What Is Making Tax Digital? A Proper Explanation

What's going on?

HMRC has changed how self-employed people and landlords report their income. The old system was simple: one tax return a year, filed by 31 January.

The new system is called Making Tax Digital for Income Tax, or MTD for short. Under MTD, you report your income and expenses to HMRC four times a year instead of once, and you do it through software rather than the Self Assessment website.

It went live on 6 April 2026. If you're earning above the threshold and haven't set things up yet, you need to act now.

Who does this apply to?

Two groups of people:

• Sole traders (anyone self-employed who isn't a limited company)
• Landlords (anyone earning rental income from property)

But not everyone at once. HMRC is phasing it in based on income:

There's a catch with that income figure. It's your gross income, meaning your turnover before you take off expenses. So if you invoiced £55,000 last year but only made £30,000 profit after costs, you're still in the £50k bracket.

And if you're both self-employed AND a landlord, both income sources get lumped together. A freelancer on £35,000 who also rents out a flat for £20,000 has qualifying income of £55,000. First wave.

Limited companies aren't affected. Partnerships aren't either, at least not yet. HMRC says they'll bring partnerships in later but hasn't committed to a date.

What actually changes in practice?

Under the old system, you'd earn money all year, scramble to pull your records together sometime between April and January, file your Self Assessment, pay your bill.

Under MTD, the year gets chopped into quarters. After each quarter, you submit a short update to HMRC showing what you earned and what you spent. Then at the end of the year, you file a final declaration that confirms everything and calculates your actual tax bill.

The reporting cycle looks like this:

The quarterly updates are not full tax returns. You're sending totals, split by category: income in, expenses out. No tax calculation at this stage. Your actual bill gets worked out at the final declaration.

Digital record-keeping

This is the part that worries people, but it's less dramatic than it sounds.

You need to keep a digital record of every business transaction. For each one, HMRC wants three things:

1. The date
2. The amount
3. The category (type of income or expense)

You can use proper accounting software, a dedicated MTD app, or even a spreadsheet. The only thing you can't do is keep paper records and type them up at the end of the year. HMRC wants the data to be digital from the moment it happens.

If you already track things in a spreadsheet or use something like Xero, you're halfway there. If your current system involves a drawer full of receipts, that needs to change.

You need HMRC-approved software

You can't submit your quarterly updates through the HMRC website like you do with Self Assessment. You need software that HMRC has approved for MTD.

There are broadly three options:

Full accounting packages like Xero, QuickBooks, or FreeAgent. These do everything: invoicing, bank feeds, expenses, tax submissions. If you already use one, check that it supports MTD for Income Tax (most do by now).

Simpler MTD-specific tools that focus on record-keeping and quarterly submissions without all the accounting overhead. Good if you don't need invoicing or payroll and just want to stay compliant.

Bridging software that connects a spreadsheet to HMRC's systems. You keep your records in Excel or Google Sheets, and the bridging tool sends the data to HMRC in the right format. Cheapest option but requires more manual work.

HMRC keeps a list of compatible software on GOV.UK. Worth checking before you commit to anything.

Why is HMRC doing this?

The official reason is to reduce errors and help people stay on top of their tax affairs. There is some truth in that. The old system practically encouraged people to leave everything to the last minute, which meant records got lost, figures got guessed, and mistakes crept in.

Quarterly reporting forces you to deal with three months of data at a time rather than twelve. It should mean fewer errors and fewer nasty surprises when your tax bill arrives.

There's also a benefit for HMRC: they get near real-time visibility into tax revenues rather than waiting until January to find out what everyone earned.

Whether you think that's a good trade-off probably depends on how well-organised you already are.

What happens if you miss a deadline?

HMRC has brought in a new penalty system. Instead of getting fined immediately for one late return, you now accumulate penalty points.

Miss a quarterly deadline? One point. Miss another? Two points. Hit four points and you get a £200 fine. Every late submission after that is another £200 until you clean up your act.

You can wipe your points by submitting everything on time for 24 consecutive months.

Worth knowing: penalty points won't be applied to quarterly updates in the first year. So for the first wave (started April 2026), the 2026/27 tax year is effectively a grace period for quarterly submissions. The final declaration deadline is enforced from day one though.

There's a full guide to MTD penalties if you want the detail.

What should you do now?

If you're earning over £50,000 from self-employment or property, MTD has already started for you. Your first quarterly update (Q1) is due by 7 August 2026. These are the steps, in order:

Step 1: Confirm you're in scope. Look at your gross income from self-employment and/or property for the current tax year. Over £50k? You're in.

Step 2: Pick your software. Don't agonise over this. Find something that's HMRC-approved, set it up, and start using it. You can always switch later if you hate it.

Step 3: Start recording things digitally. If you haven't already, start now. Every day you wait is more data you'll need to backfill before your first quarterly submission.

Step 4: Talk to your accountant. If you've got one, make sure they know how you'll work together under the new system. Some want you on specific software. Others don't mind what you use.

Step 5: Put the deadlines in your calendar. Set reminders for a week before each one. Don't rely on HMRC to chase you.

If your income is between £30k and £50k, you've got until April 2027. Under £30k but over £20k, April 2028. But there's no downside to getting set up early. Read more about the dropping thresholds.

If you're self-employed specifically, our MTD guide for sole traders goes deeper. Landlords should read the MTD for landlords guide instead.