Making Tax Digital For Income Tax

What Businesses Need to Know About Making Tax Digital for Income Tax

After years of preparation and delays, the government’s Making Tax Digital for Income Tax (MTD for IT) finally came into effect in April 2026. As expected (and intended), it is transforming the way sole traders and landlords report to HM Revenue and Customs (HMRC). What’s more, as Accountancy Age notes, “UK accountants are at the heart of this shift, helping clients stay compliant and get ahead of the curve”.

So, What Is Making Tax Digital for Income Tax?

As the name suggests, Making Tax Digital is a government initiative by HMRC aimed at modernising the tax system by supplanting traditional paper records with mandatory digital record-keeping and regular electronic updates. The first phase of the initiative, Making Tax Digital for VAT, was launched in 2019 and affected an estimated 2.3 million businesses.

The prospective benefits of MTD for IT, according to the government, include:

1. Time saving. Digital submissions via software are generally quicker than traditional paper filings, though getting set up can take time. An HMRC survey of business owners found that MTD for VAT generated a time saving of between 26 hours and 40 hours per business per year, which equates to a financial saving to the overall economy of between £603 million and £915 million. 
2. More tax confidence. Sending quarterly updates gives businesses a clearer view of the health of their business and helps them to estimate their annual tax bill. This, in turn, helps them to set aside necessary funds, detect accounting errors and correct them before they become serious problems. 
3. Improved business operations. Using bank-fed software and updating records more regularly help to ensure more accurate and more timely reporting than 'back of an envelope’ or spreadsheet methods. This is a win-win for both HMRC and taxpayers: with realtime data, the government should have a better idea of what funds to expect in the near future while sole traders and landlords should be able to plan their finances more effectively.

Who Will Be Affected?

The first phase of MTD for IT affects sole traders and landlords with annual revenues of £50,000 and above. The first quarterly update under Making Tax Digital for Income Tax came into effect in the second quarter of 2026 and the deadline is due on 7 August, 2026.

From then on, quarterly digital updates are required on top of the traditional annual tax declaration. It is important to note that a quarterly update is not equivalent to a tax return given that it requires far less data. As such, everyone affected still needs to complete their annual filing.

The annual revenue threshold is set to drop to £30,000 in the second phase, scheduled for next year, and then to £20,000 in the third phase, scheduled for 2028. This will significantly widen the number of businesses and landlords having to report to HMRC on a quarterly basis, with an estimated 2.9 million individuals expected to be affected by MTD for IT.

Making Tax Digital is one of the biggest changes to self assessment in a generation, and it will no doubt take time for many to adjust. Understandably, many sole traders and landlords have concerns and misgivings about the new processes. Here are three of the most common:

• Administrative over-burden. Instead of having to file one tax return a year, self-employed people will now have to submit at least five. While that might sound like a lot of additional (paperless) paperwork, the admin burden should grow lighter as the automated processes kick in and as the prospective benefits outlined above take effect. 
• Additional costs. Many sole traders are also concerned about the additional financial burden, particularly on the software front. As with all digital transformation initiatives, the less computer literate you are, the more difficult the change. That said, there is a combination of free and paid MTD-compatible software options available, designed for different types of businesses, with free software products on offer to sole traders with a single income source.
• More penalties for non-compliance. Another common fear is that the introduction of more deadlines will translate into more fines for non-compliance. To try to allay this fear, the government has introduced a points-based penalty system for MTD, rather than immediate fines for missed submissions. Missing a deadline earns a point and penalties only apply once a certain threshold is breached.

Public resistance to the changes remains high, however. In mid-July, over half (55%) of the small businesses affected by the first phase of MTD for IT were still not prepared for the first submission deadline on August 7, according to research by Lloyds Bank. Using HMRC estimates, Lloyds believes that could represent close to half a million sole traders, landlords and small businesses.

If you are one of those people, it probably makes sense to seek guidance on MTD for IT and complete your submission as soon as possible. Remember, missing the first deadline does not carry a penalty fine.

If it’s any consolation, it’s not just small businesses and landlords that are behind schedule. According to a survey cited by Accountancy Age, around 80% of UK accountants see MTD as both their biggest challenge and opportunity this year. One in three say they’re not fully ready.

That is not the case here at Moore Northern Home Counties. If you are a sole trader, private landlord or small business owner, we can assess whether MTD for IT applies to you. If that is the case, we can recommend suitable software, set up the required bookkeeping processes and ensure that quarterly submissions are compliant and filed on time.