Making Tax Digital for Income Tax – Your Complete Guide

In the UK, millions of self-employed people and landlords still prepare their tax information once a year, often in a rush before the January deadline. Receipts appear from drawers. Bank statements are downloaded. And accountants receive a familiar message: “Sorry it’s late… here are my numbers.”

That annual scramble is about to change.

HM Revenue & Customs is introducing Making Tax Digital for Income Tax (MTD). The aim is simple: move tax reporting away from paper records and annual submissions, and towards digital record-keeping with regular updates to HMRC.

For many small businesses, contractors, and landlords, this will be the biggest change to income tax reporting in decades.

Some people are excited about the efficiency. Others are worried about the extra work. Most are simply unsure what it all means for them.

At Cannon Accountants, we have already begun preparing clients for this shift. Some of the conversations are reassuringly simple. Others raise practical concerns. A contractor asked us recently, “Does this mean I’ll be filing four tax returns a year?” A landlord wondered if her spreadsheet would suddenly become illegal!

This guide explains exactly how MTD works, who it affects, and what you should do now to prepare. No jargon. No panic. Just clear information.

Let’s begin.

Understanding Making Tax Digital for Income Tax

What is Making Tax Digital for Income Tax?

Making Tax Digital (MTD) is a government initiative designed to digitise the UK tax system.

Instead of preparing a tax return once per year, businesses within the scope of MTD will:

• Keep digital accounting records

• Submit quarterly summaries of income and expenses

• Complete a final year-end declaration

The aim is to reduce errors and make tax reporting more up-to-date. For many businesses, this will simply mean using accounting software instead of spreadsheets or paper records. For others, it may require a more structured bookkeeping process. The important point is this: MTD changes how information is reported, not how tax is calculated.

Why is the government introducing MTD?

According to government estimates, billions of pounds in tax revenue are lost each year because of avoidable mistakes in tax returns. Many of these errors occur when records are incomplete or prepared months after transactions happened. Digital systems can reduce these mistakes. For example, one of our contractor clients used to prepare his accounts once a year using bank statements. It worked — mostly. But expenses were occasionally missed and invoices sometimes slipped through the cracks. Once he switched to digital bookkeeping, the difference was obvious. Income and expenses were tracked monthly. Reports were clear. And the January deadline became far less stressful. That is the direction HMRC wants the entire tax system to move toward.

How MTD changes the current Self Assessment system

Currently, most sole traders and landlords use the Self Assessment system.

The process is simple:

1. Keep records during the year

2. Submit a tax return after the tax year ends

3. Pay tax by 31 January

Under MTD, this structure changes slightly.

Businesses will now:

- Keep digital records throughout the year

- Submit four quarterly summaries

- Complete a final declaration after the year ends

This means HMRC will receive information more regularly. But importantly, you will not pay tax four times a year unless the government changes payment rules in the future.

Who needs to comply with MTD for Income Tax?

MTD will apply to individuals with income from self-employment or property above certain thresholds.

The thresholds are based on gross income, not profit. This means HMRC looks at total revenue before expenses. If your combined income from self-employment and property exceeds the threshold, you must join MTD.

Who is currently exempt from MTD

Some groups are currently outside the scope of the new rules.

These include:

- Partnerships (for now)

- Trusts and estates

- Some non-resident individuals

- Certain specialised taxpayers

There is also a digital exclusion exemption for people who cannot reasonably use digital systems because of age, disability, location, or religious reasons. Each case is assessed individually.

When Does Making Tax Digital Start?

MTD will not begin for everyone at the same time. Instead, the system will be introduced gradually. This phased approach allows businesses and accountants to adjust.

MTD start date for taxpayers earning over £50,000

The first group to join will be businesses with annual income above £50,000 from self-employment or property.

They must comply from:

6 April 2026

For these businesses, the first quarterly reporting period will begin immediately after that date.

MTD start date for taxpayers earning over £30,000

The second group will include businesses earning more than £30,000 per year.

They will join from:

April 2027

MTD start date for taxpayers earning over £20,000

The third group will include businesses earning more than £20,000 annually.

They will be required to join from:

April 2028

This means many smaller sole traders still have time to prepare. But preparation should start early.

When the first quarterly submissions will be required

For businesses joining in April 2026, the first reporting period will cover:

6 April – 5 July 2026

The submission deadline will be:

7 August 2026

That gives businesses just over a month to prepare and submit their first update.

What Is the MTD Income Threshold?

The threshold determines whether a taxpayer must comply with MTD.

Understanding how it works is important.

How the MTD income threshold is calculated

The threshold is based on total gross income from:

- Self-employment

- UK property income

- Overseas property income

Expenses are not deducted at this stage.

If the total exceeds the threshold, MTD applies.

Combining property and self-employment income

Many clients assume each business is assessed separately. That is not correct.

The threshold applies to combined income.

For example:

- Freelance design income: £32,000

- Rental income: £21,000

Total income = £53,000

This person would fall within the first phase of MTD.

What happens if your income goes above the threshold

HMRC will review your previous tax return to determine whether you must join MTD. If your income exceeds the threshold, you will be required to join from the relevant start date.Preparation will involve setting up digital record-keeping and compatible software.

What happens if your income later falls below the threshold

Businesses cannot leave MTD immediately. To avoid constant changes in reporting requirements, HMRC requires income to stay below the threshold for three consecutive years before leaving the system.

Does Making Tax Digital Apply to Landlords?

Yes. Landlords with rental income above the threshold will need to comply. This applies whether you own one property or several.

How rental income is reported under MTD

Rental income must be reported through quarterly updates. Income and expenses will be summarised and submitted digitally.

How jointly owned property is reported

Joint ownership introduces an interesting situation. Each owner must report their share of income and expenses. Imagine two siblings who inherit a rental property. Each owns 50%.

