Making Tax Digital for Income Tax: What You Need to Know

The UK’s Making Tax Digital for Income Tax (MTD) initiative continues to reshape income tax reporting, with significant updates announced in 2025. Designed to modernise tax administration, MTD for Income Tax mandates digital record-keeping and quarterly submissions for self-employed individuals and landlords. Below, we break down the latest developments and their implications.

1. Phased Implementation Timeline

MTD for Income Tax is rolling out in phases, targeting taxpayers based on income thresholds:

• 6 April 2026: Mandatory for sole traders and landlords with total gross income over £50,000 from self-employment and/or property.

• 6 April 2027: Extended to those with income over £30,000.

• 6 April 2028: Threshold lowered to £20,000, bringing an estimated 900,000 additional taxpayers into scope.

The thresholds are based on income reported in prior tax returns. For example, eligibility for 6 April 2026 depends on the 2024/25 tax return (submitted by 31 January 2026). Once mandated, taxpayers must comply for at least three consecutive tax years before opting out, even if income later falls below the threshold.

2. Key Requirements Under MTD

Taxpayers in scope must:

• Maintain digital records: Transactions must be recorded digitally using MTD-compatible software or spreadsheets (linked to approved tools). Paper records alone no longer suffice.

• Submit quarterly updates: Reports are due within one month after each quarter (e.g., 7 August 2026 for the 6 April–5 July 2026 period).

• File a final declaration: Replace the traditional Self Assessment (SA) tax return with a year-end submission by 31 January.

Software changes: HMRC’s online SA portal will no longer be available for MTD-compliant taxpayers. Instead, third-party software (e.g., Xero, QuickBooks, FreeAgent) must be used for both quarterly updates and final declarations. Free software options are promised for those with "straightforward affairs," though details remain unclear .

3. Exemptions and Deferrals

Certain groups are exempt or deferred from MTD requirements:

• Automatic exemptions: Foster carers, non-UK residents, trustees, and taxpayers without a National Insurance number.

• Applied exemptions: Those digitally excluded due to age, disability, religious beliefs, or lack of broadband access. VAT-exempt businesses are also automatically exempt.

• Deferred groups: Partnerships, ministers of religion, Lloyds underwriters, and taxpayers claiming Married Couple’s or Blind Person’s Allowance.

Additionally, taxpayers using the SA109 form (for residence/remittance basis) are deferred until April 2027 to accommodate non-domiciled individuals’ reporting needs.

4. Penalty Reforms

A revamped penalty regime applies to MTD adopters:

• Late submissions: Points-based system, with penalties (£200) triggered after accumulating a threshold of points.

• Late payments:

  • 15 days overdue: 3% of outstanding tax.

  • 30 days overdue: Additional 3%.

  • 31+ days: 10% annual interest on unpaid amounts. HMRC gains authority to cancel penalties in exceptional cases, such as insolvency.

5. Industry Concerns and Preparations

The 2028 threshold reduction to £20,000 has sparked concerns. The Institute of Chartered Accountants in England and Wales (ICAEW) warns the timeline is "premature," leaving little room to assess initial rollout challenges before expanding the scheme. Taxpayers face rising compliance costs, particularly unrepresented individuals who must now purchase software instead of using HMRC’s free portal.

Preparation steps for taxpayers:

1. Assess eligibility: Use HMRC’s online tool to check thresholds .

2. Adopt digital tools: Transition to cloud accounting software (e.g., Xero) and ensure MTD compatibility.

3. Separate finances: Divide personal and business banking to streamline record-keeping.

4. Consult professionals: Agents can assist with software setup and submissions.

Looking Ahead

While MTD for Income Tax aims to reduce errors and improve transparency, its success hinges on accessible software and taxpayer readiness. HMRC plans further guidance on exemptions and free tools later in 2025. For now, taxpayers are urged to start their digital transition early to avoid last-minute hurdles.

If you have any questions about MTD for income tax or how it may affect you, please feel free to get in touch with us. For detailed guidance, you can also refer to HMRC’s MTD portal.