Preparation for Making Tax Digital Compliance Starting from £50,000 Income in 2026
- Adil Akhtar
- 2 days ago
- 14 min read
The Audio Summary of the Key Points of the Article:
Understanding Making Tax Digital and Its Impact on Your Business
What Is Making Tax Digital and Why Should You Care?
Now, if you’re a sole trader or landlord pulling in over £50,000 a year, you’ve probably heard whispers about Making Tax Digital (MTD). It’s HMRC’s big push to drag tax reporting into the digital age, and it’s coming for you starting 6 April 2026. MTD for Income Tax Self Assessment (ITSA) replaces the traditional annual Self Assessment tax return with a system of digital record-keeping and quarterly updates. The goal? To make tax reporting more accurate, reduce errors, and give you a clearer picture of your tax obligations throughout the year. According to HMRC, around 780,000 self-employed individuals and landlords will need to comply from April 2026, with another 970,000 joining by April 2027 when the threshold drops to £30,000.
This isn’t just about swapping paper for pixels. MTD requires you to use software that connects directly to HMRC’s systems, submitting summaries of your income and expenses every three months, followed by a year-end declaration. It’s a shift from the once-a-year tax scramble to a more regular, real-time process. The upside? HMRC claims 69% of businesses using MTD for VAT (introduced in 2019) saw benefits like fewer mistakes and less time spent on tax prep. But let’s be honest—it’s a big change, and getting ready now will save you a headache later.
Who Needs to Comply with MTD in 2026?
So, who exactly is on the hook? If your total qualifying income from self-employment, property, or both exceeds £50,000 in the 2024/25 tax year, you’re mandated to join MTD from 6 April 2026. Qualifying income is your gross income—before any deductions or expenses. For example, if you’re a freelance graphic designer earning £40,000 and rent out a flat for £15,000 annually, your combined £55,000 puts you over the threshold. HMRC will review your 2024/25 Self Assessment return (due by 31 January 2026) and notify you in February 2026 if you need to comply.
Here’s a quick breakdown of the phased rollout:
Tax Year | Income Threshold | Compliance Start Date | Who’s Affected? |
2024/25 | Over £50,000 | 6 April 2026 | Sole traders and landlords |
2025/26 | Over £30,000 | 6 April 2027 | Sole traders and landlords |
2026/27 | Over £20,000 | 6 April 2028 | Sole traders and landlords |
Partnerships are off the hook for now—no start date has been confirmed, but HMRC plans to include them later. If you’re a non-UK resident with UK property income or a UK resident with foreign property income, you’re only subject to MTD if that income exceeds the threshold.
What Counts as Qualifying Income?
Now, let’s clear up what “qualifying income” actually means, because it’s not as simple as your bank balance. It’s the gross amount you earn from self-employment or property before any expenses, allowances, or deductions. For instance, if you’re a landlord and your tenant pays £1,000 a month, but your agent takes a £150 cut, your qualifying income is still £1,000 monthly (£12,000 annually). Similarly, if you’re a gig economy worker and a platform deducts fees before paying you, you count the full amount before those deductions.
Here’s an example to make it crystal: Meet Priya, a part-time yoga instructor and landlord in Bristol. In 2024/25, she earns £35,000 from teaching and £20,000 from renting out a flat. Her total qualifying income is £55,000, so she’s mandated to use MTD from April 2026. If she only earned £25,000 from teaching, she’d be under the threshold and could stick with Self Assessment for now.
Be careful! If you jointly own a property, your share of the income counts. So, if you and your partner own a rental property generating £60,000 annually, your £30,000 share could push you over the threshold if combined with other income. Check your figures early to avoid surprises.
Are There Any Exemptions?
None of us loves jumping through new tax hoops, but some folks get a pass. You’re automatically exempt from MTD if you:
● Don’t have a National Insurance number (e.g., certain non-UK residents).
● Are a foster carer or provide shared lives care—those receipts don’t count toward your qualifying income.
