Making Tax Digital (MTD): Your essential FAQs answered
Making Tax Digital (MTD) is transforming the way businesses and individuals manage their tax obligations. With MTD now a legal requirement for many taxpayers, it’s crucial to understand how the system works, who is affected, and what steps you need to take to stay compliant. Below, we answer some of the most frequently asked questions about MTD.
What is Making Tax Digital (MTD)?
MTD is a UK government initiative designed to modernise the tax system by promoting better and more timely record-keeping to reduce errors and mistakes. It is part of the Government’s aim to reduce the tax gap.
MTD will operate on a more modern HMRC IT platform, improving security whilst enabling improved digital services such as pre-population of data and nudges/prompts to taxpayers fed by better connections with data held by HMRC.
There have been a lot of delays, is MTD really happening?
The Making Tax Digital program was first announced in 2015. MTD for VAT was fully implemented in 2022. MTD for income tax (MTD) is a more complicated program, and has experienced a number of deferrals.
The Government confirmed its commitment to MTD on the timescale below at the Autumn Budget 2024. The most recent guidance issued by HMRC to professional bodies indicates MTD will go ahead from April 2026.
What does MTD involve, in a nutshell?
MTD will have three key components: digital records, quarterly updates, and a year-end declaration. All transfers of data to meet these requirements will have to be done using digital links.
Will the due dates for paying tax change under MTD?
No, the payment dates for tax will remain the same as under Self-Assessment – i.e. tax payable by 31 January following the end of each tax year, with payments on account payable for the following year by 31 January and 31 July where relevant.
Who will be affected?
Who’s in and when?
MTD will apply to self-employed individuals and landlords with rental and/or self-employment income above the relevant threshold, which is £50,000 from April 2026 and £30,000 from April 2027.
The threshold is based on your most recent tax return filed. Your 2024/25 tax return (due by 31 January 2026) will determine whether you will have to join MTD from April 2026. Where you hold property jointly it is only your share of the gross rents which is taken into account.
Who is excluded or exempt from MTD?
MTD does not apply to:
- Individuals with income is below the above thresholds;
- Limited companies and partnerships (note MTD is intended to be rolled out to limited companies, partnerships and limited liability partnerships (LLPs) at some point in the future but no timescales have been proposed);
- Individual partners (but they may need to comply with MTD if they have other sources of qualifying income (self-employment or property income outside the partnership);
- Anyone who does not have a National Insurance number;
- Trustees and personal representatives;
- Foster carers and Non-resident companies.
The above exemptions apply automatically and do not need to be claimed.
You should be able to claim exemption from MTD for Income Tax if any of the following apply:
- It’s not reasonably practicable for you to use digital tools to keep your business records or submit quarterly returns due to age, disability, remoteness of location or any other reason (often referred to as ‘digital exclusion’);
- You are subject to an insolvency procedure;
- Your business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records.
Where any of the above apply, you will have to apply to HMRC to claim an exemption, with HMRC having 28 days to either grant or deny the application. The method of applying for this exemption hasn’t been confirmed.
The MTD requirements
Digital record keeping
If you’re in MTD, you will have to keep digital records of the amount, category and date of income and expenses relating to your self-employment and/or property business in some form of software. The categories used will follow those on current Self-Assessment returns.
Do I need special software?
Digital records can be kept either in purpose-built software, or on spreadsheets.
What software is available?
HMRC will not provide MTD compatible software themselves, but most major software providers are expected to offer suitable products. We can make a recommendation as to suitable software in your case if software is appropriate.
Quarterly updates
What are quarterly updates?
From your digital records, you will have to submit a summary of your business income and expenses every quarter.
Does that mean doing a mini-tax return every quarter?
No, the quarterly updates won’t be as detailed as the annual tax return. You won’t need to make accounting or tax adjustments, unless you choose to, and you only need to include details relating to your self-employment and/or property business.
What period do the quarters cover?
The quarterly updates will operate cumulatively. By default, the quarters will be based on the dates of the tax year and will cover the following periods, with the following deadlines, regardless of the accounting period end of the business:
| Period covered | Filing deadline | |
| Quarterly update 1 | 6 April to 5 July | 7 August |
| Quarterly update 2 | 6 April to 5 October | 7 November |
| Quarterly update 3 | 6 April to 5 January | 7 February |
| Quarterly update 4 | 6 April to 5 April | 7 May |
Alternatively, a ‘calendar quarters election’ will be possible, which will align the quarterly update periods with calendar months instead of with the tax year. This is likely to be simpler for businesses which compile their accounts to a month-end date rather than to match the tax year. Where this election is made, the quarterly updates will be as follows:
| Period covered | Filing deadline | |
| Quarterly update 1 | 1 April to 30 June | 7 August |
| Quarterly update 2 | 1 April to 30 September | 7 November |
| Quarterly update 3 | 1 April to 31 December | 7 February |
| Quarterly update 4 | 1 April to 31 March | 7 May |
Note that the filing deadline does not change where a calendar quarters election is made.
What if I have self-employment and property income?
A separate quarterly update will be needed for each trade or property business. If you have sole trade and property income, you will need to submit eight quarterly submissions each year.
When are the quarterly updates due?
Each quarterly update will need to be filed by the 7th of the month following the quarter-end – e.g. 7 August for the first quarterly submission.
The submission date does not change where a ‘calendar quarters election’ is made (see above).
End of year submission
Do I still need to do a tax return?
Yes.
Digital links
What does the requirement to use digital links mean?
From the point where business records are created in software, all transfers of data will have to be made digitally, including: submitting the quarterly updates, making any corrections, and filing the year-end declaration.
What counts as a digital link?
Permitted digital transfer methods include emailing, importing data and use of memory sticks. We are expecting further guidance from HMRC on permitted practices, but copying and pasting or manually retyping entries will not be allowed.
Will there be penalties for non-compliance?
Penalties for late submissions and late payment for taxpayers within MTD will move to a points-based system, similar to the rules for VAT.
Taxpayers in MTD will receive a point each time they miss a submission deadline (quarterly updates and year end submission). Points accumulate until a threshold is reached, at which point a £200 penalty will be issued. From that point onwards, any further late submissions will result in an immediate £200 penalty.
To ‘reset’ the penalty position, the taxpayer will need a set period of compliance (4 quarterly updates, or 2 end of year returns) and to have submitted all returns required for the previous 24 months.
Penalties for VAT and MTD will be treated separately. The existing Self-Assessment penalty regime will continue to apply until you join MTD, and for taxpayers outside the scope of MTD.
How can you prepare?
Making Tax Digital is a significant change to the UK tax system, but with the right tools and preparation, it can simplify tax compliance.
For more information about how this might affect you, contact a member of our Private Client Team on 01903 234094.
