The United Kingdom’s tax landscape is undergoing a significant transformation with the phased rollout of Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA). This government initiative, which builds on the earlier implementation of MTD for VAT, is set to fundamentally change how self-employed individuals, small business owners, and landlords manage and report their tax affairs. With the first phase of MTD for ITSA becoming mandatory in April 2026 and further expansions planned through 2028, understanding the scope, requirements, benefits, and challenges of MTD is crucial for affected taxpayers.
I hope this article helps provide a comprehensive analysis of how MTD will affect self-employed individuals, small business owners, and landlords, drawing on the latest guidance from HM Revenue & Customs (HMRC), professional bodies, and leading tax advisory sources. The report also offers practical recommendations for compliance and explores the broader implications for the UK’s tax system.
Overview of Making Tax Digital (MTD) for Income Tax
What is MTD for ITSA?
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is a government initiative designed to digitalise the process of income tax reporting for unincorporated businesses and landlords. MTD aims to reduce errors, improve efficiency, and bring tax administration closer to real-time, thus supporting economic growth and ensuring tax compliance.
Who is Affected and When?
The rollout is phased according to income thresholds:
| Phase | Income Threshold (Gross) | Affected Groups | Start Date | Estimated Number Affected |
|---|---|---|---|---|
| Phase 1 | Over £50,000 | Self-employed & landlords | April 2026 | ~780,000 |
| Phase 2 | Over £30,000 | Self-employed & landlords | April 2027 | ~970,000 |
| Phase 3 | Over £20,000 | Self-employed & landlords | April 2028 | ~900,000 |
Remember: The MTD for ITSA income threshold is calculated based on the total gross income from qualifying self-employment and property rental sources in a tax year. Income from other sources, like employment (PAYE), dividends, or savings interest, does not count towards this MTD threshold calculation.
Note: Partnerships and those with income below £20,000 are not yet mandated, but may be included in future expansions (HMRC, 2025).
Key Changes Under MTD for ITSA
Digital Record-Keeping
- Requirement: Taxpayers must maintain digital records of all business and/or property income and expenses.
- Software: Records must be kept using MTD-compatible software or spreadsheets that can connect to HMRC’s systems via APIs (GOV UK).
- Paper records will no longer satisfy legal requirements.
Quarterly Reporting
- Frequency: Instead of an annual Self Assessment tax return, affected taxpayers must submit four quarterly updates per tax year.
- Content: Each update summarises income and expenses for the quarter.
- Deadlines: Quarterly updates must be submitted within just over a month after each quarter ends.
End-of-Period Statement (EOPS) and Final Declaration
- EOPS: At the end of the tax year, an End-of-Period Statement must be submitted to confirm all income and expenses.
- Final Declaration: A final declaration (similar to the current tax return) confirms total tax liability for the year.
Penalties
- Late Filing: Penalties for late quarterly updates will apply after the initial testing phase, starting at 3% of unpaid tax after 15 days, escalating to 10% after 31 days.
- Testing Phase: No penalties during the voluntary testing phase, encouraging early adoption.
Practical Impact on Self-Employed, Small Business Owners, and Landlords
Administrative and Financial Implications
Transition Costs
- Software: Initial setup costs for MTD-compatible software range from £200–£500, with annual fees of £100–£300. These costs are tax-deductible.
- Training: Time and resources will be needed to learn new systems and workflows.
Ongoing Administrative Burden
- Quarterly Submissions: The need to submit data every three months increases the frequency of tax-related tasks, but spreads the workload more evenly across the year.
- Digital Literacy: Some taxpayers, especially older or less tech-savvy individuals, may find the transition challenging.
Compliance and Accuracy
- Reduced Errors: Digital record-keeping and quarterly updates are expected to reduce mistakes. HMRC estimates that 12% of 2023 Self-Assessments contained errors, which MTD aims to address.
- Real-Time Insights: More frequent reporting provides up-to-date financial information, aiding better tax planning and cash flow management.
Impact on Different Groups
Self-Employed Individuals
- Income Tracking: MTD provides greater visibility into business performance throughout the year, helping to avoid surprises at year-end.
- Growth Opportunities: Quarterly data can help identify trends, inform business decisions, and support growth strategies.
Small Business Owners
- Efficiency Gains: Digitalisation reduces paperwork and manual errors. Businesses that already use digital tools will find the transition easier.
- Agent Support: Those using accountants or agents may delegate submissions, but must ensure records are kept digitally.
Landlords
- Property Income: Both professional and part-time landlords must comply if their total property income exceeds the relevant threshold.
- Complexity: Landlords with multiple properties or mixed income streams (e.g., PAYE and rental income) must ensure all qualifying income is included.
Benefits and Opportunities
For Taxpayers
- Time Savings: Digital records and quarterly updates reduce the year-end rush and make tax preparation more manageable.
- Improved Tax Planning: Regular updates provide a clearer picture of tax liabilities, enabling better budgeting and planning.
- Faster Refunds: More frequent submissions can lead to quicker identification of overpayments and faster refunds.
For HMRC and the Economy
- Reduced Tax Gap: MTD is part of HMRC’s strategy to close the £31 billion tax gap (2022–2023 figures) by reducing errors and improving compliance.
- Economic Growth: By modernising tax administration, MTD supports business efficiency and productivity, contributing to the government’s Plan for Change.
Challenges and Risks
Digital Exclusion
- Vulnerable Groups: Some taxpayers may lack access to digital tools or the skills needed to comply. HMRC offers a digital exclusion exemption, but this requires application and is not automatic.
Increased Compliance Risk
- Penalties: More frequent deadlines mean more opportunities for missed submissions and associated penalties.
- Scrutiny: Real-time data allows HMRC to flag discrepancies faster, increasing the risk of audits for those with poor record-keeping.
Costs
- Financial Outlay: While software costs are tax-deductible, they may be a burden for the smallest businesses or those with tight margins.
- Time Investment: Learning new systems and maintaining regular submissions may take time away from core business activities, especially during the transition period.
Recommendations for Affected Taxpayers
Prepare Early
- Adopt Digital Tools: Start using MTD-compatible software now to become familiar with digital record-keeping.
- Join Testing Programmes: HMRC encourages early sign-up for pilot testing, offering support and a penalty-free environment.
Seek Professional Advice
- Accountant Support: Engage a tax professional to ensure compliance and take advantage of tax planning opportunities.
- Training: Invest in training for yourself or your staff to ensure smooth adoption of new systems.
Monitor HMRC Updates
- Stay Informed: HMRC continues to refine MTD rules and thresholds. Keep up to date with official guidance and deadlines.
My Informed Opinion
Based on the evidence and the phased approach adopted by HMRC, I believe that MTD for ITSA represents a positive, albeit challenging, step forward for the UK tax system. The benefits of reduced errors, improved efficiency, and real-time financial visibility outweigh the transitional costs and administrative burdens, particularly for those who embrace digitalisation early. However, HMRC must continue to support vulnerable groups and ensure that digital exclusion does not create new inequalities. For the majority of self-employed individuals, small business owners, and landlords, proactive preparation and the adoption of digital tools will not only ensure compliance but also unlock new opportunities for business growth and financial management.
Conclusion
Making Tax Digital for Income Tax is a transformative policy that will reshape how self-employed individuals, small business owners, and landlords interact with the tax system. While the transition requires investment in software, training, and new workflows, the long-term benefits—greater accuracy, efficiency, and financial insight—are substantial. Early preparation, professional advice, and ongoing engagement with HMRC’s evolving guidance are essential for a smooth transition and continued compliance.
This report was prepared on 22 April 2025, reflecting the most current guidance and policy developments available at the time.
