What is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) replaces the annual Self Assessment tax return with a system of quarterly digital updates. Instead of filing one return per year, you submit a summary of your income and expenses to HMRC every three months, then make a final declaration at the end of the tax year to confirm the totals.
The system is designed to reduce errors and keep tax records more current. For most sole traders, the practical change is that you'll need compatible software to keep digital records and submit those quarterly updates directly to HMRC.
When does it start?
MTD ITSA is being rolled out in stages based on gross income:
| From | Applies to |
|---|---|
| April 2026 | Sole traders and landlords with gross income over £50,000 |
| April 2027 | Gross income over £30,000 |
| April 2028 | Gross income over £20,000 |
The threshold is based on gross income — your total receipts before expenses are deducted — not your taxable profit. If you're close to a threshold, check your actual receipts figure from your last Self Assessment return, not your profit after expenses.
What changes in practice
Under MTD ITSA, a tax year looks like this:
- Quarterly digital updates — submitted within one month of each quarter end (7 August, 7 November, 7 February, 7 May). These are summaries of your income and expenses, not full tax calculations. No tax is due at this stage.
- Final declaration — submitted by 31 January following the end of the tax year. This replaces the current Self Assessment return and is where you confirm your totals, claim any allowances, and finalise your tax liability.
The underlying tax calculation doesn't change. You still pay Income Tax and National Insurance on your profits using the same rates and allowances. MTD changes how and when you report to HMRC, not how much tax you pay.
What records do you need to keep?
HMRC requires digital records — not a spreadsheet exported to PDF or a paper notebook. Your records need to be kept in recognised software that can submit updates directly to HMRC via their API.
What counts as a digital record:
- Income and expenses logged in MTD-compatible software
- Digital copies of invoices and receipts (a photo on your phone linked to the expense counts)
A standard Excel or Google Sheets spreadsheet works only if you use a recognised bridging software tool to submit from it. A spreadsheet on its own is not compliant.
What software do you need?
HMRC maintains a list of recognised MTD-compatible software on gov.uk. Options range from full accounting packages (Xero, QuickBooks, FreeAgent) to lightweight apps built specifically for sole traders.
When choosing, check that the software is:
- On HMRC's approved list
- Compatible with MTD ITSA (not just MTD VAT, which is a separate system that's already live)
- Able to submit quarterly updates and a final declaration
Several free or low-cost options exist for sole traders who don't need invoicing, payroll, or multi-user features. Cost and complexity aren't the same thing — a simple sole trader business doesn't need enterprise accounting software.
What should you do now?
If your gross income is over £50,000, you should already be signed up and using compliant software. The first quarterly deadline for 2026–27 (covering 6 April to 5 July 2026) is 7 August 2026.
If your income is between £30,000 and £50,000, April 2027 is your date. You have time, but starting to keep digital records now — before the deadline — makes the transition significantly easier. Running two systems in parallel as you switch over is more painful than just starting in software from the beginning.
If your income is between £20,000 and £30,000, April 2028 is the current date. No obligation yet. HMRC may lower the threshold further in future but no date below £20,000 has been confirmed.
If your income is under £20,000, MTD ITSA doesn't currently apply to you.
Not sure where your income sits? Check the gross income figure on your most recent Self Assessment return — it's your total receipts before expenses, not the profit figure. See does Making Tax Digital apply to me? for a step-by-step check.