Making Tax Digital (MTD) is one of the largest changes to the UK tax system that has happened in decades. Starting April 2026, these major changes will take effect for self-employed Individuals and landlords. Whether you have a small business, earn income through rentals or are simply curious as to what’s changing, this breaks it down and gives you all you need to know!
What is making tax digital?
Making Tax Digital (MTD) is HMRC’s ongoing strategy to modernise the tax systems, moving on from paper and annual submission to keeping records digital and on top of your taxes with quarterly reporting. So instead of filling in one self-assessment return, those affected by MTD will submit more regular reports with software compatible with HMRC
MTD aims to ensure that:
- The errors in tax returns are reduced
- Improve real-time visibility of your taxes
- Making reporting easier
- Bringing the tax system closer to day-to-day financial activity
Who does MTD affect and when?
MTD will be phased in gradually and will be based on gross income (before expenses)
April 6th, 2026
- For sole traders and landlords with income thresholds of over 50,000
April 6th, 2027
- For sole traders and landlords with income thresholds of over 30,000
April 6th, 2028
- For sole traders and landlords with income thresholds of over 20,000
This means that if your total combined income from self-employment and property exceeded 50,000 on your 24/25 return, you’ll need to join MTD from April 2026.
What will be changing under MTD?
Digital Record Keeping
You must keep digital records, not just paper/manual spreadsheets of your income and expenses. Of which must be stored in MTD compatible software
Quarterly Updates
Every quarter (three months), you must submit a summary of your income and expenses directly to HMRC through your selected software. These are not tax returns! These are simply summaries of your finances over quarterly periods
Final Declaration
At the end of the year, you will submit a final declaration, which will be done in place of the original self-assessment. This will pull all the quarterly updates and allow the adjustments and reliefs
Compatible Software Requirement
You must use an accounting software recognised/approved by HMRC, such as Xero, QuickBooks, Sage, or Bridging software if you prefer to use spreadsheets. HMRC is not providing its own software for MTD ITSA
Why is this change happening?
MTD is designed to
- Reduce common manual errors
- Improve tax accuracy and compliance across the UK
- Give taxpayers a better understanding of what they will be paying tax-wise, and can plan their cash flow effectively
- To help modernise the tax system and close the ‘Tax Gap’ (the difference between tax owed and tax collected)
Penalties and Compliance
A new point-based system for penalties will be coming into place. This means that:
- Each missed quarterly update will be 1 penalty point
- Reaching the point threshold will result in a financial penalty
- Late payment penalties from 26/27 will be proportional to how overdue the payment is
However, HMRC will offer some exemptions for those who cannot reasonably use digital tools, such as individuals with certain disabilities or practical limitations
How to prepare
Check your income threshold – If you made more than 50.000 in the 24/25 tax year, you would need to MTD in April 2026
Choose the MTD-compatible software – Explore the recognised software and find which will work best for you!
Start keeping digital records – Getting used to your chosen software will make the transition smoother than you may think
Sign up for early testing – HMRC encourages taxpayers to join the pilot programme to become familiar with how the new system is to work ahead of the deadline
Overall
Making Tax Digital is a significant change, but one designed to make it simpler and easier to manage over the long term. While this whole ordeal will feel daunting at first, adopting the right software and preparing earlier will make it easier. April 2026 has just begun; it’s time to get ahead before the threshold changes in April 2027, branching out to a larger audience of those using the new system.
If all of that seems far too overwhelming, contact Modina today and let us take this weight off your shoulders and help you make this transition!