What is Making Tax Digital for Income Tax? A Plain English Guide

If you're a sole trader or a landlord in the UK, you've probably heard the phrase “Making Tax Digital” floating around. Maybe your accountant mentioned it. Maybe HMRC sent you a letter. Either way, it sounds complicated — but it really isn't, once you strip away the jargon. This guide explains everything you need to know in plain English.

The short version

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is HMRC's programme to digitise how self-employed people and landlords report their income. Instead of filling in one big Self Assessment tax return at the end of the year, you'll keep digital records throughout the year and send HMRC a summary every quarter.

It does not change how much tax you pay. It only changes how you report it.

How things work right now

Today, most sole traders and landlords file a single Self Assessment tax return each year. The deadline is 31 January following the end of the tax year (which runs 6 April to 5 April). So for the 2024/25 tax year, the return is due by 31 January 2026.

Many people keep their records in spreadsheets, shoeboxes, or even just bank statements, and then hand everything to an accountant in January. It works, but HMRC wants to modernise it.

What changes under Making Tax Digital

Under MTD for Income Tax, there are three main changes:

• Digital records: You must keep your income and expense records using compatible software (not paper). More on what counts as “compatible” below.
• Quarterly updates: Four times a year, you send HMRC a summary of your income and expenses for that quarter. These are not tax returns — they're progress updates.
• Final Declaration: At the end of the year, you submit a Final Declaration. This replaces the Self Assessment tax return you file today. It's where you confirm your total income and claim any reliefs or allowances.

An important point: MTD does not replace Self Assessment as a system. You're still within Self Assessment. The Final Declaration simply replaces the SA return you currently file.

Who does it apply to?

MTD for Income Tax applies to sole traders and landlords whose qualifying income exceeds certain thresholds. Qualifying income means your gross income before expenses from self-employment and/or property. If you have both, you add them together.

For example, if you earn £35,000 from freelance work and £8,000 from renting a property, your qualifying income is £43,000 — even if your profit after expenses is much lower.

The thresholds are being rolled out in stages:

• From April 2026: Qualifying income over £50,000
• From April 2027: Qualifying income over £30,000
• From April 2028: Qualifying income over £20,000

If your qualifying income is below the threshold for your year, you won't need to comply yet — but you can sign up voluntarily if you want to get ahead.

What do “digital records” actually mean?

HMRC requires you to keep a digital record of every business transaction. For each transaction, your records must include:

• The date of the transaction
• The amount
• The category (what type of income or expense it is)

For expenses, HMRC uses 14 standard categories for self-employment:

1. Cost of goods bought for resale or goods used
2. Construction industry — payments to subcontractors
3. Wages, salaries, and other staff costs
4. Car, van, and travel expenses
5. Rent, rates, power, and insurance costs
6. Repairs and maintenance of property and equipment
7. Phone, fax, stationery, and other office costs
8. Advertising and business entertainment costs
9. Interest on bank and other loans
10. Bank, credit card, and other financial charges
11. Irrecoverable debts written off
12. Accountancy, legal, and other professional fees
13. Depreciation and loss or profit on sale of assets
14. Other business expenses

You don't need to use all 14 categories. If you're a freelance graphic designer, for instance, you might only use a handful. But every expense needs to be assigned to one of them.

What software do you need?

You have two main options:

• HMRC-compatible software that keeps your records and submits your quarterly updates and Final Declaration directly to HMRC.
• Record-keeping software or spreadsheets combined with bridging software that takes your data and submits it to HMRC on your behalf. Many accountants provide bridging software as part of their service.

The key requirement is that your records are digital and can be submitted to HMRC — either directly or via bridging software. Paper records alone won't cut it, even if you type them up at the end of the quarter.

QuarterlyUK handles the record-keeping side — tracking your income and expenses digitally, categorising them into the 14 HMRC categories, and giving you quarterly summaries ready for submission. At £2.50/month, it's designed to make the record-keeping part painless. Your accountant or bridging software handles the actual submission to HMRC.

The quarterly deadlines

The tax year is split into four quarters. After each quarter ends, you have one month and seven days to send your quarterly update to HMRC. Here are the exact dates:

After all four quarterly updates are submitted, you then submit your Final Declaration. The deadline for the Final Declaration is 31 January following the end of the tax year — the same deadline as the current Self Assessment return.

What happens in a quarterly update?

A quarterly update is simpler than you might think. Your software sends HMRC a summary of your total income and expenses for that quarter, broken down by category. You don't need to send individual receipts or invoices. You just need to have the underlying digital records available in case HMRC ever asks to see them.

Think of it as HMRC asking “roughly how is your business doing this quarter?” rather than “give us your full tax return.” The quarterly updates are estimates. The Final Declaration at the end of the year is where you finalise everything.

Penalties for late submissions

HMRC is introducing a new points-based penalty system for MTD, replacing the old fixed fines. Here's how it works:

• Each time you miss a quarterly update deadline, you receive one penalty point.
• Once you reach the penalty point threshold (which depends on your submission frequency — for quarterly submissions, this is typically four points), you receive a £200 financial penalty.
• After reaching the threshold, every subsequent late submission also incurs a £200 penalty.
• Points expire after a period of good compliance — if you submit on time for a set period, your points reset to zero.

Late payment of tax still carries separate interest charges and penalties, as it does today. The points-based system is specifically about late submissions, not late payments.

What MTD does not change

There are several common misconceptions worth clearing up:

• Your tax bill stays the same. MTD changes how you report, not how much you owe. The same tax rates, allowances, and thresholds apply.
• You still get the same reliefs. Trading allowance, capital allowances, mileage rates — all unchanged.
• You can still use an accountant. Many accountants will handle the quarterly submissions on your behalf. You just need to keep your digital records up to date so they have the data they need.
• Partnerships and companies are not included yet. MTD for Income Tax currently applies only to sole traders and landlords. General partnerships may be included from April 2027, but limited companies remain under Corporation Tax rules.

How to prepare

If your qualifying income is over £50,000, MTD starts for you from April 2026 — which is very soon. Here's what to do:

1. Check your qualifying income. Add up your gross self-employment income and gross property income (before expenses). If it's over the threshold, you're in.
2. Choose your software. Pick a tool that lets you record income and expenses digitally, categorise them, and either submit to HMRC directly or export data for bridging software.
3. Start keeping digital records now. Even if your threshold year hasn't arrived, getting into the habit early means no last-minute scramble.
4. Talk to your accountant. Ask them how they plan to handle MTD submissions and what they need from you.

The bottom line

Making Tax Digital for Income Tax isn't as scary as it sounds. At its core, it's asking you to do something most organised sole traders already do — keep track of what comes in and what goes out. The main difference is that it must be digital, it must use the right categories, and you must share a summary with HMRC four times a year instead of once.

The biggest adjustment isn't the technology. It's the habit of recording things as they happen instead of reconstructing a year's worth of finances in January. If you can build that habit, MTD will be straightforward.

QuarterlyUK was built specifically for this. It gives you a simple place to log income and expenses against the 14 HMRC categories, tracks your quarterly deadlines, and generates the summaries you or your accountant need. At £2.50/month, it costs less than a coffee. And your data stays on your device — we never see it.