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THE DIGITL TRANSFORMATION OF TAX

Making Tax Digital for Income Tax

The way UK self-employed individuals and landlords report their income to HMRC is changing in a big way.

Making Tax Digital is the cornerstone of HMRC’s plan to modernise the UK tax system and change how businesses and individuals handle their tax responsibilities - moving away from annual paper returns towards a fully digital system that keeps your tax information updated in near real time.

On this page, we’ll walk you through what’s changing, when the key deadlines are, what penalties and obligations you need to know about under the new rules, and the practical steps you can take now so you’re ready for the move to digital tax.

Making Tax Digital ITSA - Feature Image
Ashleigh Wood, Director

"MTD isn't one-size-fits-all, so it’s important to understand how the rules apply to your situation as a landlord or sole trader and select the software that makes staying compliant easy."

 

MTD ITSA - Icon Feature

What is Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax (MTD for ITSA) is a new system for self-employed individuals and landlords to report income to HMRC. Instead of completing a single Self Assessment tax return once a year, you’ll keep digital records and send regular updates to HMRC using approved software.

When Does Making Tax Digital Apply to You?

While Making Tax Digital is already a requirement for all VAT-registered businesses, the government's focus has now shifted to individuals who manage their own tax affairs, specifically landlords and the self-employed.

The transition to MTD for ITSA is being phased in to give you ample time to prepare. Whether you need to comply, and the date you must start, depends on your qualifying income. This is your total gross income (receipts before any expenses are deducted) from self-employment and property rental combined.

The Timeline for MTD for ITSA

HMRC is introducing these requirements in stages based on your income levels from previous tax years. If your qualifying income is below £20,000, you are not currently required to join MTD for ITSA, though the government continues to review this threshold for the future.

6 April 2026

Qualifying income threshold over £50,000 based on income from tax year ended 5 April 2025.

6 April 2027

Qualifying income threshold over £30,000 based on income from tax year ended 5 April 2026.

6 April 2028

Qualifying income threshold over £20,000 based on income from tax year ended 5 April 2027.

How Will MTD Change the Way You Manage Your Tax?

  

Making Tax Digital means moving away from paper records and manual spreadsheets to a fully digital process.

Digital Record Keeping

Keep a digital record of every business or property transaction - both money coming in and money going out. This is usually done using MTD-compatible software such as Xero.

Quarterly Updates

Every three months, you’ll send HMRC a digital summary of your income and expenses for each qualifying income stream, instead of waiting until the end of the tax year.

Final Declaration

After the tax year, you’ll submit a final declaration to confirm all your income, claim any reliefs, and finalise how much tax you owe, instead of filing a traditional Self Assessment return.

Making Tax Digital Deadlines & Compliance

Whether you’re a landlord or sole trader, Making Tax Digital introduces new rules.

New Reporting Deadlines

Under MTD for ITSA, the tax year remains 6 April to 5 April. However, your quarterly reports will have strict deadlines. You can choose to report using the standard tax year quarters (6th of the month) or opt for calendar quarters (1st of the month), but the filing deadlines remain the same

Quarter Period (Standard) Filing Deadline
Quarter 1 (6 April - 5 July) 7 August
Quarter 2 (6 July - 5 October) 7 November
Quarter 3 (6 October - 5 January) 7 February
Quarter 4 (6 January - 5 April) 7 May
Final Declaration (End of Year) 31 January

New Penalty System

HMRC has introduced a new, clearer framework for penalties related to MTD compliance, focusing on three key areas: late submission, late payment, and a failure to keep digital records. The aim is to target persistent non-compliance rather than minor, one-off errors. 

The updated penalty framework replaces immediate fines with a points-based system. This shift aims to support those who occasionally struggle with deadlines while targeting more frequent defaults.

