MTD for Income Tax: The Complete Guide for Self-Employed

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is the biggest change to how self-employed people report to HMRC in decades. Instead of filling in one tax return at the end of the year, you'll keep digital records and send updates to HMRC every quarter.

If you earn over £50,000 from self-employment or property, this applies to you from 6 April 2026. If you earn less, your turn is coming.

This guide covers who's affected, when, and what you actually need to do about it.

What is MTD for Income Tax?

MTD ITSA replaces the traditional Self Assessment tax return with a digital reporting system. The core changes are:

• You keep digital records of all business income and expenses throughout the year
• You send quarterly updates to HMRC summarising those records
• At the end of the tax year, you submit a final declaration instead of a full Self Assessment return

The quarterly updates aren't full tax calculations. They're summaries of your income and expenses for that quarter. HMRC uses them to build up a picture of your tax position throughout the year, rather than getting everything in one lump in January.

The idea, according to HMRC's own guidance, is to reduce errors and make the system work closer to real time. Whether it achieves that is another matter. But it's the law now.

Who does it affect and when?

MTD ITSA is being rolled out in phases based on how much you earn:

The threshold is based on your gross income (turnover), not profit. So if you invoice £55,000 a year but only take home £35,000 after expenses, you're still in Phase 1.

If you have both self-employment income and property income, they're assessed separately. If either source alone exceeds the threshold, you're in.

Below £20,000, there's no confirmed date yet. HMRC has said they'll extend MTD further, but nothing is set in stone.

The quarterly submission cycle

Under MTD, the tax year is split into four quarters. Each quarter has a submission deadline:

Each update is a summary of income and expenses for that quarter. You're not doing a full tax calculation four times a year. You're sending HMRC the raw numbers. Your software handles the formatting.

After Q4, you submit a final declaration by 31 January the following year (the same deadline as the current Self Assessment). This is where you make any adjustments, confirm the figures, and finalise your tax position.

What counts as "digital records"?

HMRC requires your records to be kept in MTD-compatible software. That means:

• Accounting software like FreeAgent, Xero, or QuickBooks that connects to HMRC's API
• Bridging software that takes data from a spreadsheet and submits it via the API
• Specialist tools that feed into your accounting software (for example, a mileage tracker that exports CSV files for import)

A plain spreadsheet on its own doesn't count unless it's linked to bridging software that handles the HMRC submission. And paper records are out entirely.

For each type of income and expense, you need to record the amount, the date, and enough detail to explain what it was. For mileage, that means being able to evidence each business journey individually: the date, where you went, why it was for business, and the distance. A weekly total won't hold up if HMRC asks you to prove the "wholly and exclusively" business purpose. See the guide on what MTD means for mileage records for the full picture.

The soft landing: first year leniency

HMRC has confirmed a "soft landing" period for the first year of MTD ITSA. For the 2026/27 tax year, this means:

• You're still legally required to comply with MTD
• You still need to keep digital records and send quarterly updates
• But HMRC won't charge penalties for late submissions or minor errors during this first year

This doesn't mean you can ignore it. It means HMRC is giving people a year to get their systems working properly without the threat of fines. Think of it as a grace period, not an exemption.

From the 2027/28 tax year onwards, the full penalty regime applies.

Penalties after the soft landing

Once the soft landing ends, HMRC's new points-based penalty system kicks in:

Late submission: You get one penalty point for each late quarterly update. When you hit the threshold (four points for quarterly submissions), you get a £200 fine. Every late submission after that is another £200 until you bring your record up to date.

Late payment: No penalty if you pay within 15 days of the deadline. Between 16 and 30 days late, you're charged 2% of the tax owed. After 30 days, it's 2% plus 4% annualised on the outstanding amount. After 31 days, daily interest accrues on top.

Inaccurate returns: The existing penalty regime continues: 0–30% of the understated tax for careless errors, 20–70% for deliberate errors, and 30–100% for deliberate concealment. These apply to the final declaration, not the quarterly updates.

What software do you need?

At minimum, you need accounting software that's on HMRC's list of MTD-compatible software. The main options for self-employed people in the UK are:

• FreeAgent: free with NatWest, RBS, and Mettle business accounts. Popular with sole traders.
• Xero: widely used by accountants. Starts around £15/month.
• QuickBooks: strong UK presence. Starts around £12/month.
• Sage: long-established UK provider. Various pricing tiers.
• Bridging software: if you really want to keep using spreadsheets, tools like BTCSoftware or 123 Sheets can bridge the gap. They take your spreadsheet data and submit it to HMRC via the MTD API. This is compliant, but adds an extra step.

