With the start of Making Tax Digital for Income Tax (MTD for ITSA) now upon us, HMRC has been clarifying several practical questions around how the system will operate.
From the use of bridging software to what happens if income drops below the reporting threshold, a number of areas still require explanation as taxpayers prepare for the new regime beginning on 6 April 2026.
MTD for Income Tax represents one of the most significant changes to the UK self-assessment system in decades. For the first time, many sole traders, landlords and self-employed individuals will be required to keep digital records and submit quarterly updates to HMRC rather than relying solely on a single annual tax return. The initial rollout will apply to individuals whose qualifying income from self-employment or property exceeds £50,000, based on figures reported in their 2024-25 self-assessment tax return. HMRC estimates that approximately 864,000 taxpayers will fall into this first group and says that letters have already been issued to notify those affected.
Registration and preparing for the new system
HMRC has encouraged affected taxpayers to register for MTD before 6 April 2026 so that their details can be transferred to the new service and reporting systems prepared in advance. Although this is not a strict legal deadline, registering early is strongly recommended. Both HMRC and software providers require time to ensure their systems are operating correctly, and taxpayers will also need to ensure that their chosen software is set up and working properly before the first quarterly submission deadline arrives.
To comply with MTD requirements, taxpayers must keep digital records and submit updates using MTD-compatible software. HMRC has confirmed that bridging software will be permitted, allowing taxpayers who keep records in spreadsheets to connect those records digitally to HMRC’s system for submission. However, HMRC has made it clear that its preference is for taxpayers to use fully integrated accounting software that records transactions digitally from the outset rather than relying on spreadsheets and bridging tools.
Understanding quarterly reporting
One of the most noticeable changes under MTD will be the introduction of quarterly reporting, something that many taxpayers who are used to annual reporting will need time to adapt to. The first quarterly update will cover the period 6 April to 5 July 2026, with a filing deadline of 7 August 2026. These submissions will summarise income and expenses for the quarter and must be reported separately for each trade or property business where applicable.
It is important to note that these quarterly submissions do not replace the existing self-assessment tax return. Taxpayers will still need to submit their annual return in the normal way. For example, the tax return for the 2025-26 tax year will still be due by 31 January 2027, meaning that MTD introduces additional reporting obligations rather than replacing the current system entirely.
Income thresholds and when MTD applies
A common point of confusion concerns how the income thresholds operate. HMRC has confirmed that eligibility for MTD is determined using the previous year’s self-assessment tax return, not the taxpayer’s income during the current year. This means that if a taxpayer’s income exceeds the £50,000 threshold part way through a tax year, they will not normally need to join MTD until the following tax year, allowing them to complete the current year using the traditional self-assessment process.
The threshold will gradually expand over time as HMRC rolls out the system more widely. Individuals with qualifying income above £30,000 will be required to join from April 2027, while those with income exceeding £20,000 will join from April 2028.
A soft landing for the first year
Recognising that the move to quarterly reporting represents a significant change for many taxpayers, HMRC has indicated that the first year of MTD will effectively operate as a soft landing period. Penalties for late quarterly submissions will initially be waived to allow taxpayers time to adjust to the new requirements.
From April 2027, however, the full compliance regime will apply using HMRC’s points-based penalty system.
While the aim of MTD is to modernise the tax system and provide more up-to-date information for both taxpayers and HMRC, the transition will inevitably require changes in working practices for many individuals. Ensuring that digital record-keeping systems are in place early, and that software is functioning correctly, will be essential in helping taxpayers adapt smoothly to this next stage of digital taxation.
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.
