Chapter 11: Making Tax Digital -- What's Changing

Tax year notice: This guide uses 2025/26 tax year figures (6 April 2025 -- 5 April 2026). Check gov.uk for the latest rates and MTD timeline.

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What Making Tax Digital is

Making Tax Digital (MTD) is the UK government's plan to move the tax system from annual paper returns to quarterly digital updates. Instead of filing one Self Assessment return at the end of the year, you'll submit summary data to HMRC four times a year through compatible software, then a final declaration after the year ends.

It's the biggest change to how self-employed people report their tax since Self Assessment was introduced in 1996.

What it is NOT:

• It's not paying tax quarterly (you still pay on the existing schedule)
• It's not a quarterly tax return (it's a summary update, not a full return)
• It's not optional (once it applies to you, you must comply)

The timeline: Who and when

MTD for Income Tax Self Assessment (MTD ITSA) is being introduced in phases based on your income:

Date	Who it applies to	Estimated people affected
April 2026	Self-employed individuals and landlords with income over 50,000	~780,000
April 2027	Self-employed individuals and landlords with income over 30,000	~970,000 additional
April 2028	Self-employed individuals and landlords with income over 20,000	Further expansion

"Income" here means your gross self-employed income or rental income before expenses -- not your profit. If Sam's Unbought sales are 55,000 (even if profit is only 15,000), Sam falls into the April 2026 cohort.

Key point: MTD for VAT is already mandatory. If you're VAT-registered, you're already filing digital VAT returns through compatible software. MTD ITSA extends this to income tax.

What you'll need to do

Under MTD ITSA, your obligations change from one annual return to five submissions per year:

1. Keep digital records

You must use MTD-compatible software to record your income and expenses digitally. Spreadsheets alone are not sufficient -- you need software that can submit data to HMRC through their API.

The records must include:

• All business income (each transaction, not just totals)
• All business expenses (each transaction with category)
• The date, amount, and category of each transaction

This is essentially what Chapter 7 already described -- if you're using accounting software with bank feeds, you're already keeping MTD-compliant records.

2. Submit quarterly updates

Four times a year, you submit a summary of your income and expenses to HMRC through your software. The quarterly periods and deadlines are:

Quarter	Period	Deadline
Q1	6 April -- 5 July	7 August
Q2	6 July -- 5 October	7 November
Q3	6 October -- 5 January	7 February
Q4	6 January -- 5 April	7 May

Your software submits the update to HMRC automatically -- you review the figures and confirm. It's not a full tax return. It's a progress report.

3. Submit an End of Period Statement (EOPS)

After the tax year ends (5 April), you submit an End of Period Statement confirming that your quarterly figures are complete and accurate. You can make adjustments at this stage -- for example, adding capital allowances or adjusting for stock held at year-end.

4. Submit a Final Declaration

This replaces the Self Assessment tax return. It pulls together your self-employment data (from the quarterly updates and EOPS), any employment income, other income, and tax reliefs into a final tax calculation.

Deadline: 31 January following the tax year (same as the current Self Assessment deadline).

So the total submissions per year are: 4 quarterly updates + 1 EOPS + 1 Final Declaration = 6 submissions, though the EOPS and Final Declaration can often be submitted together.

What changes and what stays the same

Aspect	Currently (Self Assessment)	Under MTD ITSA
Record-keeping	Any format (paper, spreadsheet, software)	Must use MTD-compatible software
Reporting frequency	Once a year	Quarterly updates + Final Declaration
Tax calculation	Calculated on your return	Software estimates throughout the year
Payment dates	31 January + 31 July (Payments on Account)	Same -- no change to payment dates
Payment amounts	Based on annual return	Same -- quarterly updates don't trigger payments
Deadlines	File by 31 January	Quarterly: ~5 weeks after quarter end. Final: 31 January
Penalties	Fixed penalties for late filing	Points-based system (see below)

The new penalty system

MTD ITSA introduces a points-based penalty system, replacing the fixed penalties described in Chapter 8:

Late submission:

• Each late quarterly update earns 1 penalty point
• When you reach 4 points, you receive a 200 penalty
• Every subsequent late submission triggers another 200 penalty
• Points expire after 24 months of compliance

Late payment:

• No penalty if paid within 15 days of the due date
• 15--30 days late: penalty calculated at an annualised rate on the amount owed
• 30+ days late: additional daily penalties accrue

This is generally more forgiving than the current system for occasional late submissions (you get four chances before a penalty) but stricter for persistent lateness.

