The difference between how much tax should be paid and how much is actually collected is called the “tax gap”. A 2024 report from HMRC estimated it at almost £40 billion, with around half that shortfall being due to taxpayers either making mistakes or failing to take reasonable care with their tax affairs; small businesses are one of the biggest risk areas (HMRC, 2025).
Making Tax Digital for Income Tax (MTD) is part of the government’s strategy to reduce the tax gap. It will introduce requirements for businesses to keep digital records and submit information to HMRC closer to in real-time.
Who will Making Tax Digital affect, and when
MTD applies to unincorporated businesses – sole traders and the self-employed – and landlords, and will be introduced in phases. Self-employed vets and locums are squarely in the firing line of the regime.
The date from which a taxpayer might have to join MTD will depend on their combined level of income from trading and property, before expenses. HMRC calls this “qualifying income”.
From April 2026, taxpayers with qualifying income of more than £50,000 will need to comply with MTD. From April 2027, the programme will extend to those with qualifying income over £30,000, and from April 2028 MTD will extend to those with qualifying income over £20,000.
For ease of reference, we’re only referring to businesses here, but if the owner of an unincorporated business is also a landlord, they will need to look at their total income (before expenses) from both sources.
The government intends to extend MTD to cover partnerships and limited companies at some point, but there’s no indication of when this might happen
Consider the self-employed taxpayer whose business has an annual turnover of £48,000 – they will have to comply with MTD from April 2027. However, if they also have a rental property generating a gross rent of £15,000 per year, both sources of business income would need to be combined, meaning they would be in scope of MTD from April 2026, as the combined qualifying income exceeds £50,000.
Taxpayers with qualifying income under £20,000 can continue dealing with their taxes as they currently do. The government intends to extend MTD to cover partnerships and limited companies at some point, but there’s no indication of when this might happen.
What will MTD involve?
MTD will have three key components: digital records, quarterly updates and a year-end tax return. All transfers of data to meet these requirements will have to be sent digitally.
1. Digital records
Taxpayers in MTD will have to use software to keep digital records of the amount, category and date of income and expenses relating to their business.
2. Quarterly updates
A summary will have to be submitted to HMRC from software of the income and expenses of the business every quarter, based on the digital records kept.
The quarterly updates won’t be as detailed as the annual tax return, but a separate quarterly update will be needed for each trade or property business. Referring to the example earlier, if that person also rents out a property, they will have eight quarterly submissions to make each year.
3. Year-end tax return
After the fourth quarterly update has been submitted, the taxpayer will need to file a “digital tax return”. This will have similarities with the current self-assessment return, but it will pre-populate with the income and expenses from the quarterly updates already filed. Those entries will need to be adjusted for accounting and tax purposes.
Any non-business income sources, such as bank interest or salaries and pensions, will need to be reported. The digital tax return will also be the place to claim relevant tax reliefs, such as for pension contributions made during the year.
4. Digital links
From the point where business records are created in software, all transfers of data will have to be sent digitally. This includes submitting the quarterly updates, making any corrections and filing the year-end declaration. It also includes transfers of business records, for instance between the taxpayer and their bookkeeper or accountant.
What’s not changing
The tax return as we know it will change for those in MTD, but it will still be due by 31 January after the end of the tax year.
The due dates for paying tax won’t change – tax will still be due by 31 January after the end of the tax year, and most will still need to make “payments on account” by 31 January and 31 July.
Can it be made simpler?
There are expected to be simplification options for some businesses.
Where business or property income is below the VAT threshold (currently £90,000), taxpayers will be able to record each item of income and expense without categorising it by income/expense type. The total income and expenses will have to be reported each quarter, but no detailed categorisation will be needed.
Getting ready for the change
The exact date from which taxpayers have to comply with MTD will depend on the qualifying income reported on their most recent tax return.
For instance, tax returns for the year ended 5 April 2025 will be due for submission by 31 January 2026. If that tax return reports gross qualifying income of more than £50,000, that individual will have to join MTD from the start of the following tax year – April 2026.
