Making Tax Digital for Income Tax (MTD IT for short) is set to replace the Self Assessment process for some sole traders and landlords.
It’s rolling out in phases, beginning in April 2026, but whether or not you need to start complying with the MTD rules depends on your qualifying income.
In this article, we’ll go through the key changes and also explain how you can best prepare yourself for the switch to MTD.
What is MTD IT?
Making Tax Digital for Income Tax (MTD IT) is HMRC’s plan to replace the Self Assessment with a new digital reporting system. It’s being rolled out gradually, starting with sole traders and landlords who earn income from self-employment.
What will change?
In short, the arrival of MTD IT means instead of submitting a Self Assessment tax return, those that qualify will need to record their Income Tax records digitally and submit quarterly updates to HMRC via approved software.
You must also submit an MTD Income Tax Return (called a ‘Final Declaration’) once your tax year is complete.
What counts as qualifying income?
MTD IT applies to any sole trader and property income you report in the previous year’s Self Assessment Tax Return. Remember, ‘qualifying income’ refers to your gross turnover (total money in before expenses), not your net take-home profit.
Your Return may also include income from other sources (e.g. dividends, wages from traditional employment, or your share of a partnership’s profits), but HMRC won’t count this towards your qualifying income.
Does MTD affect freelancers?
As a freelancer, you earn self-employed income and fall into the category of sole trader, so these changes will apply to you.
When exactly you need to start complying depends on your income level, with the new system rolling out gradually over time.
For example, if your qualifying income from freelancing and/or property is over:
- £50,000 in the 2024/25 tax year; from April 2026
- £30,000 in 2025/26; from April 2027
- £20,000 in 2026/27; from April 2028
If your turnover is more than £50,000, it could be worth considering operating through a limited company for tax-efficiency.
That would mean completing a Company Tax return and paying Corporation Tax instead – but ask an accountant first to weigh the pros and cons.
What happens if you don’t pay?
There are penalties for non-compliance, with HMRC using a points-based system based based on a percentage of your earnings for this and late payment penalties.
As MTD IT is still in the early stages, penalties are not currently being issued if you’re late submitting a quarterly update, but they will start being issued after the 2026/27 tax year.
After this, missing a deadline to submit a quarterly update will earn you a point, and you’ll receive a penalty of £200 if you receive four points.
Your MTD Income Tax Return is due annually, and missing the deadline earns you a point.
With this, though, a £200 penalty is applied if you receive just two points.
How do I comply with MTD?
The MTD IT rules talk about keeping ‘digital’ records, which means you’ll need to start recording your income and expenses using MTD-compliant software.
Once you have the software, you’ll:
- Create digital records for all your business transactions
- Send quarterly updates – due one calendar month and 7 days after the end of each quarter
- Submit a Final Declaration (which will include all of your other income too, not just your self-employment/property income – so it replaces the current Self Assessment)
Is anyone exempt?
You can apply for an exemption against using MTD IT if it’s simply not practical for you to keep and submit digital records – for example, due to age, disability, or religious beliefs.
You won’t need to comply at all if:
- Your qualifying income is below £20,000
- You’re a non-resident company, trust, or estate
- You don’t have a UK National Insurance number
Preparing yourself for MTD
So, you need to start complying.
Even if you don’t just yet, getting started with digital record keeping now will make your life a whole lot easier down the line – and if MTD IT is on the horizon for you, there’s no harm in getting ahead of it.
Thankfully, there are a number of steps you can take to help get yourself ready.
Get software
The first thing you’ll want to do is look for online accounting software that’s fully compliant with Making Tax Digital.
Ideally it will meet the requirement for digital bookkeeping and be able submit your quarterly updates and final declaration directly to HMRC. Not all software will do both, so you might need additional bridging software to connect your digital records to HMRC unless the connection is already available!
Do some research and try to find bookkeeping software that’s right for you, based on your own needs and preferences.
Remember: the simpler the better.
Align your reporting periods
Your quarterly updates will align with the standard tax year quarters. Fortunately, under recent tax rule changes, your accounting software will automatically handle this timing for you, so you do not need to worry about changing your business year-end dates.
Plan ahead
Now, if you are someone who doesn’t yet need to follow the MTD rules, you can actually choose to opt in early – and if you’re going to start digitising your records anyway, then this makes a lot of sense.
If you do sign up early, you must obviously make sure you’re following the rules and meeting the various deadlines throughout the year.
It might not be mandatory for you yet, but getting everything in place early is the smart way to go.
You could also speak to an accountant, who will simplify the whole process and ensure you’re operating in the most tax-efficient way possible.
They may even be able to recommend MTD-compliant bookkeeping software.
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