What is Making Tax Digital for Income Tax Self Assessment (MTD for ITSA)?
MTD for ITSA marks the most significant transformation of the UK’s Self Assessment system since it was first introduced It is a government initiative led by HMRC to modernise tax reporting by moving it entirely online. For millions of self-employed individuals and landlords, this means the end of the single annual tax return and a move to a new system of digital record-keeping and quarterly updates.
This change is a source of considerable confusion and anxiety. Recent data shows a massive surge in online searches for information about MTD, which coincides with reports of HMRC struggling to handle the volume of calls for guidance. This indicates a “support vacuum” where taxpayers are turning to the internet for clear, reliable advice. This guide is designed to fill that vacuum, providing a step-by-step plan to help you understand what MTD for Income Tax Self Assessment (ITSA) is, who it affects, and exactly what you need to do to prepare for the deadline.
The MTD for ITSA Timeline: Who is Affected and When?
The rollout of MTD for ITSA is being phased in based on a taxpayer’s total ‘qualifying income’ from self-employment and property letting. This is a critical detail: the threshold is based on your gross income, before any expenses or allowances are deducted.
The timeline is as follows:
| If your qualifying annual income is… | You must follow MTD rules from… | Based on income from tax year… |
| Over £50,000 | 6 April 2026 | 2024 to 2025 |
| Over £30,000 | 6 April 2027 | 2025 to 2026 |
| Over £20,000 | 6 April 2028 (Proposed) | 2026 to 2027 |
Source:(https://www.gov.uk/guidance/check-if-youre-eligible-for-making-tax-digital-for-income-tax)
HMRC will assess your qualifying income based on your submitted Self Assessment tax return for the relevant year. For example, your 2024/25 tax return (due by 31 January 2026) will determine if you must join MTD from April 2026. Business partnerships will be required to join MTD for ITSA at a later date, which has not yet been confirmed by the government.
MTD for ITSA Requirements: What Will You Actually Have to Do?
The new system replaces the annual tax return with four key obligations that must be managed through MTD-compatible software.
1. Keep Digital Records
Under MTD, paper-based bookkeeping will no longer be sufficient for your primary records. You are legally required to keep digital records of all your business income and expenses. This means every transaction must be recorded in a compatible digital format.
2. Use MTD-Compatible Software
You must use software that can connect directly to HMRC’s systems via an Application Programming Interface (API). This is a fundamental requirement. For those who are comfortable with spreadsheets, it is still possible to use them, but they must be digitally linked to HMRC using ‘bridging software’—you cannot simply copy and paste totals into an online form.
3. Send Quarterly Updates
Instead of one annual return, you will be required to send a summary of your business income and expenses to HMRC every quarter. These updates are generated by your software based on the digital records you keep. The standard deadlines are:
- Quarter 1 (6 April – 5 July): Submission deadline 7 August
- Quarter 2 (6 July – 5 October): Submission deadline 7 November
- Quarter 3 (6 October – 5 January): Submission deadline 7 February
- Quarter 4 (6 January – 5 April): Submission deadline 7 May.
It is crucial to understand that quarterly updates do not mean you have to pay tax quarterly. This is a common and stressful misconception. The existing payment deadlines of 31 January and 31 July for Payments on Account remain unchanged.
4. Submit a Final Declaration
After the end of the tax year, you will need to finalise your tax position. This involves submitting an End of Period Statement (EOPS) for each business and a Final Declaration for all of your income. This is where you will:
- Make final adjustments to your business income (e.g., for private use of expenses).
- Claim any allowances and reliefs (e.g., capital allowances).
- Declare any other non-business income, such as from PAYE employment, savings interest, or dividends.
The deadline for this final submission and for paying any tax owed remains 31 January following the end of the tax year.
Choosing the Right MTD Software: Your Most Important Decision
The transition to MTD introduces a new cost and administrative challenge for many: selecting and using compatible software. This is a critical decision that will shape your entire tax compliance process.
What is MTD-Compatible Software?
There are two main categories of software that meet HMRC’s requirements:
- Integrated Accounting Software: This includes well-known platforms like QuickBooks, Xero, and FreeAgent. These applications handle all aspects of your bookkeeping, from invoicing and expense tracking to generating and submitting your MTD updates directly to HMRC. The benefits include improved accuracy, significant time savings, and better real-time visibility of your finances.
- Bridging Software: This is a tool that connects a spreadsheet to HMRC’s MTD system. It allows you to continue using your existing spreadsheets for record-keeping while still being compliant with the digital submission requirement.
How to Choose
When selecting software, consider the following factors:
- Ease of Use: Is the interface intuitive and easy to navigate, especially if you are not tech-savvy?
- Features: Does it offer the tools you need, such as invoicing, receipt scanning, expense tracking, or bank account integration?
- Cost: Prices vary, so find a solution that fits your budget. Some providers offer free or low-cost versions for simpler businesses.
- Support: Check what level of customer support is available if you run into problems.
HMRC provides a list of recognised software providers on its website. If you use an accountant, it is essential to speak with them before choosing, as they may have a preferred platform that integrates with their systems.