The exact date from which taxpayers have to comply with MTD will depend on the qualifying income reported on their most recent tax return
This means if business owners don’t plan in advance, they could only have two months to prepare for MTD after filing their 2024/25 tax return.
Check whether or when MTD affects the business
The first step is to look at the gross business income reported on the tax return for the year ended 5 April 2024 (and add gross rent received if the individual is a landlord as well). If it is over £50,000 and the 2024/25 tax year is expected to be similar, then it’s likely the individual will be within MTD from April 2026. If the total was over £30,000, they should expect to be in MTD from April 2027.
If it is over £50,000 and the 2024/25 tax year is expected to be similar, then it’s likely the individual will be within MTD from April 2026
If the business has performed better in 2024/25 than the year before, thought needs to be given to whether the qualifying income is likely to go over £50,000 – if it does, the taxpayer needs to be ready for MTD by April 2026. Of course, if the 2024/25 tax return has been prepared already, the position will be more certain, and that person can start to prepare for MTD if they’re in scope from April 2026.
And if someone has set up in business since April 2024, they’ll need to scale up their income. For example, if the business started on 1 January 2025 and has earned gross income of £10,000 per month, the 2024/25 tax return will show £30,000 of income, which is below the MTD threshold for April 2026. But they’ll need to adjust that to estimate a full year’s worth of income – £120,000 – and will therefore need to comply with MTD from April 2026.
| HMRC has an online tool that may help to check when someone will need to start using MTD. |
Look at the record-keeping system
If a taxpayer keeps paper receipts and tends to work out the accounts and tax position after the end of the year, they’ll need to start using software and keep records on a timelier basis.
Unlike the current self-assessment system, HMRC won’t be offering an online filing service for the digital tax return in MTD – instead, taxpayers will need to find software that supports this
For small, straightforward businesses, a spreadsheet will help. “Bridging software” is already available to feed the data from spreadsheets into other software products that can support MTD filing obligations. However, unlike the current self-assessment system, HMRC won’t be offering an online filing service for the digital tax return in MTD – instead, taxpayers will need to find software that supports this.
HMRC’s software choices webpage shows what compatible software is available. It’s worth keeping an eye on the options and thinking about what functionality a business might need, and making sure they have one or more pieces of software in place that can support the full compliance process in MTD.
The demands of record-keeping and administration will increase for the majority of businesses affected by MTD, so good professional support will free up time to allow a focus on running the business.
Join MTD testing
HMRC is operating a testing phase for MTD from April 2025, allowing businesses to understand what MTD will mean for them and get up to speed. During the testing, there will be fewer consequences of getting things wrong – for instance, there will be no penalties for being late to submit a quarterly update during the testing phase. HMRC also has a dedicated support team to help taxpayers in the testing programme. You can sign up to testing mid-way through the year – details of how to sign up can be found here.
Remember to register
HMRC are writing to taxpayers they believe may need to comply with MTD from April 2026 based on the level of qualifying income declared on their 2023/24 tax returns. Those with business and/or property income in 2023/24 over £50,000 should hear from HMRC about MTD this year. HMRC will write again after January 2026, confirming who needs to comply with MTD from April 2026 once 2024/25 tax returns have been filed.
Taxpayers who are in scope of MTD will need to register – HMRC won’t do this automatically – so they will need to sign up in advance of the date from which they’ll need to comply.
Find out more about MTD
HMRC will be stepping up its communications campaign for MTD during 2025, so business owners should look out for relevant content.
HMRC’s guidance about MTD – Making Tax Digital for Income Tax – is available on gov.uk, along with Benefits of Making Tax Digital.
The Association of Tax Technicians has published a frequently asked questions page with further information about MTD.
Summary
Whether taxpayers like it or not, change is coming, and that change requires compliance. It makes sense, therefore, to seek advice sooner rather than later on what needs to be done to comply.
