Whether you are a sole trader, a landlord, a combination of both or are interested in what this change means, our handy explanation on this new process will explain all you need to know.
Why is HMRC “Making Tax Digital”?
HMRC is rolling out Making Tax Digital (MTD) to modernise the tax system by requiring digital record-keeping and more frequent reporting. Rather than submitting one self-assessment tax return each January, individuals will need to:
- Keep digital records of business or rental income
- Submit quarterly updates to HMRC via approved software
- File a final declaration after year-end, which replaces the traditional self-assessment return
Who must join MTD and when?
For those who are self-employed or earn income from a rental property, from April 2026, HMRC is rolling out MTD for income tax. MTD is based on your combined gross income from self-employment and property, before expenses.
MTD timetable
HMRC will introduce MTD in 3 phases. Each phase will be based on your most recent self-assessment tax return:
- 6 April 2026: If your gross income is over £50,000
- 6 April 2027: If your gross income is over £30,000
- 6 April 2028: If your gross income is over £20,000
Qualifying income will include your total gross turnover from sole-trader activities, UK rental properties and overseas rental properties that you may own. HMRC will combine these in order to decide whether you pass the threshold or not.
Please note that employment income, pensions, dividends and other similar sources of income will not count toward the MTD threshold.
Dates and submission timelines
- Q1 (6 April – 5 July): deadline 7 August
- Q2 (6 July – 5 October): deadline 7 November
- Q3 (6 October – 5 January): deadline 7 February
- Q4 (6 January – 5 April): deadline 7 May
- Final declaration: 31 January following the end of the tax year
Penalties for late submissions
For the 2026/27 submissions, HMRC has confirmed a ‘soft-landing’ for the MTD process. This means that late quarterly submissions will not attract penalties during this initial period. However; penalties will apply to your final declaration and for any late tax payments. From 2027/28, a points based system will apply to missed quarterly deadlines, resulting in a £200 fine once four points have been accumulated.
What will change for self-employed individuals and landlords?
Digital record-keeping will become mandatory, and you will need to maintain digital records of:
- Income received
- Allowable expenses
- Rental costs such as maintenance, repairs, agent fees and insurance
Quarterly submissions will replace single annual reporting
Rather than reporting everything at the end of the year, you will now submit 4 quarterly updates which will summarise your income and expenses.
What to submit each quarter
The documents you will need to submit each quarter will vary depending on whether you are a sole trader or a landlord.
- For sole traders, each quarterly update should include gross income from the business and categorised allowable expenses (cost of sales, admin costs, travel, premises costs etc.).
- For landlords, you will need to submit rental income received and allowable property expenses such as repairs, agent fees, insurance and finance costs.
It is important to note that quarterly submissions are not adjusted for accruals. They report on a cash basis by default unless you opt out for the accrual’s basis.
End-of-year final declaration
While quarterly submissions will take over, you will still be required to complete a final declaration by 31 January each year. This will confirm your total income, tax relief allowances and any other income sources.
This will now replace the self-assessment tax return done in previous years.
This is where you (or us on your behalf) will add in any additional income sources not covered by MTD. This includes: dividends, employment income, savings interest, capital gains, along with personal allowances, pension contributions and gift aid. In simpler terms, this is effectively the equivalent of the current SA100 and supplementary pages.
Who is excluded from MTD?
There are some circumstances where individuals are exempt from MTD, this includes:
- Individuals below the income threshold
- Individuals who are unable to use digital tools due to age, disability or location
- Individuals with religious grounds for exemption
- Individuals within specialist cases such as those who are recipients of Blind Persons Allowance, or those with a trust or estate income
If you wish to apply for an exemption, please follow this link: Apply for an exemption from Making Tax Digital for Income Tax – GOV.UK
MTD and limited company landlords
MTD will not affect landlords who own a property through a limited company as they will report their income and expenses through corporation tax.
What will you need to keep these records:
If you are using an accountant, they will request the required information from you, keep it on file and will submit your quarterly and year-end report on your behalf.
If you are doing this yourself, you will need an HMRC recognised accounting software or a ‘bridging software’ if you would like to keep records on spreadsheets.
HMRC has included a list of improved products on their website, which you can find here: Choose the right software for Making Tax Digital for Income Tax – GOV.UK
How can I prepare for MTD?
If you are doing this yourself, we have a few handy tips:
- Check your income level to see whether you exceed the threshold for the phase-in year
- Start using the digital records immediately, set aside time consistently to upload and track. This will save you time when the return date is approaching
- Keep your paperwork in order and upload it to your digital files as frequently as possible
At PennyBooks, we are always happy to answer any questions you may have about this new process and are ready to assist with submitting your quarterly and year‑end returns. We remain fully engaged with HMRC and are up to date with the latest guidance and any new developments. If you would like to know more or have any questions, send us an email to support@pennybooks.io.
Sarah Morris