How to Prepare Now: Your MTD for ITSA Action Plan
Although the first deadline is April 2026, waiting until the last minute is a high-risk strategy. Starting your preparations now will make the transition smoother and less stressful.
Step 1: Confirm Your Start Date
Review your income for the 2024/25 tax year as soon as possible after 5 April 2025. This will tell you definitively whether you fall into the first wave of MTD mandation. Don’t wait until the January 2026 filing deadline to find out.
Step 2: Go Digital with Your Record-Keeping
Do not wait until you are mandated to start keeping digital records. Begin using MTD-compatible software or a well-structured spreadsheet now. This will help you build the habit of regular bookkeeping, which will be essential under the quarterly update system.
Step 3: Separate Your Finances
If you haven’t already, open a dedicated business bank account. Linking this account to your accounting software can automate much of your income and expense tracking, dramatically reducing your administrative workload.
Step 4: Research and Choose Your Software
Take the time now to research different software options. Many providers offer free trials, allowing you to find the platform that best suits your business needs before you have to commit.
Step 5: Talk to Your Accountant
If you have an accountant, schedule a meeting to discuss their plan for MTD. They will be a key partner in your transition and can often manage the entire submission process on your behalf.
MTD Exemptions and Penalties
While MTD for ITSA will be mandatory for most, there are some exceptions and a new penalty system to be aware of.
Who is Exempt from MTD?
HMRC may grant an exemption if it is not reasonable or practical for you to use digital tools for your tax. This is known as ‘digital exclusion’ and can be due to:
- Age, disability, or a health condition
- Living in a remote location with no reliable internet access
- Religious beliefs that prevent the use of technology.
Certain entities, such as trusts and estates, are also exempt. It is important to note that an exemption is not automatic; you must apply to HMRC for it.
The New Points-Based Penalty System
MTD introduces a new, fairer penalty system for late submissions. Instead of an immediate £100 fine, you will receive one penalty point for each missed deadline. A financial penalty of £200 is only issued once you reach a certain points threshold (four points for those filing quarterly). This system is designed to penalise persistent non-compliance rather than occasional, honest mistakes. There is also a new, more proportionate penalty regime for the late payment of tax.
Conclusion: MTD is a Challenge, but Preparation is Key
Making Tax Digital for ITSA is a fundamental shift in tax administration for the self-employed. While it presents challenges, it is manageable with proactive preparation. By understanding your start date, digitising your records early, and choosing the right software, you can navigate the transition smoothly. Ultimately, MTD also offers an opportunity to gain better, real-time insight into your business’s financial performance, helping you stay on top of your finances and avoid the last-minute rush of the annual tax return.
FAQs: MTD for ITSA – 2026 Readiness for UK Sole Traders
1. What is Making Tax Digital (MTD) for ITSA?
MTD for Income Tax Self Assessment (ITSA) is a UK government initiative requiring self-employed individuals and landlords to keep digital records and submit quarterly updates to HMRC using approved software.
2. When does MTD for ITSA come into effect?
It will be mandatory starting April 2026 for sole traders and landlords with an annual income over £50,000. Those earning above £30,000 will be brought in from April 2027.
3. Who needs to comply with MTD for ITSA?
If you’re a sole trader or landlord with annual business or property income over the thresholds mentioned, you’ll need to comply. Partnerships and those below the threshold will be phased in later.
4. What are the main requirements under MTD for ITSA?
You must:
- Keep digital records of income and expenses
- Use compatible software to send updates
- Submit quarterly updates, an End of Period Statement (EOPS), and a Final Declaration
5. What qualifies as compatible software?
Software that can connect directly to HMRC’s systems for MTD filings. Examples include QuickBooks, Xero, FreeAgent, and others listed on HMRC’s official site.
6. Can I still use spreadsheets for MTD?
Yes, but only if they are linked to bridging software that can communicate with HMRC’s systems.
7. What are the quarterly update deadlines?
The deadlines are one month after each quarter ends. For example, for the period 6 April–5 July, the submission is due by 5 August.
8. What is the End of Period Statement (EOPS)?
EOPS finalises each business’s accounting records for the tax year and includes any accounting adjustments. One EOPS is required per business.
9. What is the Final Declaration?
The Final Declaration replaces the Self Assessment tax return and reports all income sources. It confirms the final tax position for the year.
10. Will I still be able to file a Self Assessment return?
No, once MTD for ITSA applies to you, the Self Assessment process will be replaced by quarterly updates, EOPS, and the Final Declaration.
11. What happens if I don’t comply with MTD requirements?
You could face penalties for failing to keep digital records, missing deadlines, or submitting incorrect information. A points-based system will apply.
12. How can I prepare for MTD for ITSA now?
- Check if you’re eligible for the 2026 rollout
- Start using digital bookkeeping software
- Consult an accountant or tax advisor
- Sign up early for MTD ITSA pilot programs (if available)
13. Is there support available for low-income businesses?
Yes, HMRC has stated they will work with software providers to offer low-cost or free tools for small businesses and landlords.
14. Can I join MTD for ITSA early?
Yes, there’s an open pilot program for early adopters. However, functionality may be limited depending on your circumstances.