Making Tax Digital Guide: Practical Steps for Sole Traders, Landlords and Companies

Making Tax Digital is a mandatory HMRC initiative for digital record-keeping that will reshape how millions of UK taxpayers report their income. Whether you run a small business, rent out property, or manage books for someone who does, the changes arriving from April 2026 demand attention now. This making tax digital guide walks you through who is affected, what the rules require, and exactly how to prepare.

Key Pointers

• Making Tax Digital for Income Tax starts in April 2026 for self employed individuals and landlords with qualifying income over £50,000, extending to those over £30,000 in April 2027 and £20,000 in April 2028.
• MTD does not change how much income tax or corporation tax you owe, nor does it alter payment dates. It changes how you maintain digital records and submit information using compatible software.
• Affected sole traders and landlords must keep a digital record of every transaction, submit quarterly updates through compatible software, and file a final declaration instead of a traditional income tax self assessment return.
• Digital record keeping can be done via accounting software, apps, or spreadsheets linked with bridging software, but all products used must be connected by digital links with no manual re-typing.

What is Making Tax Digital and why is it changing income tax?

Making Tax Digital is a UK government initiative to modernise tax reporting by moving away from annual, largely manual returns toward digital, in-year submissions. It began with VAT in April 2019, became mandatory for all VAT-registered businesses in 2022, and now extends to income tax self assessment under the banner of MTD ITSA. HMRC plans to bring corporation tax into a separate MTD regime later in the decade, though no mandatory date has been confirmed.

The formal name for the programme affecting sole traders and landlords is Making Tax Digital for Income Tax Self Assessment. It focuses entirely on how data is recorded and sent to HMRC systems, not on changing income tax rates, bands, or allowances. Tax affairs are still calculated under existing legislation.

The core aims are straightforward. MTD requires continuous updates for better cash flow management, reducing the risk of year-end surprises. Digital submissions streamline the tax process compared to paper records, and spreading admin across four quarters rather than cramming it into a single annual filing cuts errors caused by rushed, manual data entry. HMRC gains a more real-time view of taxpayer income, while taxpayers get earlier sight of their estimated liabilities.

Limited companies will eventually be brought into MTD for Corporation Tax, but this guide mainly focuses on individuals with self employment and property income. For e-Careers learners, including bookkeepers, junior accountants, and business owners, the sections below provide clear, non-technical explanations you can apply directly to your studies or day-to-day roles.

Who Making Tax Digital for Income Tax applies to (and who is exempt)

From April 2026 onwards, MTD for income tax applies to:

• UK-resident sole traders whose gross self employment turnover meets or exceeds the relevant threshold.
• Unincorporated landlords whose property income (UK or overseas) meets or exceeds the threshold, including where residential rental income forms part of the qualifying income being tested against the threshold.
• Individuals with a combination of sole trade and property businesses whose combined gross income crosses the threshold, even if neither source does so individually.

Qualifying income for MTD purposes is defined as the combined gross income from all relevant self employment activities plus the total gross income from property businesses, measured before expenses, allowances, or losses. PAYE salary, pensions, dividends, savings interest, and partnership profit shares do not count toward the income threshold. Rental income from residential properties is included when deciding whether income tax apply rules bring a landlord into MTD.

For jointly owned property, each owner counts only their share of the rental income when testing the £50,000, £30,000, or £20,000 thresholds. A married couple splitting rental income 50/50 would each test half, not the full amount.

Several groups are exempt from MTD income tax:

• Trustees and personal representatives are automatically exempt from MTD.
• Individuals without a National Insurance number are exempt from MTD.
• Landlords with annual turnover below £20,000 are exempt from MTD (once the lowest threshold takes effect in 2028).
• Digital exclusion exemptions apply for age or disability reasons, as well as for those in remote locations without broadband or those whose religious beliefs prevent the use of electronic communications.
• Certain non-UK entertainers and individuals receiving only trust income fall outside the regime.
• Exemptions may be claimed on a case-by-case basis by applying to HMRC.

Limited companies are not within MTD for income tax. Their rental profits and trading income remain within corporation tax rules, though HMRC expects to capture them under a future MTD for Corporation Tax regime.

Key dates and phased rollout: 2026 to 2028

Getting the dates and income thresholds right is critical, because missing a phase means you could face penalties without realising you were in scope.

