Making Tax Digital for Income Tax
A Fully Digital System
Making tax digital (MTD) for income tax is HMRC’s plan to move UK taxpayer’s records to a fully digital system.
It is being phased in from April 2026 for the self-employed and those with income from property.
MTD income tax will apply from April 2026 to those who receive income from self-employment and/or property where turnover/gross income from these sources combined is above a threshold of £50,000.
Those with turnover from these sources combined above a threshold of £30,000 are mandated to join MTD income tax from April 2027.
Those with turnover from these sources combined above a threshold of £20,000 will be mandated to join MTD income tax from April 2028.
Requirements to comply with MTD for Income Tax
If a business is trading at 5 April 2025, it will be required to comply with MTD income tax from 6 April 2026 if it exceeds the £50,000 turnover threshold in the 2024/25 tax year (i.e., the decision will be based on the 2024/25 tax return due to be filed on 31 January 2026).
New businesses and those that exceed the turnover threshold for the first time will be required to comply with MTD income tax from the start of the third tax year (i.e., if a business first exceeds the turnover threshold in 2025/26, they will, unless there is late notification, be required to comply with MTD income tax from 6 April 2027).
Where a taxpayer elects for calendar rather than tax year quarters, they will need to join from the relevant 1 April rather than 6 April.
What will be required?
When MTD income tax becomes mandatory, taxpayers within the scope will be required to:
- Maintain digital accounting records including the amounts and dates of the transaction and the category of the expense (which is broadly aligned with those on the Self-Assessment return).
- Submit quarterly updates to HMRC within just over a month of the end of the quarter and a year-end tax return after the end of the tax year. The submissions must be made using a functional compatible software product that can access HMRC’s application program interfaces (API) platform.
There are some relaxations to the record-keeping rules, if your trade or property business is below the VAT threshold, you can opt for “three-line accounting”. This is a simplified method of categorisation, which allows you to simply categorise most items as either “income” or “expense”.
Other record-keeping relaxations include:
- Retailers can record their daily gross takings, rather than every sale they make
- For transactions that are part revenue and part capital (such as mortgage payments), you can choose to either record just the revenue amount, or record the full amount and adjust for the capital at the year end
There is an easement for landlords of jointly owned properties. They will not need to show their expenses in the quarterly updates, instead reporting them when finalising their year-end tax position. However, they do still have to submit their income each quarter, so are not exempt from making quarterly updates.
Quarterly Updates
Quarterly updates will be required for standard quarters, irrespective of a business’s accounting period. The quarterly updates are cumulative year to date figures and in most cases, corrections will be made automatically when the next update is submitted.
The standard quarters are:
- 6 April to 5 July
- 6 July to 5 October
- 6 October to 5 January
- 6 January to 5 April
Businesses will be able to elect to report for calendar quarters:
- 1 January to 31 March
- 1 April to 30 June
- 1 July to 30 September
- 1 October to 31 December
Deadlines
The deadlines for quarterly updates will be 7 August, 7 November, 7 February and 7 May following the end of the relevant quarter (so those that elect for calendar quarters get an extra five days).
The information to be included in a quarterly update is the totals of the amount of income and expenses for set categories.
Separate quarterly updates will be required for each business. For example, an individual operating as a sole trader who also has a UK property business would need to submit eight quarterly updates a year. Income from UK property and income from overseas property are each treated as a single business. If a taxpayer has more than one self-employed trade a separate update is required for each trade.
Year end Tax Return
After the fourth quarterly update has been submitted and is final, the year-end tax return can be completed. The year-end tax return process includes two steps:
- Step one is the BSAS (business source adjustable summary). This involves the software retrieving the totals from the final quarterly update submission from HMRC systems. It is at this stage that the tax and accounting adjustments needed to adjust the quarterly update figures to the final figures for the tax year are made and submitted to HMRC. This step is done for each MTD income source.
- The second step involves bringing together the information submitted through MTD income tax with information about the taxpayer’s other sources of income and details of other claims etc that form the complete tax return. This step will include a declaration like that on the current SA return.
- The software currently does not support end of year functionality (including final declaration) or non-mandated income sources this feature is expected to be brought out later in the 25/26 tax year.
Leaving MTD for income tax
The MTD income tax regulations will allow taxpayers to stop complying with the requirements where their relevant turnover/gross income falls below the threshold or when the business ceases permanently.
To avoid the possibility of taxpayers joining, exiting, and re-joining on a frequent basis as their turnover fluctuates, the requirements will cease to apply only when turnover/gross income falls below the threshold for three successive years.
For example, if a taxpayer is required to comply with MTD income tax for 2027/28 and their turnover/gross income falls below £20,000 in the tax years 2028/29, 2029/30 and 2030/31 they can opt out of MTD income tax requirements as soon as they submit the fourth quarterly update for 2030/31 (due 7 May 2031) and before the first quarterly obligation for 2031/32 falls due.