Are you aware of the changes coming soon for how you report your income for tax purposes?
Do you have the necessary software in place to make this feasible?
Keeping on top of your finances is, of course, fundamental to running your business but when you're self-employed it can sometimes feel like a full time role in itself. Now, the way you report your income to calculate your tax liability could be about to change significantly. HM Revenue & Customs (HMRC) are expanding their Making Tax Digital (MTD) scheme to Income Tax Self Assessment.
The government's aim is to eventually make tax administration more effective, efficient, and easier for tax payers to administer correctly. The project first started in 2015 and was applied to VAT reporting for businesses that breached the VAT threshold. After some delays, it's now expanding and over time will be applied to more self-employed businesses and individuals.
As with many government initiatives, time will tell to see if MTD can achieve the goal of real-time reporting that could eventually phase out the traditional annual tax return. In the meantime, this blog post covers all the key things you need to consider including:
Read on to discover how to stay ahead of the MTD curve! This post covers specifically:
Making Tax Digital for Income Tax Self Assessment is the latest phase of HMRC’s drive to modernise the UK tax system. It builds on the initial rollout through VAT meaning MTD now requires certain businesses and individuals to keep digital records and submit quarterly updates using compatible software, rather than relying solely on paperwork and/or spreadsheets.
The primary purpose of MTD is to make the tax process more efficient, by reducing mistakes, and helping business owners better manage their financial obligations. This means you'll likely have to embrace a digital approach, if you don't already have one, to maintaining your financial record keeping and reporting income to HMRC.
Instead of waiting until year-end to piece together all your paperwork you can, through approved accounting software, record transactions as they occur and submit quarterly updates throughout the tax year.
The changes are intended to help streamline the tax compliance process over time. This could also provide you potentially with more up-to-date insights into your financial performance. The idea being going digital could help support more efficient processes, and smarter, better informed decision-making.
By moving away from manual, analogue methods, MTD aims to free up your time spent on admin tasks, reduce the risk of errors, and deliver more certainty as to your tax position. If you adopt digital record keeping now then this can ensure you're prepared, compliant, and able to take advantage of new processes as MTD is introduced over time.
MTD for Income Tax is subjected to individuals and businesses in the UK who are required to file a Self Assessment tax return and generate a certain level of qualifying income from self-employment and/or rental property.
In particular, as of April 2026 MTD impacts:
HMRC’s current threshold for MTD for Income Tax is set at a total of £50,000 or more per year in gross income. The threshold is expected to reduce to £30,000 in following years. If your income from self-employment and/or property is at or above this £50,000, you will be required to keep digital records and submit your tax information both quarterly, and every financial year using appropriate, compatible software.
Where your qualifying income is below the threshold, you can continue using the current Self Assessment process, although you have the option to pre-empt MTD by choosing to opt in voluntarily. Make sure you review all sources of business and property income to determine whether you will be required to comply with these new requirements.
Keeping track of your income streams now will help with both compliance and planning as the roll-out continues.
Making Tax Digital for Income Tax is being introduced in stages, with phased deadlines that depend on your level of qualifying income and the type of taxpayer you are. Your qualifying income will be determined based on your most recent tax return. So, if your income means you'll be in the phase 1 cohort 9see below), this will have been determined based on your 2024/25 tax return.
The current rollout plan is as follows:
Phase 1
From 6 April 2026, MTD will apply to individuals (including self-employed business owners and landlords) whose total qualifying income from self-employment and rental property reaches £50,000 or more per year.
If you fall within this group, you'll have to keep digital records and submit quarterly updates to HMRC through compliant digital software from the start of your new accounting period following the commencement of the 2026/27 tax year.
HMRC will send a letter to tax payers before April 2026 that are identified as needing to comply with MTD for Income Tax.
Phase 2
From 6 April 2027, the threshold then drops to £30,000 gross income. At this point, individuals with qualifying income in the £30,000 - £50,000 bracket will also come within the scope of MTD. You'll then have to follow the same requirements as those detailed in phase 1 in order to make digital submissions to HMRC.
Phase 3
If your qualifying income is £20,000 or over then you will need to company with MTD from April 2028.
Later phases (dates to be confirmed)
HMRC has announced that general partnerships will be required to comply in a future phase, but a start date has not yet been confirmed. For more complex partnerships, such as LLPs and those with corporate partners, HMRC has confirmed that MTD will be introduced at a future date once the scheme has bedded in for individuals and regular partnerships.
Join the pilot programme?
If you wish to prepare in advance, it’s possible to join HMRC’s MTD pilot scheme. This allows eligible businesses and landlords to get familiar with digital software and reporting requirements before they become mandatory.
Timelines and details are still subject to government review and may be updated as the programme progresses. We recommend checking for the latest updates, and keeping an eye on this blog. Be sure to also consult with your accountant to ensure you’re fully prepared for the relevant start date to your financial circumstances.
If you qualify under MTD, you need to make significant potential changes to how you manage and report your income. This covers 3 core areas:
1. Record keeping:
You must keep fully digital records of all your business and property income, as well as allowable expenses. You'll need to use HMRC-approved MTD-compatible software so as to record transactions as they occur. The software should capture and securely store details such as sales, receipts, purchases, and payments, ensuring every transaction is logged in real time when it occurs.
2. Quarterly returns:
Instead of submitting information once a year, you’ll need to send quarterly updates to HMRC through your accounting software. These updates provide summaries of your income and expenses every 3 months (quarter), giving HMRC a regular picture of your business’s financial position.
