Hundreds of thousands of landlords and self-employed sole traders in the UK are being urged to check their registration status for HM Revenue and Customs' (HMRC) Making Tax Digital (MTD) initiative. The phased implementation of MTD for income tax and self-assessment (ITSA) began on April 6 for those with the highest incomes from self-employment or rental income.
MTD Requirements and Deadlines
Individuals with a combined income from self-employment and/or rental income exceeding £50,000 in the 2024/25 tax year were required to register for MTD for income tax by April 6, 2026. Approximately 864,000 taxpayers fell into this category. Those who have not yet registered and are eligible are advised to do so immediately. The first MTD for income tax filing for these individuals is due by August 7, 2026.
The MTD requirements will extend to those with incomes between £30,000 and £49,999 from April 2027, and those with incomes between £20,000 and £29,999 from April 2028. For those whose qualifying income exceeds £30,000 in the 2025/26 tax year, registration will be mandatory from April 2027. Similarly, an income exceeding £20,000 in the 2026/27 tax year will trigger MTD requirements from April 2028.
MTD applies only to landlords and self-employed sole traders; partnerships are not yet included, though future inclusion is planned. MTD for corporation tax has been discontinued.
Digital Record-Keeping and Filing
Taxpayers affected by MTD must file quarterly returns detailing their income and expenses using compatible software. Spreadsheets can be used in conjunction with 'bridging software' to facilitate these filings. Digital records for each transaction, including date and amount, must be created by the submission deadline for the relevant quarterly period and retained for five years after the tax return filing deadline.
Each sole proprietorship constitutes a separate business for filing purposes, and all UK properties are treated as a single UK property business. Similarly, all overseas properties form a single overseas property business. The quarterly updates are cumulative, reflecting the tax year to date. Taxpayers can opt to align their quarterly updates with calendar quarters, but this election must be made before the first quarterly submission deadline of the tax year and remains in place thereafter.
For those not VAT registered, a summary of total income and expenses is sufficient. VAT-registered businesses must break down expenses into categories specified by HMRC and continue to file separate MTD VAT returns. They can align VAT quarters with MTD for income tax quarters if requested.
Tax Payments and Final Returns
MTD does not alter the existing payment dates for self-assessment, which remain January and July. While software may provide tax estimates, these might not be fully accurate without including non-MTD income sources. After the final quarterly filing, a final MTD tax return must be submitted by January 31 following the tax year's end. This return includes a final declaration of accuracy and accounts for any error corrections, adjustments, or tax reliefs, as well as any income not covered by MTD, such as employment or dividend income.
Exemptions and Deferrals
Exemptions from MTD for income tax are available for individuals deemed 'digitally excluded' by HMRC based on criteria such as age, health, disability, religion, or internet access. Other exemptions apply to those unable to complete identity verification, trustees, executors of deceased persons, individuals lacking mental capacity, and Lloyds members in relation to their underwriting business.
Deferrals to the mandatory start dates are in place for several groups until at least April 2027, including non-UK residents, recipients of income from trusts or estates, qualifying care recipients (e.g., foster carers), those using averaging adjustments (e.g., farmers), and non-UK resident foreign entertainers and sportspeople.
Further deferrals, with no firm end date, extend to at least April 2028 for Lloyds members with self-employment or rental income, ministers of religion, and recipients of the Married Couples Allowance or Blind Person's Allowance born before April 6, 1935.
Penalties for Non-Compliance
HMRC is waiving penalties for the first year of MTD for income tax. However, from April 2027, penalties will be levied. Each missed quarterly filing deadline will result in a penalty point. A maximum of four points can be accumulated before a £200 penalty is issued. These points expire after 24 months if the taxpayer remains below the four-point threshold. Once the threshold is reached, points do not expire automatically, and further £200 penalties are issued for subsequent missed deadlines until compliance is met for 12 months and all outstanding returns are filed.
Penalties may be waived if a reasonable excuse for non-compliance exists, though this does not typically include a lack of understanding of the rules or an agent's failure. There is a right of appeal against penalties.