Both individuals must:

- Keep digital records

- Submit quarterly updates for their share

This can feel unusual at first, but software can manage it easily.

Reporting income from multiple rental properties

All UK rental properties are treated as one property business. That means you do not submit separate updates for each property. Instead, totals are combined.

Does Making Tax Digital Apply to Partnerships?

At the moment, partnerships are not included in MTD for Income Tax. However, the government has indicated that partnerships will likely be brought into the system in the future. For now, partnership tax reporting remains unchanged. But it would be sensible to prepare for eventual digital reporting.

Digital Record-Keeping Requirements

One of the biggest changes under MTD is the requirement for digital record-keeping. Paper notebooks and memory will no longer be enough.

What digital records businesses must keep

Businesses must keep digital records including:

- Income received

- Expenses paid

- Transaction dates

- Categories of income or expense

Each transaction must be recorded digitally.

Recording income and expenses digitally

This does not mean every receipt must be scanned. You can still keep paper receipts if you wish. But the financial information from those receipts must be entered into digital records.

Do you need to keep receipts digitally?

Not necessarily. However, many businesses now store receipts digitally because it is easier and safer. One of our clients once lost an entire folder of receipts during an office move. The digital records survived. The paper did not! That experience convinced him to go fully digital.

MTD Software Requirements

Digital records must be kept using MTD-compatible software.

What is MTD-compatible software?

Compatible software can:

- Store digital records

- Submit updates directly to HMRC

- Retrieve information from HMRC systems

Many modern accounting systems already support these features.

Free software options for simple businesses

The government has indicated that free software will be available for businesses with simple affairs. These are likely to include small sole traders with straightforward income and no employees. However, details are still developing.

Choosing the right accounting software

Software selection depends on several factors:

- Business size

- Complexity of transactions

- Budget

- Whether an accountant manages the records

Choosing the right system early can make the transition smooth.

Can Spreadsheets Be Used for MTD?

Yes — but with limitations. Spreadsheets can still be used for bookkeeping. However, they must be connected to bridging software.

What bridging software is

Bridging software acts as a link between spreadsheets and HMRC. It converts spreadsheet data into the format required for digital submission. Without this link, spreadsheets alone will not meet MTD requirements.

Quarterly Reporting Under MTD

The most visible change will be quarterly reporting.

What quarterly updates are

Quarterly updates are simple summaries of income and expenses. They are not full tax returns. No detailed tax adjustments are required at this stage.

Standard quarterly reporting periods

The default reporting periods are:

- 6 April – 5 July

- 6 July – 5 October

- 6 October – 5 January

- 6 January – 5 April

Each update must be submitted within one month of the quarter ending.

End-of-Year Reporting Requirements

Quarterly updates alone do not finalise your tax position. After the fourth update, businesses must complete the year-end process.

What the End of Period Statement (EOPS) is

The EOPS allows businesses to adjust their quarterly figures.

This is where accounting adjustments are made.

For example:

- Capital allowances

- Private use adjustments

- Accounting corrections

What the final declaration is

The final declaration replaces the traditional Self Assessment return.

It combines:

- Business income

- Employment income

- Investment income

- Personal tax claims

The deadline remains 31 January after the tax year ends.

Penalties and Compliance

MTD introduces a points-based penalty system for late submissions. Each late submission results in a penalty point. Once enough points accumulate, a financial penalty is issued. The system is designed to be fairer than immediate fines. Businesses that fail to maintain proper digital records could face compliance penalties. However, HMRC is expected to adopt a practical approach during the early years of implementation.

Signing Up for Making Tax Digital

Some businesses will be automatically required to join. Others may choose to join early. Early adoption can be beneficial.

Businesses that join early can:

- Learn the system gradually

- Improve record-keeping processes

- Avoid last-minute stress

Many of our clients are already doing this.

Common Questions About Making Tax Digital

A few concerns appear repeatedly when we speak with clients. Let’s address them.

Do quarterly updates mean paying tax four times a year? No. Quarterly updates are reporting obligations, not payment deadlines. Tax payments remain due in January and July under the current system.

Does the £1,000 trading allowance affect MTD? The trading allowance may still apply to small side businesses. However, MTD thresholds are based on gross income, not taxable profit.

What if you are not comfortable using technology? This is more common than people admit. Many business owners feel uneasy about accounting software at first. But modern systems are surprisingly simple. And accountants can manage the process on your behalf.

Will MTD Increase Costs for Businesses? Possibly — but not always. Some businesses will incur software costs or bookkeeping support. Others may actually reduce costs by improving efficiency. For example, a contractor who switched to digital records recently told us his bookkeeping time fell from two days per year to about one hour per month. Consistency makes life easier.

Is Making Tax Digital Complicated for Small Businesses? At first glance, it might seem so. But in practice, many small businesses are already operating digitally. Bank feeds, cloud accounting, and digital invoices are common. MTD simply formalises these habits.

Preparing for Making Tax Digital

If you run a business or receive rental income, preparation should start now.

Practical steps include:

1. Review your current record-keeping system

2. Consider suitable accounting software

3. Speak with your accountant about the transition

4. Begin maintaining digital records

Small changes today can prevent stress later.

Final Thoughts

Making Tax Digital represents a major shift in the UK tax system. But it is not something to fear. With the right systems in place, most businesses will find the process more organised and less stressful than the traditional once-a-year tax scramble.

At Cannon Accountants, we are already helping clients prepare for the change. Some are moving to digital bookkeeping. Others are testing quarterly reporting early. The goal is simple: make the transition smooth.

If you would like guidance on how MTD will affect your business — or help setting up the right systems — our team would be happy to help. After all, good tax planning is not just about meeting deadlines. It is about running your business with clarity and confidence.

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