Making Tax Digital for income tax: what it means and how to prepare

Making Tax Digital (MTD) is the biggest change to the income tax system since self-assessment was introduced. It becomes compulsory for the first taxpayers from April 2026 – if you are in this first wave, now is the time to understand what's involved and start preparing.

MTD is a new way of keeping records and reporting to HMRC for unincorporated trading and property businesses.

It has three main requirements:

1. digital record-keeping
2. submission of quarterly updates to HMRC
3. a final MTD tax return at the end of the year.

Importantly, you will need to choose a compatible commercial software to meet all of these requirements – HMRC will not provide its own software.

Digital record-keeping requires software to be used to record the date, amount and category of income and expense items. The categories follow the existing ones applied on the self-assessment return. 

Record-keeping needs to be carried out on at least a quarterly basis and can no longer be an end-of-year process.

The digital records form the basis of the quarterly updates to be filed with HMRC. These contain the total for each category of income and expense. They are not mini tax returns and no tax or accounting adjustments are required.

Regardless of the accounting period of the business, the quarters follow the tax year. However, you can choose to report calendar quarters, which means that instead of each quarter ending on the fifth of a month, it finishes at the end of the previous month.

In both cases, the quarterly update must be filed one month and two days after the end of the tax year quarter, i.e. by 7 August for the quarter ending 5 July.

The final stage is to file an MTD tax return after the end of the tax year.

Although the MTD tax return will carry out the same role as the current self-assessment return, and have the same 31 January deadline, it will look and feel quite different.

In particular, it must be filed using a compatible software chosen by you – HMRC's online filing portal will not be available under MTD – and it will include more pre‑populated information.

Whether and when an individual needs to join depends on their qualifying income – broadly total gross income from self‑employment and property before expenses.

The introduction of MTD will be phased over three years and is based on a taxpayer's level of qualifying income:

• from April 2026 for income over £50,000
• from April 2027 for income over £30,000
• from April 2028 for income over £20,000.

These thresholds are compared to the qualifying income in the most recently filed tax return. For entry in April 2026, taxpayers need to look at whether the qualifying income reported on their 2024/25 tax return – due on 31 January 2026 – is above £50,000.

There are a limited number of exemptions and deferrals available for certain groups of taxpayers, including those who are digitally excluded. Some of these require an application to HMRC, so it's important to check the conditions carefully.

The following practical steps can help you prepare.

1. Check the requirements. The first thing to check is whether you are in scope of MTD, and if so, when it applies to you. You should then ensure you have a good grasp of what is involved. Useful sources of information include HMRC's campaign page and the ATT's FAQs.

2. Think about what support you need. Some people may wish to handle their own bookkeeping and quarterly updates, while others may prefer support from an accountant or bookkeeper. If you have an accountant acting for you already, talk to them. If you do not, but think you might need one, start looking soon.

3. Consider opening a separate business bank account. If you do not already have a business bank account, now is a good time to consider one. This will help you keep personal and business spending separate and can speed up digital record-keeping, especially if the account links directly to your software using bank feeds. Some business accounts also include free basic bookkeeping tools.

4. Make sure you have suitable software. All MTD requirements must be completed using compatible software. Choices range from spreadsheets combined with 'bridging software', which allows you to make submissions to HMRC, through to full accounting packages. The right solution will depend on the complexity of your business and your budget. HMRC provides guidance and an interactive tool to help you find a product that suits your needs.

5. Sign up for MTD. If you are required to join MTD you will need to register manually or ask your accountant to do this for you – HMRC will not register you automatically. The online process takes only a few minutes and can be carried out in advance of April 2026.

6. Don't panic. Carefully consider your options and ensure you have the right software. Avoid the temptation to make knee-jerk decisions. If you do struggle to comply once in MTD don't worry – there are no penalties being imposed during 2026/27 for failure to file quarterly updates on time.

Start by understanding when you need to join, choosing suitable software, reviewing your record‑keeping habits and taking small steps towards keeping information digitally.