Making Tax Digital 2026: A step-by-step guide to staying compliant

Making Tax Digital (MTD) for Income Tax is a new way for sole traders and landlords to report their income and expenses to HMRC.  From 6 April 2026, sole traders and landlords must use it if their annual income from self-employment and property is over £50,000. If you’ve been ignoring the "MTD" acronym, now is the time to tune in.

Who is in the "First Wave"?

Compliance is based on your qualifying income (your total gross turnover before expenses), not your profit. Find out more about calculating your qualifying income here.

The phases for MTD are:

Note for Limited Companies: There is some rare good news! HMRC officially scrapped plans for MTD for Corporation Tax in late 2025. If you operate strictly through a limited company, your process remains unchanged. However, if you are a director who also personally owns rental property yielding over £50,000 (or receives other qualifying income), you will still fall into Phase 1 for that personal income.

What are the new requirements?

If you fall into Phase 1, the "once-a-year" tax rush is being replaced by a more frequent digital rhythm from April 2026:

1. Digital record keeping: You can no longer use paper ledgers. All transactions must be recorded in MTD-compatible software or a spreadsheet linked via "bridging software."

2. Quarterly updates: You must send a summary of your income and expenses to HMRC every three months.

3. Final declaration: You will still need to submit a final declaration by 31 January to confirm your total tax liability, including other income like dividends or PAYE. The Final Declaration replaces the Self Assessment Tax Return for those in the scope of MTD. It’s a subtle but important distinction in HMRC terminology.

Find out more about the new requirements here.

The "Soft Landing" on penalties

HMRC has confirmed a points-based system for penalties. Since you’ll be submitting four quarterly updates for MTD for Income Tax, your penalty threshold is set at four points. Essentially, if you miss four deadlines, you'll accumulate four points and trigger a fine. The goal of the points-based system is to be fair: it ensures you aren't immediately punished for a one-off slip-up if you generally stay on top of your filings.

For the first year (2026/27), you won't receive financial penalties for late quarterly updates while you get used to the system. However, don't be complacent: penalties still apply for late payments and your final year-end declaration. You can also be fined for not using compatible software, and HMRC may charge late payment interest.

How to prepare this month

1. Check your 2024/25 return: Look at your gross turnover. If it’s above £50,000, you are legally required to comply from this April.

2. Audit your software: Ensure your current accounting tool (or the tool used by your accountant) is on HMRC’s "recognised" list for MTD for Income Tax.

3. Review service agreements: If you use an accountant, ensure your engagement letter covers the four new quarterly filings, as this will likely increase their workload (and potentially your fees).