It’s hard to believe, but we’re now less than a year away from Making Tax Digital (MTD) for Income Tax becoming a reality. For those affected, it’s going to be the biggest shake-up in tax reporting since self-assessment was introduced back in the 1990s.
Now, I know what you might be thinking: “Great — more admin and another thing to keep on top of.” And yes, there will be extra steps involved, but with the right preparation it doesn’t have to be a headache. The key is to start getting ready now, so you’re not scrambling when the deadline arrives.
Who’s Affected and When?
MTD is being introduced in phases. From 6 April 2026, it will apply to sole traders and landlords whose gross income — that’s your income before expenses — is over £50,000 a year. A year later, from April 2027, the threshold will drop to £30,000, and from April 2028 it will come down again to £20,000.
It’s worth stressing that this income test looks at your total from all sources of self-employment and property. So if you’ve got £30,000 in trading income and £21,000 in rental income, you’re over the £50,000 mark and will be in the first group starting in 2026. Even overseas rental income is included in the calculation.
Who’s Not Included?
If you’re under the threshold, you’re safe for now — though the lower limits in later phases could still bring you in. Partnerships, including LLPs, aren’t part of MTD yet, and limited companies are excluded completely. But if you’re in a partnership and also have rental income or a separate sole trade on the side, that extra income could still put you into MTD.
Exemptions for Special Circumstances
HMRC knows not everyone is able to use digital systems. If you’re unable to keep digital records because of your age, a disability, poor internet access or other practical reasons, you can apply for an exemption. Certain religious groups whose beliefs are incompatible with electronic record-keeping can also be exempt.
The key here is that you have to apply — it’s not automatic. So if you think you might qualify, don’t leave it until the last minute.
How Will You Know if You’re In?
Before April 2026, HMRC will look at tax returns from 2024–25 to see whose income puts them in the first phase. If you’re over the £50,000 threshold, you’ll get a letter telling you that you must start using MTD from that April. The same process will happen for each later phase as the income limit drops.
Once you’re in scope, you (or your accountant) will need to:
1. Choose suitable software from HMRC’s approved list.
2. Sign up for MTD through HMRC.
And no, you won’t be able to use HMRC’s old self-assessment portal — everything will have to be submitted through compatible software.
What Changes Under MTD?
The main difference is that instead of keeping your records all year and filing one return, you’ll need to:
1. Keep your records digitally – every bit of income and expense for your business or rental properties will need to be recorded in MTD-compatible software, including the date, amount and category. This can include spreadsheets.
2. Send HMRC quarterly updates – every three months you’ll send a summary of your income and expenses. These aren’t full accounts, and you don’t need to make adjustments for things like depreciation or allowances yet — just the raw figures.
3. Submit an end-of-year declaration – after your final quarterly update, you’ll finalise everything, make adjustments, add other income, and claim any reliefs and allowances.
If you’re in the first phase, your quarterly update deadlines will be 7 August, 7 November, 7 February and 7 May.
Dropping Below the Threshold
If your income falls to £30,000 or less, you won’t automatically drop out. You have to stay under that level for three years in a row before you can stop using MTD.
What If You Miss a Deadline?
MTD will introduce a points-based penalty system. Every time you miss a deadline, you get a point. Hit the limit and you’ll get a £200 fine. Keep missing deadlines and the fines will keep coming. Points will eventually expire if you stay compliant, and you’ll be able to appeal if you think a penalty is unfair.
Getting Ready Now
I know April 2026 sounds far away, but it really isn’t when you think about how many changes this involves. You’ll need to get comfortable with your new software, possibly change your bookkeeping habits, and get into the routine of quarterly reporting.
The good news? If you start now, you can ease into it. Try out some software, get your records organised digitally, and maybe even practise sending a mock quarterly update so that when the real thing arrives, it’s second nature. The bad news? If you wait until the last minute, you could be juggling new technology, changing processes, and looming deadlines all at once — not a combination anyone enjoys.
WatkinsonBlack have considerable experience in all areas of taxation and business services. This includes providing a very cost-effective payroll bureau service, as well as assisting to ensure compliance with the latest Making Tax Digital legislation. If you are employed or self-employed either as a sole trader, partnership or limited company and want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us by telephone on 01925 413210 or by e-mail to info@watkinsonblack.com. Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.