• Phase 1 - 6 April 2026: MTD for Income Tax starts for eligible taxpayers in April 2026. It becomes mandatory for individuals whose qualifying gross income exceeded £50,000 in the previous tax year (2024/25). Landlords must comply with MTD if income exceeds £50,000. The first quarterly update for 2026 is due on 7 August 2026, covering the period from 6 April to 5 July.

• Phase 2 - 6 April 2027: From April 2027, MTD will also apply to those with income over £30,000, based on gross income in tax year 2025/26. An additional 970,000 individuals are estimated to join the regime in this phase.

• Phase 3 - 6 April 2028: MTD applies to self-employed individuals with income over £20,000. The MTD income threshold will drop to £20,000 by 2028, bringing in the widest group yet.

Payment deadlines for income tax do not change. You still pay tax by 31 January (balancing payment) and 31 July (payment on account) as before. MTD changes tax reporting, not payment schedules.

HMRC's new points-based penalty system applies from the 2026/27 tax year. Late submissions incur a penalty point for each missed deadline. Four penalty points trigger a £200 financial penalty, and further late filings after that threshold each attract an additional £200. Late payment penalties start at 3% after 15 days overdue and a 10% penalty applies for unpaid tax after 30 days. Penalties increase to 4% from April 2027 for late payments. Penalty points do not reset automatically at the year end; a taxpayer must complete 24 consecutive months of on-time filing to clear them.

Digital record keeping: what HMRC expects under MTD

A digital record under MTD is not simply a scanned invoice or a photo of a receipt. It is a structured, transaction-level entry stored in MTD compatible software or a spreadsheet that captures specific data points for every piece of income and expenditure.

The minimum data HMRC expects for each transaction includes:

• Date the transaction occurred.
• Amount received or paid.
• Category matching the self assessment tax return headings (e.g. rent received, repairs, mortgage interest, travel, supplies).
• Business or property identifier so HMRC can distinguish between income sources.

Annual summaries or three line accounts alone are not acceptable. Every transaction must be individually recorded. Records must be retained for at least five years following the 31 January deadline after the end of the relevant tax year.

Landlords with more than one property can keep a single digital property business record, but must still clearly identify which income and costs relate to which property. For jointly owned property, each owner must maintain digital records for their share only. HMRC's digital record-keeping direction allows some easements for joint property owners, such as simplified expense reporting during quarterly periods.

Retailers and similar small businesses with high volumes of small transactions may use daily gross takings instead of individual sale entries, provided the figures are still recorded digitally and properly categorised.

A crucial requirement is the use of digital links between systems. Once data has been entered into one digital record, any transfer to another product must be electronic. Copying summary totals by hand into a second spreadsheet or bridging tool does not meet the standard. Valid digital links include API connections, CSV or XML imports, linked spreadsheet cells, and automated bank feeds.

Compatible software, bridging tools and digital links

MTD compatible software is any product recognised by HMRC that can create, store, and submit correct digital records and quarterly updates via HMRC's APIs. Compatible software must meet minimum functionality standards set by HMRC, including the ability to file the final declaration. Importantly, HMRC does not provide software for Making Tax Digital. The onus is entirely on the taxpayer or their supporting agents to choose and pay for an appropriate tool.

There are three main routes to compliance:

• Full accounting packages - cloud-based platforms designed for small businesses, often including bank feeds, multi-property support, invoicing, and payroll. These handle everything from record income entries to final submission.
• Simple apps - lightweight tools aimed specifically at landlords or sole traders with straightforward property businesses or a single sole trade. Some are HMRC approved software options that focus purely on MTD obligations.
• Spreadsheets plus bridging software - for those who prefer Excel or Google Sheets, bridging software can integrate existing solutions with MTD requirements by sitting between the spreadsheet and HMRC's submission portal. The spreadsheet and bridge must be connected by digital links without manual cut-and-paste.

Free software options are available for small businesses under MTD, particularly those with gross income below the VAT threshold and no employees. However, free software products may not support VAT, corporation tax, or payroll alongside income tax, so check the feature list carefully before committing.