Submission to HMRC will happen through the click of a button on your software which will explain how to send these updates. You won't be required to pay tax at these points, but you will receive an estimated tax calculation after each submission based on the data you've provided.
3. End of year tax return (final declaration):
At the end of the tax year, you must make a final declaration—sometimes called an End of Period Statement or EOPS. Again this is done via your MTD software and serves to confirm and finalise your annual earnings plus any accounting adjustments.
You’ll also declare any additional personal income not covered under MTD (such as savings or dividends) as part of your final submission. Tax is then calculated as usual, you'll have to submit a tax return using your MTD compatible software with payment of any balance due by the usual deadlines under payment on account. So, there's no change to how payments of tax are collected.
Qualifying income is the gross income you receive from self-employment and / or property sources. That means the combined total if you have more than one revenue stream. You can then assess whether you meet the MTD for Income Tax threshold and if you need to comply with the MTD regime.
Of note, if you have multiple businesses or rental properties, all their gross income must be added together to then ascertain the amount to be taxed under MTD. Be sure to always use gross figures, as opposed to profit once allowable expenses have been deducted. If your income is near the threshold or likely to fluctuate around it, make sure you review your totals regularly and consult your accountant so as to stay compliant.
There are several instances where MTD for Income Tax won't apply and we detail these below:
1. Individuals and businesses below the income threshold
You're not required to comply and can continue using the existing Self Assessment system if your total qualifying income from self-employment and property is below the current MTD threshold of £50,000 as of April 2026, and then £30,000 from April 2027. However, as mentioned previously, you can opt into MTD voluntarily if you so wish.
2. Businesses and individuals who are not required to file a tax return
If you are not currently required to submit a Self Assessment tax return, MTD isn't likely to be relevant to you.
3. Certain types of partnerships (for now) and more complex entities
General partnerships, LLPs, and partnerships with corporate members are currently outside of the initial scope of MTD for Income Tax. However, HMRC has indicated that these groups will be brought in at a later date so watch this space, any announcements we'll be updating this post.
4. Specific exemptions
Some individuals may be exempt from MTD requirements on the grounds of age, disability, insolvency, or other reasons accepted by HMRC that make MTD record-keeping potentially impractical. Exemptions are granted on a case-by-case basis, and this means you'll have to apply directly to HMRC if you think you qualify.
5. Other sources of income
Income that is not from self-employment or property, such as employment, pensions, savings, and investments, is not currently within the scope of MTD for Income Tax. These income types are reported separately under the Self Assessment process.
6. Insolvency
If you're subject to insolvency proceedings then you're not required to be MTD compliant.
Remember it’s important to reassess your income sources and finances on a regular basis. Doing so can determine whether you qualify for an exemption, or if your status may change in the future. If you're unsure then it would likely be wise to get in touch with a qualified professional for advice.
Preparing early will help you transition smoothly and stay compliant. Here are some practical steps to help you get ready:
1. Assess your eligibility
Confirm your total annual gross income from all relevant self-employment and property sources. Are you already breaching, or do you expect to breach the £50,000 threshold before or after April 2026, or the £30,000 threshold from April 2027?
2. Choose and transition over to suitable accounting software
If you haven't already done so then find and set up HMRC-approved MTD-compatible software. Remember that this system needs to fit the size of your business and be able to handle the complexity of your reporting needs both now and in the future.
Make sure the platform provides digital record-keeping as a feature, as well as quarterly submissions, and final declarations. It would also be wise to choose software that includes a business banking integration and invoicing functionality.
3. Review your current record-keeping
Is your current accounting data based on manual records that are then compiled in a spreadsheet? If so, you need to migrate over to a qualifying digital platform. Then you need to ensure all income and allowable expenses are accurately captured including transaction dates and amounts, and that this is properly allocated and categorised in real time.
4. Train yourself (and your team, if applicable):
Where relevant, allocate time for training either independently, through your accountant, or through the software supplier if you're transitioning to new product. This can then help you avoid errors in recording day-to-day transactions and so reduce risk.
5. Establish processes for quarterly reporting and monitor HMRC updates
Set aside time in your diary to check, reconcile, and summarise your financial records. Planning ahead for quarterly updates will help you meet HMRC deadlines and so reduce the need for last minute reporting which can be both stressful, and problematic.
Make sure you keep up-to-date with HMRC announcements and MTD legislation and deadlines. Remember tax legislation evolves and changes over time following the Chancellor's budgets.
6. Speak to your advisor
Have a conversation with your accountant, if you haven't done so already, to clarify roles and responsibilities. This is especially the case with regards to record-keeping, submissions, and troubleshooting. Your accountant can also advise on best practice, system implementation, and future changes.
7. Join the MTD pilot programme voluntarily (optional):
Consider signing up for HMRC’s voluntary MTD pilot scheme. This allows you to get used to digital record-keeping and filing in a live environment while support is also readily available.
Being proactive by preparing now can help ensure for a manageable and efficient transition. You could also benefit from potentially improved financial reporting helping you meet legal obligations and streamline processes.
A penalty regime is also being put in place alongside MTD for Income Tax. This will operate through a points based system whereby if you miss a quarterly or annual submission requirement then you'll receive a penalty point. Once you reach a certain total number of penalty points then you'll incur a financial penalty.
The content of this post was created on 29/07/2025.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.
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