  • Earning Points: You receive one penalty point each time you miss a submission deadline (this applies to quarterly updates, End of Period Statements, and the Final Declaration).
  • The Fine Threshold: A fixed £200 financial penalty is issued only once you reach a specific points threshold. This threshold depends on how frequently you are required to report:
Submission Frequency Penalty Point Threshold
Annual 2 points
Quarterly 4 points
Monthly 5 points
  • Subsequent Penalties: Once the threshold is reached, you will be charged an additional £200 fine for every subsequent late submission. You will not accrue further points while you are above the threshold - just the financial penalty.
  • Resetting Your Points: Points automatically expire after 24 months of full compliance (no late submissions). If you have breached the threshold, you must complete a 24-month compliant period and submit all outstanding returns from the previous two years to reset your score to zero.

These penalties are entirely separate from the submission points system and start accumulating when the tax remains unpaid after the due date:

  • Up to 15 Days Overdue: No penalty is charged if the payment is made within this window.
  • 16 to 30 Days Overdue: A penalty of 3% of the outstanding tax balance is charged.
  • 31 Days or More Overdue: A second penalty of 3% of the tax outstanding at day 30 is charged. Additionally, an annualised daily penalty of 10% will begin to accrue until the tax is paid in full.

If you don’t keep proper digital records using compliant software as required by the MTD rules, HMRC can charge you a penalty of up to £3,000 for every quarter where you don’t meet the digital requirements.

Transitioning to Making Tax Digital for Income tax

 

The shift to digital tax reporting is an opportunity to streamline your finances. At DSA Prospect, we specialise in helping landlords and sole traders navigate MTD for ITSA without the headache. We’ll help you choose the right tools and set up efficient digital processes tailored to your specific needs. Start your preparation now to eliminate the risk of penalties and ensure your tax affairs remain accurate and up to date. We’ll guide you through four clear steps so you’re confident about what to do and when to do it.

MTD Health Check

We start by reviewing how you manage your books, where your income comes from, and what software you use. This lets us pinpoint your Making Tax Digital (MTD) obligations, check your systems are compliant, and clearly set out what needs to be done and when.

Software Selection & Set Up

Our team works closely with leading MTD-compatible software, including Xero and Sage. We’ll recommend and set up the best platform tailored to your needs - whether you're an SME needing full integration or a landlord needing a simpler solution.

Training & Transition

We provide hands-on training so you know exactly how to use your new software day to day. We’ll also migrate your data and make sure you and your team feel fully confident managing your digital records going forward.

Ongoing Compliance & Support

Once set up, we handle the regular heavy lifting. This includes reviewing your quarterly summaries, filing the required updates with HMRC, and preparing your final declarations. We act as your trusted advisor, ensuring you meet every deadline without stress.

FAQs

This is the gross income (before expenses) from your self-employment and/or property businesses. If you have both, the income is combined to determine the threshold.

Not exclusively, but the rules differ depending on your setup. MTD for Income Tax Self Assessment (ITSA) currently targets sole traders and landlords with qualifying income. While limited companies aren't affected by the ITSA rollout, they must still comply with MTD for VAT if they are VAT-registered.

Not quite yet. While general partnerships are included in the scope of MTD for ITSA, the government has postponed their mandatory start date. For now, you can continue with your current filing methods, but we recommend using this time to ensure your digital record-keeping is robust and ready for the eventual transition.

You are only responsible for reporting your specific share of the rental income and expenses. Under Making Tax Digital, each co-owner is treated as an individual taxpayer. This means you will only submit digital updates for your portion, rather than the total amount earned by the property as a whole.

You can still use spreadsheets, but they must be "digitally linked" to HMRC via bridging software. However, for most businesses, this is a great time to move to cloud accounting.

Under MTD for ITSA, you are required to submit separate quarterly updates for each source of income. So, if you have a trade and a rental property, that’s two sets of updates every three months.

While you’ll be sending quarterly updates to HMRC, the actual payment deadlines for Income Tax remain the same: 31 January and 31 July. The main benefit of the quarterly updates is that you’ll get a much clearer, real-time view of what you owe, helping you manage your cash flow and avoid any surprises at year-end.

If you’re required to use Making Tax Digital for Income Tax from 6th April, HMRC advise that you sign up before then.