When evaluating software options, look for features like multi-property support, three line accounts compatibility, bank feeds, business source adjustable summary views, capital gains tracking if needed, and digital record keeping tools that will support both current VAT obligations and future MTD for Corporation Tax. Also check whether the software supports calendar quarters if you prefer that reporting period, and whether it offers collaborative access for agents or family members who help with the books.

How MTD reporting works: quarterly updates and the final declaration

Under the old model, you filed one current self assessment return per year, the SA100, after the tax year ended. Under MTD, the process changes to four quarterly updates plus a year-end final declaration.

Quarterly updates are summaries of income and expenses for each business or property portfolio. Taxpayers must submit separate quarterly updates for each business source. Each quarterly update summarises income and expenses for that quarter. Users must submit quarterly updates through compatible software. Standard quarters run as follows:

Quarterly updates are due by the 7th of the month following each quarter-end. Taxpayers can elect to use calendar quarters (30 June, 30 September, 31 December, 31 March) if their compatible software supports this, which shifts each due date by a few days.

Each quarterly update is cumulative for the tax year and overwrites the previous submission, so corrections can be made in the next update rather than reopening historic periods. This means each previous submission is effectively replaced by the latest one.

The final declaration replaces the old SA100 income tax self assessment return for in-scope income. It requires you to confirm all income and expenses for the year, add other income sources such as PAYE salary, dividends, savings, and pensions, and apply allowances, reliefs, and accounting adjustments. By 31 January, a final declaration must be submitted to finalise the tax return. For the 2026/27 tax year, that deadline is 31 January 2028.

Special points for landlords, jointly owned property and companies

Property income and company structures raise extra questions under MTD, particularly around gross income thresholds and joint ownership.

Unincorporated landlords must aggregate all UK and overseas property rents when testing their annual income against the relevant threshold. Residential rental income is included in the qualifying income test when deciding whether income tax apply rules bring an unincorporated landlord into MTD. They should exclude tenancy deposits retained as security unless those deposits are kept to cover unpaid rent or damage, at which point the retained amount may become taxable property income.

For jointly owned property, each owner only counts their share of gross rental income towards the MTD thresholds. Married couples and civil partners often start on a 50/50 split unless a formal election states otherwise. Joint property owners can use some easements under HMRC's digital record-keeping direction, such as simplified expense entries during quarterly periods, with fuller reporting in the final declaration.

Limited company landlords and trading companies are outside MTD for income tax. Limited companies continue to file corporation tax returns in the usual way. HMRC plans a separate MTD for Corporation Tax regime, but wider mandation is expected no earlier than 2026 and likely later in the decade.

If you are considering moving rental activities into a company for tax or MTD reasons, seek professional advice. The decision involves stamp duty, capital gains, mortgage interest deductibility rules, and ongoing compliance costs that go well beyond MTD alone. e-Careers runs tax and accounting courses that cover both income tax and corporation tax fundamentals, giving you the grounding to have informed conversations with advisers.

Getting ready for Making Tax Digital: practical checklist

Preparation during 2025 and early 2026 is essential for a smooth transition. Waiting until April 2026 to choose software, set up bank feeds, and learn new processes risks missed deadlines and unnecessary penalty point accumulation.

Start by calculating your qualifying gross income for the 2023/24 and 2024/25 tax years. Add together your annual turnover from all sole trades and your gross property income. If the combined figure exceeds £50,000 in 2024/25, you are in Phase 1. If it exceeds £30,000 in 2025/26, you will join in Phase 2.

Key preparation tasks for small businesses and landlords:

• Choose and test MTD software or a spreadsheet-plus-bridge setup early. Run digital record keeping in parallel with your existing methods for at least one quarter to identify gaps.
• Set up bank feeds from business and property bank accounts to reduce errors from manual entry.
• Agree a standard chart of accounts that aligns with the self assessment categories HMRC expects, so quarterly totals map neatly into the final declaration.
• Document the digital links between your systems. If data flows from a bank feed into a spreadsheet and then into bridging software, map that chain so you can demonstrate compliance if HMRC asks.
• Train anyone who helps with the books, whether staff, family members, or your accountant, on the software, deadlines, and what constitutes a correct digital record.
• Keep all supporting documents (receipts, invoices, tenancy agreements) for at least five years, stored digitally or on paper alongside your business records.

FAQs

These quick answers cover practical questions not fully addressed above.