● Are a minister of religion, hold a power of attorney, or are a Lloyd’s underwriter.
You can also apply for an exemption if digital record-keeping isn’t practical—say, you live in a remote part of the Highlands with no reliable internet or have a disability that makes software use difficult. HMRC reviews these applications case by case, so don’t bank on it unless you’ve got a solid reason. If you’re exempt, you’ll continue filing annual Self Assessment returns as usual.
What Does MTD Compliance Actually Involve?
Right, so you’re over the £50,000 mark—what’s next? MTD for Income Tax requires three key actions:
● Digital Record-Keeping: You must store all business transactions (income and expenses) in MTD-compatible software or spreadsheets linked to HMRC via bridging software. No more shoeboxes of receipts.
● Quarterly Updates: Every three months, you’ll submit a summary of your income and expenses to HMRC. For 2026/27, the first update covers 6 April to 5 July 2026, due by 7 August 2026.
● Year-End Declaration: By 31 January following the tax year, you’ll submit a final declaration, wrapping up your tax position and including any non-MTD income (e.g., employment income).
This sounds like a lot, but it spreads the workload. Instead of a frantic January rush, you’re keeping tabs on your finances all year. HMRC’s pilot for MTD for VAT showed 67% of businesses found it reduced errors, so there’s a silver lining if you get organised.
Practical Steps to Prepare for Making Tax Digital Compliance
How Can You Start Preparing for MTD Now?
Now, let’s get down to brass tacks. Preparing for Making Tax Digital (MTD) compliance isn’t something you want to leave until the last minute. With the £50,]=0,000 threshold kicking in on 6 April 2026, starting early will save you stress and potential penalties. The first step is understanding your current record-keeping setup. Are you still scribbling expenses on napkins or using a basic spreadsheet? If so, it’s time to level up. HMRC expects digital records, so you’ll need to transition to MTD-compatible software or ensure your spreadsheets can connect to HMRC’s systems via bridging software.
Begin by auditing your income sources. Pull together your 2024/25 records (or projections if you’re a new business) to confirm you’re over the £50,000 threshold. If you’re close to the line, track your income monthly to avoid surprises when HMRC reviews your Self Assessment return in early 2026. For example, take Gareth, a freelance electrician in Leeds. He earned £48,000 in 2023/24 but landed a big contract in 2024/25, pushing him to £52,000. By checking his income mid-year, he started preparing for MTD early, avoiding a last-minute scramble.
Choosing the Right MTD-Compliant Software
So, the question is: what software should you use? The good news is there’s no shortage of options, but the bad news is not all software is created equal. HMRC requires software that can maintain digital records, submit quarterly updates, and file your year-end declaration. Popular choices include QuickBooks, Xero, FreeAgent, and Sage, all of which integrate with HMRC’s API for seamless submissions. If you’re already using software for VAT or bookkeeping, check if it’s MTD-compatible—most major providers updated their systems after the 2019 MTD for VAT rollout.
Here’s a comparison of key features for three popular options (based on HMRC’s approved software list as of April 2025):
Software | Key Features | Starting Cost | Best For |
QuickBooks | Invoicing, expense tracking, MTD-compliant submissions, mobile app | £8/month | Freelancers and small businesses |
Xero | Real-time bank feeds, automated expense categorisation, multi-user access | £10/month | Growing businesses with complex needs |
FreeAgent | Simplified interface, landlord-specific features, HMRC integration | £9.50/month | Sole traders and landlords |
If you’re on a tight budget, free options like Wave exist for basic needs, but they lack advanced features like automated tax calculations. For those wedded to spreadsheets, bridging software like TaxCalc or GoSimpleTax can link your Excel files to HMRC. Be careful! Free or cheap tools might save money upfront but could lack robust support, costing you time later.
Consider your business needs. If you’re a landlord like Siobhan in Manchester, who manages two rental properties and a part-time consultancy, you’ll want software with landlord-specific features, like FreeAgent’s rental income tracking. Test software with free trials—most providers offer 30 days—to ensure it fits your workflow before committing.
