Making Tax Digital (MTD) for Income Tax and VAT

Unsure what Making Tax Digital (MTD) means or when it applies? Here’s a simple, step-by-step guide to help you understand what’s changing, whether you’re affected, and how to stay compliant.

Key takeaways for 2026

• You keep all tax records digitally and use compatible software to update HMRC on your earnings and outgoings

• You send updates electronically, whether reporting VAT or income tax, with set deadlines

• You avoid penalties by staying compliant, choosing the right software and keeping accurate digital records

What is Making Tax Digital (MTD)?

MTD is the new self-assessment and VAT system from HMRC that replaces manual tax returns with software-based digital records and electronic updates.

Designed to simplify and modernise bookkeeping and reporting tax, MTD should help you to:

• Keep your records organised

• Reduce errors

• Report more accurately

• File your income and expenses in a timely fashion 

• Share information more easily with accountants, clients and HMRC

Do I need to follow MTD for Income Tax?

All businesses manage their tax affairs differently – some may prefer manual spreadsheets, while others may work with the latest accounting software, or in collaboration with an accountant or tax advisor.

MTD looks to streamline the process, guiding every business to file in a standard way with the use of digital technology. So, if you run a business or rent out property, the chances are you’re going to need to tweak your approach to tax admin ithis year or over the next couple of years.

Who it applies to

You must follow MTD for income tax if all of the following apply

You are a sole trader or a landlord registered for self-assessment

You receive income from self-employment, property or both

Your qualifying income exceeds the threshold set by the government

What counts as qualifying income

Qualifying income covers any income from self-employment and/or property.

This can include new businesses – if you begin a new self-employed activity or start letting out property partway through the tax year, you must use MTD once your annual gross income goes over £20,000.

Who is exempt

Most sole traders and landlords who pay income tax through self-assessment are going to have to comply with MTD eventually to remain within the law, but there are a few exceptions. Reasons for exemption include:

• Your qualifying income is £20,000 or less

• You are digitally excluded – perhaps due to disability, your inability to access the internet, or because of your religion/belief

• You’re a trustee filing for someone who has died or you don’t have a National Insurance number

You can see a full list of exemptions and how to apply for one through HMRC here.

When does Making Tax Digital for Income Tax start?

The exact start date depends on your level of qualifying income for the tax year you’re reporting on:

• If your gross income from self-employment and/or property was over £50,000 for the 2024/25 tax year, you must comply with MTD from 6 April 2026

• If your gross income goes over £30,000 in the 2025/26 tax year, you must comply with MTD from 6 April 2027

• If your gross income goes over £20,000 in the 2026/27 tax year, planned legislation brings you into MTD from 6 April 2028

MTD for VAT extended to all VAT-registered businesses back in April 2022.

MTD for Income Tax: key dates you need to know

• Quarterly update deadlines – Each update is due by the 7th of the month following the end of the quarter – for example, 6 April to 5 July is due by 7 August

• Final declaration deadline – This aligns with the normal self-assessment tax return deadline for the tax year. This is 31 January 2027 for the 2025/26 tax year

• Start-date deadline – If you cross the income threshold, you must sign up and start MTD from 6 April after the tax year in which you exceeded it. For example, if you go over the £30,000 threshold at any point in the 2025/26 tax year, you start MTD from 6 April 2027.

• Payment dates – Payment for any tax due remains the same – so 31 January and 31 July (if you make payments on account)

MTD for VAT explained

MTD already applies to most VAT-registered businesses. If you’re registered for VAT, you must keep digital records and submit your VAT returns through MTD-compatible software. This applies whether you registered voluntarily or passed the VAT threshold.

You record your sales, purchases and VAT calculations digitally and your MTD software sends each return directly to HMRC. If you still use spreadsheets, you can remain compliant by linking them to HMRC through bridging software.

The rules for VAT continue alongside the newer MTD requirements for income tax, so you may need to manage both within the same software if you run a business and also file self-assessment.

What software do I need for MTD ITSA?

With MTD for Income Tax Self Assessment (ITSA), you record everything digitally and send updates to HMRC through your chosen software directly. The options vary in cost and available features, so it helps to understand how each one works before you decide.

Penalties for not complying with MTD

MTD for Income Tax uses the same points-based system as MTD for VAT. 

Each late quarterly update or late final declaration earns a penalty point. When you reach four points, you receive a £200 fine. Any points you get only expire after a period of compliant filing. You can also face a penalty of up to £3,000 if you fail to keep proper digital records or don’t use compatible MTD software.

Late payment penalties work separately from submission penalties, and interest starts the day your tax becomes overdue. Further penalties apply at 16 days and again at 31 days if the payment remains outstanding. Interest then continues to accrue until you clear the outstanding balance.

To avoid these penalties, it pays to be organised. You should keep accurate digital records, file each update on time and pay any tax due by the deadline.

Your next steps with MTD

Making Tax Digital can feel like a big shift, but once you choose your software and get into a routine, the process should become much more straightforward.

If you want to dig deeper, explore our other guides:

• If you’re a sole trader, check out our dedicated guide and checklist to MTD for business income

• If you’re a landlord, read our guide to MTD for property income