Making Tax Digital (MTD)

Quick answer: Making Tax Digital is HMRC’s system for requiring specified tax records to be maintained digitally and information to be submitted through compatible software. In 2026 there are two major MTD regimes businesses need to distinguish: Making Tax Digital for Income Tax, which is now mandatory for the first qualifying cohort of sole traders and landlords, and Making Tax Digital for VAT, which already applies broadly to VAT-registered businesses.

MTD does not simply mean “send HMRC four tax returns a year”. For Income Tax, the system combines digital record keeping, quarterly updates and an annual tax-return process through compatible software. The quarterly updates are summaries built from the evolving digital records; they do not replace the annual tax return and do not themselves create four separate Income Tax payment dates.

The rules are especially important in 2026 because the first mandatory MTD for Income Tax year has already started. Businesses and landlords entering later cohorts should also begin preparing before their own mandatory start date rather than waiting for the first quarterly deadline.

What is Making Tax Digital?

Making Tax Digital, usually shortened to MTD, is HMRC’s digital tax-reporting framework.

The objective is not merely to move a paper form onto a computer. The regime connects the underlying accounting records with compatible software capable of communicating electronically with HMRC.

Depending on the relevant MTD regime, the process can require:

• specified accounting and tax records to be created and maintained digitally;
• compatible software to hold or access those records;
• digital links between software products where multiple systems are used;
• periodic submissions to HMRC;
• corrections to be reflected in the underlying digital records; and
• the appropriate annual or VAT return to be submitted through compatible software.

The practical advantage of a well-designed MTD system is that bookkeeping, tax reporting and year-end accounts can use the same underlying data rather than rebuilding records immediately before a filing deadline.

Britvex’s Making Tax Digital service connects MTD setup with bookkeeping, tax compliance and ongoing reporting.

MTD for Income Tax and MTD for VAT are different

The expression “Making Tax Digital” covers more than one tax regime. A taxpayer should first identify which MTD obligation applies.

A sole trader can be subject to both regimes. For example, a VAT-registered consultant whose qualifying self-employment income places them within MTD for Income Tax may need software that handles both VAT and Income Tax requirements.

Conversely, a limited company can be within MTD for VAT while not being subject to MTD for Income Tax, because MTD for Income Tax applies to qualifying individuals with self-employment and/or property income rather than to the company’s Corporation Tax profits.

This distinction should be built into the software selection from the beginning.

Who must use MTD for Income Tax?

MTD for Income Tax currently applies where the relevant conditions are met, including that the individual is:

• a sole trader or landlord;
• registered for Self Assessment;
• receiving qualifying income from self-employment, property, or both; and
• above the applicable qualifying-income threshold.

The first mandatory cohort began using MTD for Income Tax from 6 April 2026.

Partnerships are not currently within the mandatory timetable in the same way. HMRC has said a future timetable for partnerships will be set separately.

A limited-company director does not enter MTD for Income Tax merely because they are a director. However, the same individual could be within MTD personally if they also have qualifying self-employment or property income.

How qualifying income is calculated

This is one of the most important MTD concepts.

Qualifying income is broadly gross income from self-employment and property before expenses. It is not taxable profit and it is not the final amount on which Income Tax is paid.

Relevant income from multiple sources is generally combined.

Example — self-employment plus property

Suppose an individual has:

• £32,000 gross income from self-employment; and
• £24,000 gross rental income.

The combined qualifying income is £56,000 before considering the relevant detailed rules. The taxpayer cannot simply say that neither individual source exceeds £50,000.

Income that does not normally count toward the qualifying-income test

Other types of income generally do not form part of MTD qualifying income for this threshold test, including:

• employment income taxed through PAYE;
• an individual’s share of partnership profit;
• dividend income;
• State Pension;
• private pensions; and
• other income outside the specified self-employment/property categories.

HMRC generally uses information from an earlier Self Assessment return to determine when the individual enters mandatory MTD.

This means a taxpayer should distinguish carefully between gross income, business expenses, taxable profit and total personal income.

MTD Income Tax thresholds: 2026 to 2028

HMRC reviews the relevant Self Assessment information and can write to taxpayers who need to start using MTD. However, the taxpayer remains responsible for determining whether the rules apply even if an expected letter has not arrived.

The practical consequence is that somebody currently below the 2026 threshold may still need to prepare now for the £30,000 threshold from April 2027 or the £20,000 threshold from April 2028.

For landlord-specific treatment, including property-income scenarios, see Britvex’s dedicated Making Tax Digital for Landlords guide.

What digital records do you need to keep?

MTD works from underlying digital records rather than a figure assembled only at the end of the quarter.

For an income or expense, the digital record typically needs information sufficient to identify items such as:

• the transaction date;
• the amount;
• the relevant income or expense category; and
• which business or property source the transaction relates to.

