You’ve heard about Making Tax Digital. You’re still not sure what it means for you.
That uncertainty is well-founded. MTD for Income Tax is the most significant change to UK tax reporting in a generation. It affects sole traders and landlords directly. It changes not just what you submit to HMRC, but how and how often you do it. At Lidertax, questions about MTD arrive daily. This is the first of four articles covering the most important questions we hear. Each article builds on the last. Together, they give you a complete picture of what is changing and what you need to do about it.
1. What is Making Tax Digital, and why does it matter more than previous HMRC changes?
Making Tax Digital — abbreviated to MTD — is HMRC’s programme to move tax record-keeping and reporting entirely into the digital environment. The full programme name is MTD for Income Tax Self Assessment, or MTD ITSA.
Previous tax changes adjusted rates, thresholds, or deadlines. MTD restructures the entire reporting cycle. It replaces one annual Self Assessment return with continuous digital record-keeping and four quarterly submissions per year. The final annual declaration replaces the SA100 form. This is not an administrative tweak. It is a structural shift in how HMRC monitors taxpayer compliance in real time.
2. Who does Making Tax Digital actually affect?
MTD ITSA applies to two groups. The first is sole traders — individuals running their own businesses outside a limited company structure. The second is landlords receiving rental income from UK property.
Both groups fall within scope once their qualifying income crosses the relevant threshold.
Directors of limited companies are outside MTD ITSA for now. Formal partnerships also remain outside the current scope. This is one of the most common points of confusion we encounter. If you operate through a limited company, MTD ITSA does not currently apply to your company income. However, if you also have personal sole trader or rental income above the threshold, you may still be caught.
3. What are the income thresholds and implementation dates for MTD?
HMRC is phasing MTD ITSA in stages. Each stage has a fixed date and an income threshold.
April 2026 — MTD applies to individuals with qualifying income above £50,000.
From April 2027, the threshold drops to £30,000.
By April 2028, the threshold drops further to £20,000.
These dates are currently confirmed. However, HMRC has delayed MTD implementation before. The safest approach is to prepare for the earliest date that applies to your income level.
4. How do you calculate qualifying income for MTD purposes?
Qualifying income is gross turnover. Not profit. Not taxable income. Gross receipts before any expenses or allowances.
HMRC calculates your qualifying income based on your most recent Self Assessment return. For the first wave in April 2026, HMRC will look at the 2024/25 tax year return. This calculation has a specific implication that many self-employed people overlook. If your business income alone sits below the threshold, but you also receive rental income, both figures combine. Review your income from all sources now. Do not wait until HMRC contacts you.
5. Do income from different sources add together towards the MTD threshold?
Yes. HMRC aggregates qualifying income across all in-scope sources. Sole trading income and rental income combine to produce a single qualifying income figure. This is not optional — it is the rule.
A practical example: £35,500 from freelance work plus £15,000 from a rental property equals £50,500 qualifying income. That person falls into MTD from April 2026. This aggregation rule catches people who consider themselves “mainly employed” or whose rental income feels incidental. Review your combined position carefully. The threshold applies to the aggregate, not to any single income stream.
6. What are the three core obligations under MTD ITSA?
MTD ITSA creates three distinct compliance requirements. Each is mandatory. Each has specific rules.
Digital record-keeping. You must maintain digital records of business income and expenses. These records must be held in HMRC-recognised software. Spreadsheets are permitted, but only with approved bridging software connecting them to HMRC’s systems.
Quarterly updates. Every quarter, you submit a summary of income and expenses to HMRC. This submission goes through software — not directly through the HMRC website. It covers in-scope income only. Adjustments, reliefs, and other income sources are not included at this stage.
End of Period Statement / Final Declaration. Once per year, you confirm all business data and add any income not reported quarterly — employment income, dividends, pension income. You also claim allowances and reliefs here. This replaces the annual Self Assessment return.
All three obligations must operate together. Weakness in record-keeping creates errors in quarterly updates, which cascade into problems at the Final Declaration stage.
7. What exactly goes into a quarterly update — and what does not?
A quarterly update is a summary of income and expenses for one business or one property portfolio. Nothing more, and nothing less.
It does not include income from employment, pensions, or investments. It does not include tax adjustments or reliefs. Those elements are reserved for the Final Declaration.
The update is designed to give HMRC a continuous, low-friction picture of trading activity. HMRC can therefore identify discrepancies between quarterly data and historic patterns far earlier than under the current annual system. This is the compliance mechanism behind the administrative change. Quarterly updates are not just a reporting obligation — they are also an HMRC monitoring tool.
8. When are quarterly update deadlines?
There are four quarterly update deadlines each year. The default quarters align with the tax year and carry these submission deadlines: 7 August, 7 November, 7 February, and 7 May.
HMRC also permits calendar quarter reporting. Calendar quarters end on the last day of June, September, December, and March. Many business owners find calendar quarters easier to manage alongside bookkeeping and VAT cycles. You choose your reporting period when you register for MTD. Missing a quarterly deadline will trigger a penalty under HMRC’s new points-based system. Four missed deadlines in a year result in a financial penalty.
9. What is the Final Declaration, and what does it replace?
The Final Declaration is the annual capstone submission under MTD ITSA. It replaces the SA100 Self Assessment tax return entirely.
You submit it once per year, by 31 January following the end of the tax year.
The Final Declaration serves several functions simultaneously. It confirms all quarterly business data. Any income not covered by quarterly updates — employment, dividends, pensions, capital gains where applicable — is added here. Reliefs, allowances, and deductions are also claimed at this stage.
Errors in the Final Declaration carry the same HMRC penalty exposure as errors in any tax return. The document is legally significant. Accurate quarterly records throughout the year make the Final Declaration straightforward. Poor record-keeping during the year makes it a compliance risk.
10. Do payment deadlines change under Making Tax Digital?
No. MTD ITSA changes the reporting structure. It does not alter when tax is due. The two core payment dates remain unchanged.
31 January — balancing payment for the previous tax year, plus the first payment on account for the current year.
31 July — second payment on account.
This is an important distinction. Some business owners assume that quarterly reporting leads to quarterly tax payments. It does not — at least not under the current confirmed framework. Tax liability continues to crystallise annually, based on the Final Declaration. HMRC has indicated it may revisit payment timing in future phases of the programme. Monitor future announcements, particularly for the 2027 and 2028 implementation waves.
What this means in practice
MTD ITSA is not a distant policy change. For anyone with qualifying income above £50,000, the first compliance date is April 2026. That is one tax year away.
The practical preparation required — choosing software, establishing digital record-keeping habits, understanding quarterly deadlines — takes longer than most people expect. Starting late creates compressed timelines and increases the risk of errors in the first year.
The questions above cover the structural framework. Parts 2, 3, and 4 of this series will address software requirements, penalty exposure, strategic positioning, and what early movers can gain from proactive compliance.
If your qualifying income is approaching any of the thresholds, now is the time to review your position. Speak to a Lidertax adviser before the pressure of implementation narrows your options.