MTD Ready

Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) is HMRC’s initiative to modernise the UK tax system. Instead of completing one annual Self-Assessment tax return, qualifying taxpayers will:

• Keep digital records of all business and property income and expenses using HMRC-compatible software
• Submit four quarterly updates to HMRC throughout the tax year, each summarising that quarter’s income and expenses
• File a final declaration by 31 January the following year, confirming all income sources (including savings, dividends, employment) and claiming any reliefs

This is not a new tax — it is a new method of reporting existing tax obligations. The aim is to reduce errors (the Self-Assessment tax gap is approximately £5 billion), improve real-time visibility of tax liabilities, and align tax reporting with modern digital business practices.

MTD for ITSA applies to sole traders and landlords who are registered for Self-Assessment and whose qualifying gross income from self-employment and/or property exceeds the relevant threshold. Gross income means total turnover before deducting any expenses, allowances, or tax reliefs.

Important: If you have both self-employment income and property income, these are combined for threshold testing. A business with £35,000 turnover plus £20,000 rental income totals £55,000 — above the £50,000 threshold.

What does NOT count: Employment income, pension income, dividends, and savings interest do not count towards the qualifying income threshold.

How you’ll know: HMRC will review your Self-Assessment tax return and write to you confirming whether you need to sign up for MTD for ITSA.

Under MTD, you submit four quarterly updates per tax year, each due within one month of the quarter ending. Updates are cumulative, meaning you can correct earlier quarters in subsequent submissions.

Calendar quarter option: If your accounting period runs April–March, you can opt for calendar quarters (e.g. 1 April – 30 June) instead of standard tax year quarters. The deadlines remain the same.

First year note: In your first year of MTD, you’ll still need to submit a traditional Self-Assessment return for the previous tax year alongside your new quarterly updates.

MTD requires HMRC-compatible software that can maintain digital records, preserve digital links, and transmit quarterly updates and final declarations to HMRC via API. HMRC does not provide its own software for MTD for Income Tax.

Your software must be able to:

• Create, store, and correct digital records of income and expenses
• Send quarterly updates directly to HMRC
• Submit your final tax return by 31 January
• Receive information (e.g. tax estimates) from HMRC

Popular HMRC-recognised MTD software includes:

• Xero — full-featured cloud accounting with MTD compliance
• QuickBooks — online accounting with quarterly submission tools
• FreeAgent — designed for freelancers and small businesses
• Sage — desktop and cloud options for various business sizes
• Bridging software — connects spreadsheets to HMRC (if you prefer to keep using Excel)

HMRC maintains a full list of recognised software on GOV.UK. Some free options are available for those with the simplest tax affairs.

What records to keep digitally: Every income receipt and allowable expense needs a date, description, amount, and appropriate category. You don’t need to scan paper receipts, but every transaction must be recorded digitally in your software.

As a Nekii client, we handle software selection, setup, bank feed connections, and ongoing quarterly submissions so you don’t have to worry about the technical side.

HMRC is replacing the old fixed-penalty system with a new points-based regime, similar to driving licence points. This applies to both late submissions and late payments.

Late Submission Penalties

• Each missed quarterly submission deadline earns 1 penalty point
• Once you reach 4 points (the threshold for quarterly submissions), you receive a £200 fine
• Every further missed deadline while at the threshold incurs an additional £200
• Points can be reset after 24 months of full compliance (no missed deadlines)

Good news for the first year: The UK Government confirmed in the Autumn Budget 2025 that late submission penalties will not apply during the 2026–27 tax year for taxpayers required to join MTD. However, late payment penalties will still apply.

Late Payment Penalties (from 2025/26 onwards)

• Up to 15 days late: No late payment penalty
• 16–30 days late: 3% of the amount outstanding at day 15
• 31+ days late: 3% of day 15 balance + 3% of day 30 balance, plus 10% per year daily interest from day 31 until paid

Interest is charged from day 1 on any unpaid amount. Late payment penalties do not apply to payments on account.

Some taxpayers can apply for an exemption from MTD if they are digitally excluded. You may qualify if:

• Your age, disability, health condition, or location makes it unreasonable to use digital tools
• You are a practising member of a religious society whose beliefs are incompatible with digital communications

Automatic exemptions apply to:

• Trustees (including charitable trust trustees)
• Personal representatives administering an estate
• Non-resident companies
• Lloyd’s underwriters (for underwriting income)
• Individuals without a National Insurance number on 31 January before the start of the tax year

Who is NOT exempt: Limited companies, partnerships (for now — they will be included later), employees with no self-employment or property income, and those whose only reason for seeking exemption is unfamiliarity with software or cost concerns.

If you think you may qualify for an exemption, apply to HMRC by calling or writing. ICAEW recommends applying by January 2026 for those mandated from April 2026.

Construction Industry Scheme (CIS): Contractors must continue sending monthly CIS returns. You can use software that handles both CIS and MTD. Subcontractors include CIS deductions in their quarterly updates. Some software handles CIS deductions automatically.

Partnerships: Not yet included in MTD for ITSA. Partnerships will continue with traditional Self-Assessment. HMRC will announce the partnership timeline later. However, if you are a partner whose individual self-employment/property income exceeds the threshold, you may still need to use MTD for that separate income.

Multiple businesses: If you run multiple sole trades or have both a business and rental income, you submit separate quarterly updates for each income source. All sources are brought together in your final declaration.

Limited companies: MTD for ITSA does not apply to limited companies. However, if you’re a director who also has self-employment or property income above the threshold, those income sources are in scope.

• Smaller, regular updates instead of one overwhelming annual return
• Real-time tax estimates from HMRC — know your tax liability throughout the year, not just at year-end
• Automatic data compilation — software pulls from bank feeds, reducing manual work
• Earlier error correction — mistakes can be fixed in the next quarterly update
• Better cash flow planning — no January surprises; you see tax building up quarter by quarter
• Digital records eliminate paper clutter — no more boxes of receipts
• Year-end is simpler — quarterly data pre-populates your final return