The soft landing (first year)

For the first cohort (April 2026, income over 50,000), HMRC has announced a soft landing period: you won't receive late submission penalties for your first four quarterly updates. This gives you a full year to get used to the system.

This grace period does not apply to the April 2027 cohort onwards. If you fall into the 30,000+ bracket, you're expected to be ready from day one.

Key point: The soft landing means no penalties for late quarterly updates in year one. It does NOT mean you can skip them entirely. You must still submit.

Getting ready

If MTD applies to you (or will soon), here's what to do now:

1. Check your software is MTD-compatible

HMRC maintains a list of compatible software at gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax. If your current accounting software is on the list, you're mostly set. If not, switch before the deadline.

2. Ensure digital records

All income and expenses must be recorded digitally in compatible software. If you're using bank feeds and categorising transactions (as described in Chapter 7), you already meet this requirement.

3. Separate personal and business

MTD requires clear business records. If your personal and business spending is mixed in one account, now is the time to separate them.

4. Get comfortable with quarterly reviews

Even before MTD is mandatory, start reviewing your income and expenses quarterly. This builds the habit and means no surprises at year-end.

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Real Scenario: Sam's MTD preparation

Sam's Unbought business now turns over 65,000 per year. With income above 50,000, Sam falls into the April 2026 cohort -- MTD ITSA is mandatory from the start.

Sam's current setup:

• Accounting software with bank feeds (already MTD-compatible)
• Transactions categorised daily
• Monthly profit reviews

What changes for Sam:

• Four quarterly updates submitted through the software (click a button, review figures, confirm)
• An End of Period Statement after 5 April
• A Final Declaration by 31 January (replaces the old SA return)

What stays the same:

• Payment dates (31 January and 31 July)
• Tax calculation method
• Record-keeping approach (already digital)

Sam's quarterly update for Q1 (6 April -- 5 July) would show:

• Income: 16,250 (quarter of 65,000)
• Expenses: 5,200
• Estimated profit: 11,050

This is submitted by 7 August. The software handles the submission -- Sam just reviews and confirms.

Sam's honest assessment: "It's basically what I'm already doing, but now I press 'submit' four times a year instead of once."

Real Scenario: Steve's timeline

Steve's self-employed income is 36,000 -- below the 50,000 threshold for April 2026 but above the 30,000 threshold for April 2027.

Steve's MTD timeline:

• April 2026: Not affected (income under 50,000)
• April 2027: MTD mandatory (income over 30,000)
• Steve has 12 months to prepare

Steve's current setup:

• Basic accounting app (needs to check MTD compatibility)
• Receipts photographed and uploaded
• Bank feed connected

Steve's action plan:

1. Check if current software is on HMRC's compatible list (if not, switch by March 2027)
2. Ensure all income sources are tracked digitally (some cash jobs currently recorded in a notebook)
3. Start quarterly reviews now to build the habit
4. By April 2027, be ready for quarterly submissions

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Decision Tree: When does MTD apply to me?

• Is your self-employed or rental income over 50,000? -- MTD mandatory from April 2026
• Is your income over 30,000? -- MTD mandatory from April 2027
• Is your income over 20,000? -- MTD mandatory from April 2028
• Is your income under 20,000? -- Not yet mandatory. Keep watching for further announcements.

Checklist: Getting MTD-ready

• Check your total self-employed income (not profit) against the thresholds
• Verify your accounting software is on HMRC's MTD-compatible list
• Ensure all income and expenses are recorded digitally (not just paper)
• Open a separate business bank account if you haven't already
• Connect your bank account to your accounting software via bank feed
• Set calendar reminders for quarterly deadlines (7 Aug, 7 Nov, 7 Feb, 7 May)
• Do a practice quarterly review this month -- could you submit your figures now?

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Jargon Buster

Term	Plain English
MTD (Making Tax Digital)	The government programme moving tax reporting from annual paper returns to quarterly digital updates
MTD ITSA	Making Tax Digital for Income Tax Self Assessment -- the specific MTD programme for self-employed people and landlords
MTD-compatible software	Accounting software that can submit data directly to HMRC through their digital interface
Quarterly update	A summary of income and expenses for a 3-month period, submitted to HMRC through compatible software
End of Period Statement (EOPS)	A year-end confirmation that your quarterly figures are complete and accurate
Final Declaration	The replacement for the Self Assessment tax return, pulling together all income sources for the year
Soft landing	HMRC's grace period where late submission penalties are waived for the first cohort's first year
Penalty points	The new system where late submissions earn points; penalties trigger at 4 points
Digital records	Income and expense records kept in MTD-compatible software, not paper or non-connected spreadsheets