The source evidence still matters. Digital record keeping does not mean invoices, contracts, receipts or bank evidence suddenly become irrelevant.

For example, importing a bank transaction into bookkeeping software may create part of the digital record, but the business still needs enough evidence to support the nature and tax treatment of that expenditure.

A strong MTD process therefore joins:

source document → bookkeeping entry → reconciliation → digital tax category → HMRC submission.

Britvex’s Bookkeeping service and Cloud Accounting service are designed to keep that process connected.

Quarterly updates: how they work

An MTD for Income Tax quarterly update is not a complete tax return.

Compatible software uses the digital records to provide HMRC with the required summaries of income and expenditure for each relevant business source.

A taxpayer with more than one relevant source may therefore have separate reporting requirements for those sources.

The updates are cumulative

The quarterly periods run from the relevant start date to the quarter end, rather than functioning as four completely disconnected three-month tax returns.

For somebody using standard tax-year update periods in 2026/27:

This cumulative approach means that corrections to earlier digital records can flow through later updates instead of each quarterly submission being treated as an isolated final return.

Calendar update periods

Taxpayers using an eligible calendar-quarter approach can instead use periods ending:

• 30 June;
• 30 September;
• 31 December; and
• 31 March.

The quarterly submission deadlines remain 7 August, 7 November, 7 February and 7 May.

MTD quarterly deadlines

For the first mandatory 2026/27 MTD Income Tax year, the standard deadlines are:

• 7 August 2026 — first quarterly update;
• 7 November 2026 — second quarterly update;
• 7 February 2027 — third quarterly update; and
• 7 May 2027 — fourth quarterly update.

As at 26 October 2026, taxpayers in the first cohort are therefore approaching the 7 November 2026 second-quarter deadline.

Britvex has a separate current guide covering the 7 November 2026 MTD quarterly update. That page should remain the time-sensitive deadline resource, while this page remains the main evergreen MTD pillar.

Quarterly updates do not create quarterly Income Tax payments

The requirement to submit quarterly information should not be confused with a new requirement to pay final Income Tax four times a year.

The normal Self Assessment payment framework continues to matter, including any applicable payments on account and balancing payment.

What happens at the end of the tax year?

Quarterly updates do not complete the annual tax position.

After the end of the tax year, the taxpayer must use compatible software to complete the annual Income Tax return process.

This stage can include:

• reviewing and correcting business records;
• making relevant accounting and tax adjustments;
• claiming capital allowances;
• claiming eligible reliefs;
• adding employment income;
• adding dividends and interest;
• including capital gains where required;
• including other taxable income;
• reviewing losses and allowances; and
• submitting the completed tax return through compatible software.

For the first mandatory 2026/27 MTD year, the annual tax return deadline is 31 January 2028.

Importantly, taxpayers still need to submit the 2025/26 Self Assessment return under the existing process by 31 January 2027 where required. Starting MTD in April 2026 does not cancel the preceding year’s tax return.

MTD software and digital links

MTD requires compatible software. Merely keeping invoices as PDF files or maintaining a conventional spreadsheet does not automatically satisfy the entire MTD process.

For MTD for Income Tax, the chosen system needs to support the functions required for the taxpayer’s position, including:

• creating or maintaining digital records;
• sending quarterly updates;
• supporting the annual tax-return process; and
• communicating appropriately with HMRC.

If the taxpayer has multiple income sources, the system should support each relevant source. Someone with both self-employment and property income should check that the software can handle both.

If you already use MTD software for VAT

Do not assume that software supporting MTD for VAT automatically supports MTD for Income Tax.

A VAT-registered sole trader entering MTD for Income Tax should confirm whether the existing system supports:

• VAT digital records and VAT Returns;
• Income Tax quarterly updates;
• all relevant self-employment/property sources; and
• the annual Income Tax return.

Using more than one software product

Where records move between different products, the required data flow may need to be maintained through proper digital links.

Manual re-keying or copy-and-paste can undermine an MTD workflow where the rules require digital transfer.

Examples of digital links can include properly configured spreadsheet formulas, CSV/XML import/export processes and integrated software connections, depending on the regime and circumstances.

Making Tax Digital for VAT

MTD for VAT is already established and should not be confused with the newer Income Tax rollout.

VAT-registered businesses generally need to:

• keep the specified VAT records digitally;
• use functional compatible software;
• maintain required digital links where several systems are used; and
• submit VAT Returns to HMRC through the MTD system.

This applies broadly to VAT-registered businesses unless an exemption is available.

A spreadsheet can form part of an MTD for VAT system where it is connected appropriately through compatible software or bridging software, but an isolated spreadsheet that cannot communicate with HMRC is not by itself a complete MTD submission system.