Setting Up Digital Record-Keeping
Right, you’ve picked your software—now what? Transitioning to digital record-keeping is the backbone of MTD compliance. Start by digitising your existing records. Scan receipts, invoices, and bank statements, and organise them in your chosen software. HMRC doesn’t require you to submit receipts with quarterly updates, but you must keep digital records for six years in case of an audit. Apps like Receipt Bank or AutoEntry can automate this by extracting data from scanned documents, saving you hours.
Next, categorise your income and expenses correctly. MTD requires you to report broad categories (e.g., “self-employment income,” “property expenses”) rather than detailed breakdowns, but accurate categorisation prevents errors. For instance, if you’re a self-employed carpenter like Ewan in Glasgow, you’d separate tool purchases (capital expenses) from travel costs (allowable expenses). Mis categorising could inflate your tax bill or trigger HMRC scrutiny.
Here’s a quick checklist to set up your digital records:
● Link your bank account: Most MTD software offers bank feeds to track transactions in real time.
● Set up categories: Align with HMRC’s allowable expenses (e.g., travel, office costs, professional fees).
● Back up regularly: Store records securely in the cloud or on an external drive to avoid data loss.
● Test your setup: Run a mock quarterly update to spot any issues before April 2026.
Mastering Quarterly Updates
Now, let’s talk about those quarterly updates—they’re the heart of MTD. Starting 6 April 2026, you’ll submit a summary of your income and expenses every three months. The deadlines for 2026/27 are:
Quarter | Period Covered | Submission Deadline |
Q1 | 6 Apr–5 Jul 2026 | 7 Aug 2026 |
Q2 | 6 Jul–5 Oct 2026 | 7 Nov 2026 |
Q3 | 6 Oct–5 Jan 2027 | 7 Feb 2027 |
Q4 | 6 Jan–5 Apr 2027 | 7 May 2027 |
These updates don’t require you to pay tax quarterly—just report your figures. Your actual tax bill is calculated after your year-end declaration, due by 31 January 2028 for the 2026/27 tax year. However, you can make voluntary payments on account to spread the cost, which is handy if you expect a big tax bill.
Here’s where it gets practical: Use your software’s dashboard to monitor your income and expenses regularly. For example, Aisha, a freelance copywriter in London, sets aside one hour monthly to update her Xero account, ensuring her quarterly submissions take minutes, not days. If your income fluctuates (e.g., seasonal businesses), estimate conservatively to avoid overpaying tax early.
Handling Edge Cases and New Businesses
Now, consider this: If you’re starting a business mid-year or have irregular income, MTD can feel like a minefield. Say you launch a catering business in August 2025. Your income might not hit £50,000 in 2024/25, but if projections suggest you’ll exceed it in 2025/26, you’ll need to join MTD from April 2026. HMRC allows voluntary MTD participation, which can help you get used to the system early. For landlords with joint ownership, like Tomos and Eleri in Cardiff sharing a £70,000 rental income, each reports their £35,000 share. If Tomos earns £20,000 from freelancing, his total £55,000 triggers MTD, but Eleri’s £35,000 doesn’t—yet.
If you’re just under the threshold, don’t relax too much. The threshold drops to £30,000 in April 2027 and £20,000 in April 2028, so future-proofing your setup now makes sense. Plus, HMRC’s data shows 12% of businesses under thresholds opt into MTD voluntarily for smoother bookkeeping.
Avoiding Penalties and Staying Compliant
Be careful! HMRC isn’t messing around with compliance. Failing to submit quarterly updates or using non-compatible software can lead to penalties, starting at £100 for late submissions, with daily fines of £10 after three months. In 2023/24, HMRC issued over £15 million in penalties for late Self Assessment returns, and MTD’s stricter deadlines could ramp this up. To stay safe, set calendar reminders for submission deadlines and double-check your software’s HMRC compatibility via www.gov.uk/guidance/use-software-to-send-income-tax-updates.
