the amount above £12,570 — an effective marginal rate of 26%.

The quarterly updates you submit will trigger in-year tax estimates. If your quarterly figures show higher profits than HMRC expected based on your previous return, your estimates will update accordingly. This gives you earlier warning of a larger January bill.

Penalties Under the New Points-Based System

MTD for ITSA introduces a new points-based penalty system for late submissions, replacing the existing flat-rate Self Assessment penalties.

Each late quarterly submission earns one penalty point. When you accumulate enough points (four for quarterly submitters), you receive a £200 financial penalty. Points expire after two years of full compliance.

Late payment penalties work on a different basis:

• 1–15 days late: no penalty if you pay or contact HMRC
• 16–30 days late: 2% of the unpaid tax
• 31+ days late: 4% of unpaid tax calculated daily

The points system is designed to be more forgiving of occasional late filings while still penalising persistent non-compliance. However, four missed quarterly submissions will cost you £200 in addition to any late payment interest (currently set by HMRC above the Bank of England base rate).

How to Prepare: A Practical Checklist

Getting ready for MTD for ITSA involves several steps. Start early — software setup and HMRC registration take time.

1. Check whether you are affected now Add up your gross self-employment and/or rental income for 2025/26. If it exceeds £50,000, you should already be complying. If it exceeds £30,000, you must be ready for April 2027.

2. Choose and set up MTD-compatible software Compare options on HMRC's approved software list. Set up bank feeds so transactions import automatically. Categorise your income and expense types correctly from the start.

3. Register for MTD for ITSA with HMRC You must sign up through your software or HMRC's online service. You cannot simply continue filing Self Assessment returns once your obligation starts — you must actively enrol.

4. Migrate your records Move your existing income and expense records into your new software. Ensure opening balances and any outstanding invoices are correctly entered.

5. Understand your quarterly deadlines Diarise the four submission deadlines. Missing even one can start accumulating penalty points.

6. Plan for tax payments Your quarterly in-year estimates will show roughly what you owe. Use these to save or invest the right amount rather than being caught short in January.

7. Consider a bookkeeper or accountant MTD for ITSA does not remove the option of using a professional. Many accountants now offer MTD-managed services. If your tax affairs are complex — multiple income sources, VAT registration, employees — professional support is worthwhile.

Interaction With VAT and Other Obligations

If your taxable turnover exceeds £90,000 you are already required to be registered for VAT and, if you are not already using MTD for VAT, you must also comply with those rules. MTD for VAT and MTD for ITSA are separate obligations but many software packages handle both, making it straightforward to manage them together.

If you have employees and run payroll, PAYE Real Time Information (RTI) submissions continue unchanged alongside MTD for ITSA.

Self-employed people who also receive employment income, pension income, or investment income will still need to account for all income sources in their final declaration. The quarterly updates cover only your business income and expenses — other income types are added at the final declaration stage.

What Stays the Same

Despite the changes, several things remain the same for self-employed people:

• The tax year still runs 6 April to 5 April
• Your balancing payment and any payments on account remain due on 31 January and 31 July
• Allowable business expenses remain unchanged — you can still deduct legitimate costs of running your business
• The £1,000 Trading Allowance remains available if your turnover is low
• Capital allowances and the Annual Investment Allowance continue to apply

The core calculation of your taxable profit has not changed. What has changed is how and when you report that information to HMRC.

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This article is for information only and does not constitute financial or tax advice. Tax rules may change. Consult a qualified adviser for your specific situation.