Businesses approaching VAT registration should read Britvex’s VAT Registration UK guide. The VAT registration decision and the MTD setup should ideally be planned together so the first VAT period begins with clean digital records.

Exemptions from Making Tax Digital

Not every taxpayer who appears to exceed an income threshold will necessarily have to use MTD in the normal way.

HMRC provides for a number of exemptions and special situations. One important category is digital exclusion, where it is not reasonably practicable for the person to use digital tools because of their circumstances.

Other permanent or temporary exemptions can also apply in specified situations.

An exemption should not be assumed simply because a taxpayer:

• does not like accounting software;
• currently keeps paper records;
• has always filed Self Assessment manually;
• uses an accountant; or
• does not own a particular accounting package.

The actual HMRC exemption criteria need to be considered.

If an exemption applies, the taxpayer generally still has to report income and gains under the relevant Self Assessment obligations; exemption from MTD does not necessarily mean exemption from tax reporting itself.

MTD penalties

The penalty position needs particular care because 2026/27 has a special first-year treatment.

Quarterly updates in 2026/27

HMRC has confirmed that it will not apply penalty points for late MTD Income Tax quarterly updates during the 2026/27 tax year.

That does not mean quarterly updates are optional.

The outstanding quarterly updates still need to be sent before the taxpayer can submit the MTD Income Tax return.

Annual tax return and payment

Late tax-return and late-payment obligations remain separate. The first-year quarterly concession should therefore never be presented as a general penalty holiday.

From 2027/28

Under the points-based late-submission framework, missing quarterly update or tax-return deadlines can result in penalty points.

The normal threshold is four points. Once the threshold is reached, a £200 penalty can arise, with further £200 penalties for subsequent missed obligations while the taxpayer remains at the threshold, subject to the detailed regime.

MTD for Income Tax penalty points are separate from VAT penalty points.

Common Making Tax Digital mistakes

1. Using taxable profit instead of qualifying income

The mandatory-entry test uses gross qualifying self-employment and property income before expenses, not final taxable profit.

2. Checking each income source separately

Qualifying self-employment and property income generally needs to be considered together for the threshold test.

3. Assuming MTD only applies to landlords

Sole traders can be within the same Income Tax regime.

4. Assuming VAT software automatically covers Income Tax

MTD for VAT and MTD for Income Tax are separate regimes with different functions.

5. Treating quarterly updates as four tax returns

The quarterly update is a summary derived from digital records. The annual tax-return process still remains.

6. Assuming tax becomes payable quarterly

Quarterly reporting does not itself create four final Income Tax payment dates.

7. Keeping records digitally but filing manually

The system must use compatible software to perform the relevant HMRC submission functions.

8. Filing from unreconciled bank feeds

Digital does not mean accurate. Duplicate transactions, omitted income, personal expenditure and incorrect categories still need review.

9. Ignoring different businesses or property sources

Multiple relevant sources need to be correctly identified in the software and HMRC process.

10. Assuming the 2026 first-year penalty concession removes the filing requirement

Quarterly updates remain required even though HMRC is not applying late-quarterly-update penalty points for 2026/27.

11. Waiting until the quarterly deadline to organise records

The purpose of MTD is continuous digital record keeping. Rebuilding three months of activity immediately before submission defeats much of the compliance and management benefit.

12. Forgetting the previous Self Assessment return

Taxpayers who started MTD in April 2026 can still have a 2025/26 Self Assessment filing obligation due by 31 January 2027.

When to involve Britvex

MTD should ideally be treated as an accounting-system project rather than simply another HMRC deadline.

Britvex can help review:

• whether the individual is already within MTD;
• which qualifying-income threshold applies;
• self-employment and property income sources;
• whether an exemption requires consideration;
• compatible software selection;
• existing VAT software compatibility;
• bookkeeping setup and migration;
• digital record categories;
• quarterly update preparation;
• year-end tax adjustments;
• Self Assessment and annual tax-return completion; and
• VAT and Income Tax MTD obligations where both apply.

Businesses and landlords can start with Britvex’s Making Tax Digital service. Underlying records can be maintained through Bookkeeping and Cloud Accounting, with documents and support managed through the Britvex Client Portal.

Landlords should also review the dedicated MTD for Landlords guide, while sole traders can review Britvex’s Freelancing in the UK guide for the wider Self Assessment and business-tax position.

Official sources and further reading

• HMRC — Find out if and when you need to use MTD for Income Tax
• HMRC — Work out qualifying income
• HMRC — Using MTD for Income Tax for the first time
• HMRC — Send quarterly updates
• HMRC — Choose MTD Income Tax software
• HMRC — Find compatible Income Tax software
• HMRC — MTD Income Tax penalties
• HMRC — MTD for VAT compatible software
• HMRC — VAT Notice 700/22: Making Tax Digital for VAT