Key Takeaways for Mastering MTD Compliance in 2026
Summary of the Most Important Points
Now, let’s wrap things up with the essentials you need to nail Making Tax Digital (MTD) compliance. Whether you’re a sole trader juggling freelance gigs or a landlord managing rental properties, these points distil everything you need to know to stay on top of MTD starting April 2026. Each one’s designed to keep you compliant, save time, and avoid those dreaded HMRC penalties.
MTD for Income Tax kicks in from 6 April 2026 for sole traders and landlords with qualifying income over £50,000, requiring digital record-keeping and quarterly updates instead of annual Self Assessment returns.
Qualifying income includes gross earnings from self-employment and property before deductions, so check your 2024/25 figures to confirm if you’re over the £50,000 threshold.
You’re exempt from MTD if you lack a National Insurance number, are a foster carer, or face practical barriers like no internet access, but you must apply for exemptions through HMRC.
Choose MTD-compliant software like QuickBooks, Xero, or FreeAgent that suits your business needs, and test it with free trials to ensure it integrates with HMRC’s systems.
Start digitising records now—scan receipts, link bank accounts, and categorise expenses correctly to streamline quarterly updates and avoid errors.
Quarterly updates are due every three months (e.g., 7 August 2026 for Q1), summarising income and expenses, with a year-end declaration by 31 January to finalise your tax.
New businesses or those with fluctuating income should project 2025/26 earnings to prepare for MTD, and voluntary participation can ease the transition.
Joint property owners report only their share of rental income, which may push some over the £50,000 threshold when combined with other income.
Penalties for non-compliance start at £100 for late submissions, with daily fines possible, so set reminders and verify your software’s compatibility via www.gov.uk/guidance/use-software-to-send-income-tax-updates.
Future-proof your setup as thresholds drop to £30,000 in 2027 and £20,000 in 2028, making early adoption of digital tools a smart move.
Why Getting Ahead Matters
Right, so you’ve got the key points—what now? Getting ahead of MTD isn’t just about dodging penalties; it’s about making your life easier. Take someone like Meera, a landlord in Birmingham who also runs a small catering business. She started using FreeAgent in 2025, well before the 2026 deadline. By the time MTD kicked in, she was submitting quarterly updates in minutes, her expenses were neatly categorised, and she avoided the stress of a last-minute software switch. HMRC’s 2024/25 data suggests 72% of early adopters found MTD reduced their admin time, so starting now could give you a similar edge.
If you’re still on the fence, consider the peace of mind. Knowing your records are digital, compliant, and ready for HMRC’s scrutiny means you can focus on growing your business, not wrestling with tax forms. Plus, with thresholds dropping in future years, you’ll be ahead of the curve.
Final Tips for Staying on Track
Now, here’s a parting bit of advice: don’t go it alone if you’re unsure. While MTD software is user-friendly, complex situations—like overseas income or multiple rental properties—might need a professional touch. HMRC’s helpline (0300 200 3310) or an accountant can clarify tricky bits, especially for edge cases like mid-year business starts. For instance, Dafydd, a Swansea-based photographer, hired an accountant for a one-off MTD setup review, saving him from misreporting his irregular freelance income.
Also, keep an eye on HMRC updates. The MTD rules are still evolving, and pilots running in 2025/26 may bring tweaks. Check www.gov.uk/guidance/using-making-tax-digital-for-income-tax regularly for the latest guidance. By staying proactive, you’re not just complying—you’re setting yourself up for smoother, stress-free tax years.
FAQs
What is the purpose of Making Tax Digital for Income Tax?
A1: Making Tax Digital for Income Tax aims to modernise the UK tax system by requiring digital record-keeping and quarterly submissions, reducing errors and providing real-time tax insights for businesses and individuals.
Q2: How does Making Tax Digital differ from the current Self Assessment system?
A2: Unlike the annual Self Assessment return, MTD requires quarterly digital submissions of income and expenses via compatible software, with a final year-end declaration to confirm the tax position.
