Making Tax Digital for Income Tax (MTD) for sole traders and landlords

If you’re self-employed or a landlord, you will usually file a Self Assessment tax return with HMRC and pay any tax you owe by January 31st each year. Since April 2026, this process has changed due to Making Tax Digital for Income Tax (MTD ITSA).

As a result, most sole traders and landlords must now (or soon) maintain digital accounting records and submit quarterly updates to HMRC, as well as file a final declaration each year.

In this article, we explain what the new rules mean, and what to do if and when you fall within their scope.

Who is affected by MTD for Income Tax?

The new rules may already apply if you’re already registered for Self Assessment and your income comes from self-employment, rental property, or a mixture of both.

You must join if your qualifying income exceeds the current threshold, based on data contained in your previous Self Assessment return:

• Over £50,000 for the 2024/25 tax year. Join from 6th April 2026
• Over £30,000 for the 2025/26 tax year. Join from 6th April 2027
• Over £20,000 for the 2026/27 tax year and later. Join from 6th April 2028

Your qualifying income is your gross income, not profits.

HMRC should inform you automatically if you need to join MTD, but it’s worth checking your previous tax return just to make sure.

You can read the official GOV.UK guide to MTD ITSA here

What is the definition of ‘qualifying income’?

• Your gross self-employment trading income
• Your gross property rental income (before you deduct expenses. This includes income from furnished lettings or holiday lets)

It does not include:

• PAYE income from employment
• Pensions
• Dividends
• Income from savings or investments
• Capital gains
• Partnership income (in the initial phases)

You may also have small amounts of income which don’t need to be included if they’re already covered by the trading allowance or rent-a-room relief.

If you have income as a landlord and co-own a property, only the proportion relating to your share will be included.

If your business started mid-year, your estimated annual income will be annualised to see if your total gross income passes the current threshold.

Phased rollout and deadlines

MTD for Income Tax is being introduced in stages over the next few years.

• Phase 1: 6th April 2026 – if you have a qualifying income over £50,000 (based on 2024/25 return)
• Phase 2: 6th April 2027 – if you have a qualifying income over £30,000 (based on 2025/26 return)
• Phase 3: 6th April 2028 – if you have a qualifying income over £20,000 (based on 2026/27 return)

Once you join MTD, you must start keeping digital records from the start of the tax year in question.

There is also a fixed pattern for submitting quarterly updates, which is two months and seven days after the end of each quarter:

• For the quarter ending 5th July, you must submit by 7th August
• Quarter ending 5th October, submit by 7th November
• Quarter ending 5th January, submit by 7th February
• Quarter ending 5th April, submit by 7th May

There are two options available to you in terms of reporting – you can either report using tax year quarters or opt for calendar quarters. Either way is supported by most accounting software.

You still need to submit a full Self Assessment return, now called the Final Declaration, by 31 January after the end of the previous tax year, using MTD-compatible software.

The Final Declaration pulls in all your income, including employment, dividends and savings, along with any final adjustments to your quarterly updates.

Don’t forget that you also have to pay any tax you owe by the 31st January.

What are your obligations under MTD?

Once you join MTD, you automatically have a number of obligations to keep on top of.

• Keep digital records of all income and expenses using MTD-compatible software. You can correct records later if needed.
• Submit quarterly updates to HMRC that summarise income and expenses for each period (you do not need to calculate how much tax is due at this stage). These are summary totals only and can be adjusted later as part of the final declaration.
• Submit your Final Declaration (the end-of-year tax return) via digital accounting software.
• You must still pay your tax liabilities by the normal date – the 31st January following the tax year in question. This includes income tax and any Class 2/4 NICs.

Software and digital record-keeping requirements

Your software options include:

• Fully MTD-compatible accounting software, such as FreeAgent and Xero.
• Bridging software that links to spreadsheets.
• There are also some free or low-cost tools you can use if your accounts are very simple.

To be compliant with MTD, your records must be kept in what HMRC refers to as functionally compatible software.

In practice, this means software that can both store your records digitally and submit updates to HMRC via its API connection.

If you use spreadsheets, you cannot submit directly from them. Instead, you must use bridging software to transfer the data to HMRC in the correct format.

Most modern platforms automate this process. They can:

• Import transactions directly from your bank account using bank feeds
• Categorise income and expenses as you go
• Store digital copies of receipts
• Generate quarterly summaries automatically
• Submit updates to HMRC with minimal manual input

If you don’t already use accounting software, take a look at this official guidance, or ask an accountant for advice on the best platform to use.

Your accountant (if you use one) will be familiar with the new rules. They will be able to help you with your quarterly and final submissions, although it’s worth remembering that you are ultimately responsible for the accuracy of your records and updates.

Beware of possible penalties

The MTD for Income Tax regime includes a points-based penalty system for late submissions, replacing the existing fixed penalties under Self Assessment.

Each time you miss a submission deadline, you receive a penalty point. Once you reach a certain number of points (4 if you submit quarterly), a £200 penalty will be triggered.

And if you miss further deadlines, HMRC will issue additional £200 penalties.

You can reset your points to zero over time, but you’ll need to first complete any outstanding submissions and a period of full compliance.

These penalties apply to late submissions. Errors in your figures are dealt with separately under the existing accuracy penalty rules. There are also late payment penalties if you don’t pay your tax bills on time!

Exemptions and special cases

Some individuals are exempt from MTD where they are digitally excluded, for example due to age, disability, or limited access to reliable broadband.

Some exemptions are applied automatically. If not, you’ll need to contact HMRC to request one.

There are some other situations where MTD may not apply immediately:

• Your income is below the current threshold
• Certain specialised income types (check the qualifying income guidance carefully)
• Trustees, personal representatives, or non-residents in specific circumstances

You can read more details here: Find out if you can get an exemption from Making Tax Digital for Income Tax.

Can you leave MTD in the future?

If your qualifying income drops significantly after you’ve joined MTD, you won’t usually be able to leave straight away.

Once you’re in the system, you generally have to stay for three consecutive tax years where your gross self-employment and property income stay below the relevant threshold before you can notify HMRC and opt out.

During those years, you’ll still need to file quarterly updates and submit the final declaration.

However, if you permanently stop all your self-employment or rental activity (for example, you close the business completely or sell all your properties and receive no further qualifying income), you can usually exit much sooner.

If your income drops significantly in a future tax year, you may be able to leave MTD, but the rules for exiting are different.

In all of these cases, you should contact HMRC via phone or webchat.

Some practical steps to take to prepare for MTD

If you are a sole trader or landlord and have not already joined MTD, here are some steps to prepare for joining later.

• Look up the figures from last year’s Self Assessment to estimate your qualifying income under the MTD rules.
• Read the official HMRC guides to the new rules. Start with their step-by-step guide.
• Research what MTD-compatible software is available for sole traders. Many offer free trials.
• Start practising digital record-keeping for the current tax year, even if it’s not mandatory for you at the moment.
• If you already have an accountant, they should have already sent you information about MTD. If not, make sure you get in touch with them, especially if your joining date is imminent.
• If you look after your own accounts, it’s worth preparing in advance – even using digital accounting software now, even if your joining date isn’t immediate.

Although the move to quarterly MTD reporting may seem like a stressful change, it is important to remember that the main thing to get used to is how your accounts are organised.

You have to file quarterly updates, but there are no changes to how your tax is calculated or to the final payment deadline (31st January).

Do you have any MTD-related questions?

We can help you with all aspects of MTD for Income Tax – from choosing the right accounting software to filing updates on your behalf.

Get in touch today by calling 0207 096 2659 or book a free discovery call with our expert accountants who can guide you further.