What is Making Tax Digital?
Making Tax Digital (MTD) is HMRC's programme to move the UK tax system fully online. The idea is that businesses keep digital records and submit tax information to HMRC directly from their accounting software — instead of filling in one annual return at the end of the year.
MTD for VAT has been mandatory since 2022 for all VAT-registered businesses. MTD for Income Tax is now rolling out for sole traders and landlords. Corporation tax is expected to follow.
In short: if you run a business in the UK, MTD affects you. The only question is when.
Does Making Tax Digital apply to my business?
For MTD for Income Tax, the answer depends on your annual gross income from self-employment or property:
- Over £50,000/year: Mandatory from April 2026
- Over £30,000/year: Mandatory from April 2027
- Over £20,000/year: Mandatory from April 2028
If you're VAT-registered, MTD for VAT is already mandatory — you must be keeping digital records and submitting VAT returns through HMRC-compatible software right now.
If you're a sole trader with gross income over £20,000, the question is not if MTD applies — it's when. Getting set up now rather than at the deadline means no last-minute panic and no penalties.
What does MTD for Income Tax actually require?
Three things:
1. Digital records
All your income and expenses must be recorded digitally using HMRC-recognised software. Paper records, spreadsheets without bridging software, and manual entry into HMRC's portal do not comply. You need software like Xero, QuickBooks, or FreeAgent — connected directly to HMRC.
2. Quarterly updates
Instead of one annual tax return, you submit four quarterly updates — one for each three-month period of the tax year. Each update summarises your income and expenses for that quarter. This replaces the annual Self Assessment return (though a final year-end declaration is still required).
3. A digital link
There must be a direct digital connection between your records and your submission. You cannot manually re-type figures from a spreadsheet into HMRC's system. The software must connect to HMRC and file directly.
What happens if I don't comply?
HMRC uses a points-based penalty system. You receive one penalty point for each missed or late submission. When your points reach the threshold (four points for quarterly submissions), you receive a £200 fine. Points and fines continue to accumulate until you return to compliance for 24 months.
Separate penalties apply for failing to keep digital records — up to £3,000 per tax year — and for inaccurate submissions, which can be 30% to 100% of any underpaid tax.
The penalties are not theoretical. HMRC has been clear that MTD compliance will be enforced from the applicable dates.