Q3: Can someone below the £50,000 threshold opt into MTD voluntarily?
A3: Yes, individuals with income below £50,000 can voluntarily join MTD to benefit from streamlined record-keeping and to prepare for future lower thresholds.
Q4: What happens if a business misses an MTD quarterly update deadline?
A4: Missing a quarterly update deadline can result in a £100 penalty, with additional daily fines of £10 after three months, depending on the delay.
Q5: Does MTD for Income Tax apply to limited companies?
A5: No, MTD for Income Tax applies only to sole traders and landlords, not limited companies, which are subject to different tax reporting requirements.
Q6: Can spreadsheets be used for MTD compliance?
A6: Spreadsheets can be used if paired with bridging software that connects to HMRC’s systems for submitting quarterly updates and year-end declarations.
Q7: How does MTD affect tax payments for self-employed individuals?
A7: MTD doesn’t change when tax is paid; payments on account or final tax bills are still due by 31 January, but quarterly updates provide better visibility of tax liabilities.
Q8: What records must be kept digitally under MTD?
A8: All business transactions, including income, expenses, invoices, and receipts, must be stored digitally in MTD-compliant software for at least six years.
Q9: Can a non-UK resident landlord comply with MTD?
A9: Non-UK resident landlords with UK property income over £50,000 must comply with MTD, using compatible software to report their UK income.
Q10: How does MTD handle income from multiple businesses?
A10: Income from multiple self-employed businesses or properties is combined to determine if the £50,000 threshold is met, with all qualifying income reported under MTD.
Q11: What support does HMRC offer for MTD compliance?
A11: HMRC provides guidance, webinars, and a helpline (0300 200 3310) to assist with MTD setup, software selection, and exemption applications.
Q12: Can MTD software automatically calculate tax owed?
A12: Many MTD-compliant software options estimate tax liabilities based on quarterly data, but the final tax calculation is confirmed in the year-end declaration.
Q13: How does MTD affect landlords with furnished holiday lettings?
A13: Furnished holiday letting income counts toward the £50,000 threshold, and landlords must report it under MTD if their total qualifying income exceeds this amount.
Q14: What happens if someone’s income drops below £50,000 after joining MTD?
A14: If income falls below the threshold, individuals can apply to exit MTD and revert to Self Assessment, subject to HMRC approval.
Q15: Can an accountant file MTD updates on behalf of a client?
A15: Yes, accountants can manage MTD submissions if authorised as an agent through HMRC’s online services, using compatible software.
Q16: How does MTD impact tax reliefs and allowances?
A16: MTD doesn’t change tax reliefs or allowances; these are still claimed in the year-end declaration, but digital records make tracking them easier.
Q17: What are the costs of MTD-compliant software?
A17: Costs vary, with basic plans starting at £8–£10 per month for software like QuickBooks or FreeAgent, while free options like Wave exist for simpler needs.
Q18: Can someone appeal an MTD penalty?
A18: Yes, penalties can be appealed if there’s a reasonable excuse, such as technical issues or personal circumstances, by contacting HMRC within 30 days.
Q19: How does MTD affect those with both employment and self-employment income?
A19: Only self-employment income counts toward the £50,000 threshold, but employment income must be included in the year-end declaration for a complete tax picture.
Q20: What should new businesses do to prepare for MTD?
A20: New businesses should estimate their 2025/26 income, adopt MTD-compliant software early, and consider voluntary MTD participation to build compliant habits.
About The Author:
Adil Akhtar, ACMA, CGMA, CEO and Chief Accountant of Pro Tax Accountant, is an esteemed tax blog writer with over 10 years of expertise in navigating complex tax matters. For more than three years, his insightful blogs have empowered UK taxpayers with clear, actionable advice. Leading Advantax Accountants as well, Adil blends technical prowess with a passion for demystifying finance, cementing his reputation as a trusted authority in tax education.
Email: adilacma@icloud.com
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