Making Tax Digital (MTD) is HMRC’s programme to modernise the UK tax system by requiring businesses and individuals to keep digital records and submit tax information using compatible software rather than paper forms. MTD for VAT is already mandatory for most VAT-registered businesses, and MTD for Income Tax Self Assessment (MTD for ITSA) is being phased in from April 2026.
MTD for VAT — Already in Effect
Since April 2022, all VAT-registered businesses must:
- Keep their VAT records digitally using MTD-compatible software
- Submit VAT returns directly from that software to HMRC (not by typing figures into the HMRC portal)
- Ensure digital links between all parts of their record-keeping system (no manual re-keying between spreadsheets)
This applies regardless of turnover. Even voluntarily VAT-registered businesses below the £90,000 threshold must comply.
MTD for Income Tax Self Assessment (ITSA)
MTD for ITSA will require self-employed individuals and landlords to submit quarterly updates to HMRC instead of a single annual tax return. The rollout timeline is:
| Phase | Who Is Affected | Start Date |
|---|---|---|
| Phase 1 | Self-employed / landlords with income over £50,000 | 6 April 2026 |
| Phase 2 | Self-employed / landlords with income over £30,000 | 6 April 2027 |
| Future phases | Those with income below £30,000 | To be confirmed |
Under MTD for ITSA, affected taxpayers must:
- Use MTD-compatible software to keep digital records of income and expenses
- Send quarterly summary updates to HMRC (by the 7th of the month following each quarter end)
- Submit a final declaration after the tax year end (replacing the Self Assessment return)
What Software Do You Need?
HMRC maintains a list of MTD-compatible software on GOV.UK. Options range from free basic tools to full accounting packages. Popular choices include Xero, QuickBooks, FreeAgent, and Sage. Bridging software is also available if you prefer to keep records in spreadsheets but need to submit digitally.
Exemptions
Certain groups are exempt from MTD requirements:
- Those who are digitally excluded (e.g., due to age, disability, or remote location with no internet)
- Religious objections to using electronic communications
- Insolvency situations
- Taxpayers for whom HMRC agrees it is not reasonably practicable to use digital tools
Exemptions must be applied for and approved by HMRC.
Penalties Under the New System
MTD for ITSA will use a points-based penalty system:
- You receive one point for each late submission
- Once you reach the penalty threshold (typically 4 points for quarterly obligations), you receive a £200 penalty
- Points expire after a period of compliance
Late payment penalties work separately, starting at 2% of the tax due if paid more than 15 days late, with further charges at 30 days and then daily interest.
Key Takeaway
If you are self-employed or a landlord with annual income above £50,000, you should start preparing now. Choose MTD-compatible software, begin keeping digital records, and familiarise yourself with the quarterly reporting process before the April 2026 deadline arrives.