If you’re a sole trader, landlord, or small business owner in the UK, you’ve probably heard the phrase “Making Tax Digital” floating around — usually followed by a slightly worried look from your accountant. Here’s the straight-talking version: what it is, why HMRC is doing it, and exactly when it lands on your desk.
What Is Making Tax Digital, and Why Does It Exist?
Making Tax Digital (MTD) is HMRC’s long-running project to move the UK’s tax system away from paper records and annual guesswork, and towards digital record-keeping with regular updates throughout the year. The idea has been in motion since 2016, and it’s designed to do three main things:
- Cut down on errors. HMRC estimates a significant chunk of the “tax gap” comes from simple mistakes — not deliberate evasion, just poor record-keeping. Digital, real-time records reduce that.
- Give business owners a clearer, more current view of their tax position rather than a once-a-year scramble in January.
- Modernise HMRC’s own systems, replacing outdated processes with something built for how businesses actually operate today.
MTD isn’t one single change — it’s a rolling programme. VAT-registered businesses have already been through this: MTD for VAT has been mandatory for most VAT-registered businesses for several years now. The next, much bigger wave is MTD for Income Tax Self Assessment (MTD for ITSA), and this is the one catching most sole traders and landlords off guard.
Who’s Affected, and When
MTD for ITSA applies to sole traders and landlords earning above certain income thresholds. It’s being phased in gradually, based on gross income — not profit — from self-employment and property combined.
Since 6 April 2026 — anyone with qualifying income over £50,000 (based on 2024/25 figures) has been required to keep digital records and file quarterly updates. If that’s you, this isn’t a future deadline any more — it’s already in effect. The next phase-in date to watch is 6 April 2027, when the threshold drops to £30,000.
From 6 April 2027 — the threshold drops to £30,000, pulling in a much larger group of smaller sole traders and landlords.
From 6 April 2028 — it drops again to £20,000, bringing roughly another 970,000 people into scope.
A few important clarifications:
- The test is based on gross income, not profit — so don’t assume you’re under the radar just because your margins are tight.
- If you have both self-employment and property income, the two are added together for the threshold test.
- Income from PAYE employment, dividends, pensions, and investments doesn’t count towards the threshold.
- Limited companies are not affected. HMRC has confirmed MTD will not extend to corporation tax, so if you trade through a company, this particular change isn’t aimed at you.
- General partnerships are excluded for now — MTD for partnerships is expected to follow later, with no date confirmed yet.
What Actually Changes Once You’re In
Once mandated, the shift is from one annual tax return to a quarterly rhythm:
- Digital record-keeping — transactions need to be recorded using MTD-compatible software (or bridging software linked to spreadsheets), not a shoebox of receipts.
- Four quarterly updates a year, summarising income and expenses for each three-month period.
- A Final Declaration at year end (replacing the old Self Assessment submission), due by the usual 31 January deadline.
Missing deadlines will matter more than it used to. HMRC is introducing a points-based penalty system: each missed submission earns a point, and once you hit the threshold, a fixed fine kicks in. This replaces the old system of one-off penalties, and it’s designed to catch persistent lateness rather than the odd slip-up — but it still means quarterly updates need to become part of your routine, not an afterthought.
What SMEs Should Be Doing Now
Even if your income currently sits below £50,000, it’s worth getting ahead of this rather than waiting for the letter from HMRC:
- Check your gross income for the relevant tax year to work out which phase applies to you.
- Start using compatible accounting software now, even before you’re mandated — it’s far less stressful to build the habit early than to switch mid-crisis. Xero, QuickBooks, and similar platforms all have MTD-ready options, and bridging software exists if you want to stick with spreadsheets for now.
- Tidy up your bookkeeping habits — clear categorisation of income and expenses will make quarterly filing far less painful.
- Talk to your accountant early, particularly if you’re near a threshold or have combined income from more than one source.
Some taxpayers may qualify for exemptions — for example, on digital exclusion grounds — so if you think MTD genuinely isn’t workable for you, that’s worth raising directly with HMRC or your adviser rather than assuming you’re covered.
The Bottom Line
MTD isn’t going away, and the thresholds are only going to keep pulling in more small businesses over the next few years. The businesses that treat this as a “get ahead of it” job — sorting software and habits now — will find the transition barely noticeable. The ones who wait for the threshold to catch them will be doing it under pressure, with penalties on the table from day one.
If you’re unsure which phase applies to you, or want a hand getting your bookkeeping MTD-ready, that’s exactly the kind of groundwork worth sorting out before the deadline arrives, not after.
This article is for general guidance only and does not constitute tax advice. Always check the latest guidance on GOV.UK or speak to a qualified accountant about your specific circumstances.