Your accounting software handles the quarterly submissions. Specialist tools (mileage trackers, receipt scanners, invoicing apps) feed data into your accounting software via CSV import, API integration, or manual entry.

What records to keep beyond mileage

MTD requires digital records of all business income and expenses. For a typical self-employed person, that means:

• Income: every invoice or payment received, with date, amount, and client/source
• Expenses: every business purchase, with date, amount, and what it was for
• Mileage: evidence of each business journey: date, locations, purpose, and distance (see BIM37600)
• Bank transactions: business account statements showing money in and out
• Capital equipment: anything over £1,000 that you've bought for the business (tools, vehicles, equipment)

You need to keep these records for at least five years after the 31 January submission deadline for that tax year. For the 2026/27 tax year, that means keeping records until at least January 2033.

How to prepare: a practical checklist

Whether MTD applies to you now or in 2027/2028, here's what to sort out:

1. Check your income. Add up your self-employment and property gross income for the current tax year. If it's over £50,000, you're in from April 2026. Over £30,000, you're in from April 2027.
2. Choose your accounting software. If you don't have one, pick one now and start using it. If your accountant already uses something, ask what they recommend. It'll make your life easier if you're both on the same platform.
3. Set up digital expense tracking. Stop keeping paper receipts as your primary record. Photograph them and log them in your accounting software, or use a receipt scanner app.
4. Start tracking mileage digitally. If you claim mileage, you need to be able to evidence each business journey, not weekly totals, not a number you estimate in January. A GPS-based mileage tracker running in the background is the simplest way to produce records that hold up in a compliance check. See the detailed guide on MTD and mileage records.
5. Talk to your accountant. Ask them specifically: "Are we ready for MTD?" If they say "we'll sort it out in January", find a new accountant. MTD is quarterly. January is too late.
6. Run a dry quarter. Even if MTD doesn't apply to you yet, try running one quarter as if it does. Keep digital records, total everything up at the three-month mark, and see if you can produce the numbers your accounting software needs. Better to find the gaps now than when it's mandatory.

Common questions

Does MTD replace Self Assessment?
Partly. You still file a final declaration at the end of the year (by 31 January), but the quarterly updates replace much of what the Self Assessment return used to cover. The process changes, but the deadlines for paying tax don't.

Do I still need an accountant?
MTD doesn't change whether you need an accountant; it changes how you share data with them. If you use cloud accounting software, your accountant can see your records in real time and handle the quarterly submissions on your behalf. Many accountants prefer this to the old system of receiving a shoebox of receipts in December.

What if I miss a quarterly deadline?
During the 2026/27 soft landing, nothing happens. From 2027/28 onwards, you get a penalty point. Four points triggers a £200 fine.

Can I still use a spreadsheet?
Yes, but only if it connects to HMRC via bridging software. A standalone Excel file that you email to your accountant once a year doesn't meet the requirements.

What about partnerships and limited companies?
MTD ITSA currently applies to sole traders and individual landlords. Partnerships are expected to be brought in later (HMRC hasn't confirmed when). Limited companies are already covered by MTD for Corporation Tax, which is a separate system.

I earn under £20,000: will this ever affect me?
Probably, but no date has been set. HMRC's stated intention is to extend MTD to all self-employed individuals eventually. For now, if you're under £20,000, you continue with traditional Self Assessment.

The bottom line

MTD for Income Tax isn't optional, and it isn't going away. The phased rollout means most self-employed people will be affected within the next two to three years. The best thing you can do right now is start keeping digital records, even if your threshold hasn't kicked in yet. When your turn comes, you'll be ready instead of scrambling.

The quarterly reporting sounds like more work, and in the first year it probably will be. But once you've got your systems set up (accounting software, digital receipts, automatic mileage tracking) each quarterly update should take minutes, not hours. The pain is in the setup. The ongoing effort is minimal.

For more on the mileage side of things, see the guide on what MTD means for your mileage records. The new tax year checklist covers everything else you need to sort out for 2026/27.

All Premium features free until 5th April 2027 (end of 26/27 tax year). KeptMiles tracks your mileage and produces the digital records MTD requires.