Making Tax Digital for Income Tax: A complete guide

MTD for IT is HMRC’s next major step in its long-term plan to modernise the UK tax system. The idea was first floated back in 2015, and it’s already been rolled out for VAT. Now, it’s being extended to individuals who earn income through self-employment and/or property, starting from April 2026.

At its core, MTD for IT is not about changing how much tax you pay. It’s about changing how you keep records and report that income to HMRC. Instead of filing a single Self-Assessment Tax Return once a year, affected taxpayers will be required to:

• Keep digital records of all relevant income and expenses;
• Submit quarterly updates to HMRC summarising this data;
• Submit an end-of-year submission that replaces the current annual tax return.

This system is designed to reduce errors, close the so-called “tax gap” (the amount of tax HMRC believes is going unpaid), and eventually provide real-time tax visibility to taxpayers and HMRC alike.

Once you’re in the MTD for IT compliance system, you leave the traditional Self-Assessment regime. The two are mutually exclusive, which has implications for how your accountant and/or tax advisor supports you.

And just to be clear: this isn’t an optional change. Once your income hits the threshold, MTD compliance becomes mandatory.

Ultimately, MTD is also laying the groundwork for a more automated tax future. As HMRC’s systems improve, they’ll start to pre-fill more of your information (things like employment income, bank interest and dividends). Over time, this could eliminate the need to manually enter data at all. But for now, the focus is on those with self-employed or property income, and the shift begins with setting up digital records and staying on top of quarterly reporting.

If you receive income from property or self-employment, this change is on the horizon. And now is the time to understand what’s coming and how to prepare.

MTD for IT isn’t for everyone… at least, not yet. Initially, it will only apply to individuals with qualifying income from either self-employment, property rental, or both.

Crucially, HMRC looks at the combined gross income from these sources.

Here’s the rollout timeline based on income thresholds:

• ≥ £50,000 mandated from April 2026
• ≥ £30,000 mandated from April 2027
• ≥ £20,000 mandated from April 2028
• < £20,000, not yet mandated, but likely to follow

If you meet these criteria, MTD for IT will replace your existing Self-Assessment process. You’ll move onto the new system entirely, filing digitally, quarterly, and annually through approved software.

If you’re in scope for Making Tax Digital for Income Tax, your responsibilities shift from one annual tax return to a structured, multi-stage process throughout the year. Here’s what that looks like in practice:

1. Keep digital records

This is the foundation of MTD. You’ll need to record your income and allowable expenses digitally, either using accounting software like Xero, or a spreadsheet that’s connected to bridging software approved by HMRC. Paper records alone won’t cut it.

Each trade or property business must be tracked separately. If you’re a self-employed graphic designer who also lets out two rental properties, those are two distinct business activities, and they each require their own digital record and filing process.

2. Submit quarterly updates

You’ll need to send HMRC a summary of income and expenses every three months, for each business activity. These updates follow the tax year, not the calendar year:

• Quarter 1: 6 April – 5 July (file by 7 August)
• Quarter 2: 6 April – 5 October (file by 7 November)
• Quarter 3: 6 April – 5 January (file by 7 February)
• Quarter 4: 6 April – 5 April (file by 7 May)

Remember: if you have multiple businesses, you’ll need to file separate updates for each one. So, if you run a sole trade and have a property portfolio, you’ll be filing eight updates per year (four for each business).

3. Submit an end-of-year submission

This replaces your current Self-Assessment Tax Return. It pulls together your MTD filings, applies any final adjustments (such as mortgage interest tax relief), and includes any additional income not yet reported, such as bank interest, dividends, or employment income.

You’ll need to file your end-of-year submission by 31 January following the end of the tax year, just like the current deadline for Self-Assessment.

Together, these steps represent a major change in workflow, but handled correctly, they can streamline tax compliance and reduce last-minute stress. The key is preparation, process, and, ideally, software that does the heavy lifting.

One of the most significant shifts under Making Tax Digital for Income Tax is the role of software. Under the old Self-Assessment regime, you could log into HMRC’s own portal, enter your figures manually, and be done. Under MTD, that option disappears, and HMRC will not be providing a filing tool.

You will need to use commercial software that’s been approved by HMRC. That might sound daunting, but it doesn’t have to be.

At Wilson Partners, the preferred solution is Xero, a market-leading accounting platform that’s MTD-compliant and designed to integrate smoothly with HMRC’s systems.

Other software options are available (QuickBooks, Sage, FreeAgent, etc.), and if you’re already using one, it may be possible to continue with it. However, Wilson Partners recommends clients move to Xero for consistency, efficiency, and cost-effectiveness, particularly when quarterly submissions and collaboration are involved.

What about spreadsheets?

Technically, HMRC allows digital records to be maintained in spreadsheets, but only if they are linked to bridging software that submits the data to HMRC in the correct format. This route may seem simpler at first, but it introduces friction, risk of error, and often hidden costs in the long run. In practice, we expect most clients and their accountants to quickly outgrow this workaround.

In theory, yes. If you’re confident with accounting software and your finances are straightforward, you can set up MTD software (like Xero), do your own bookkeeping, and submit your quarterly updates and end-of-year return yourself.

In reality, most individuals find the software isn’t as intuitive as expected, especially when it comes to things like setting the correct chart of account, rule setting, account mapping, reconciling transactions, and tracking categories.  Even experienced professionals at Wilson Partners undergo significant training in order to use Xero effectively.

Wilson Partners offers flexible models depending on how hands-on you want to be:

• Some clients do their own bookkeeping and Wilson Partners handles submissions
• Others hand over everything, from digital recordkeeping to full MTD compliance
• Many opt for a hybrid model: Wilson Partners sets up the software, and clients gradually take more control

Whatever your situation, MTD for IT isn’t something you have to face alone.

HMRC is introducing a points-based penalty system (modelled on VAT penalties). It’s designed to be more forgiving than one-off fines, but it’s still something to avoid:

• Each missed deadline earns you a penalty point.
• Once you reach four points, you’ll be fined £200.
• After that, every further missed deadline within the compliance period triggers another £200 penalty.

These points accumulate over a 24-month period, but they reset after 12 months of full compliance. Importantly, the penalty is based on submission periods, not the number of businesses. So, if you’re late with both your property and self-employment update in the same quarter, that’s still one point, not two.

As confirmed following the Autumn 2025 Budget announcement, the taxpayers joining MTD income tax in April 2026 will not receive penalty points for late submission of their first four quarterly updates.