From Self Assessment to Making Tax Digital in the UK: thresholds, costs and the essential steps to 2028
In short: Making Tax Digital for Income Tax (MTD ITSA) is live in the United Kingdom from 6 April 2026. Sole traders and landlords with qualifying income above £50,000 are already filing quarterly. The threshold drops to £30,000 in 2027 and £20,000 in 2028. The guide below shows you who's in, when, what it costs, and how to avoid the penalties.
Executive summary
- MTD for Income Tax is mandatory from 6 April 2026 for individuals with qualifying income above £50,000 from self-employment (sole traders) and/or property (landlords), based on the 2024/25 return. The threshold drops to over £30,000 from 6 April 2027 and over £20,000 from 6 April 2028.
- The change does not abolish the annual return. Under MTD you keep digital records, send four quarterly updates through HMRC-authorised software and still file a final tax return by 31 January each year. Tax payment dates remain broadly the same as under Self Assessment.
- The most affected groups are sole traders and landlords with rental income. Partnerships and limited companies are not yet in MTD for Income Tax. Profit received as an individual partner does not count towards the qualifying-income threshold.
- Real gains can be substantial: cleaner records, fewer copy-paste errors, better visibility of your tax position throughout the year, and time savings if you use fully functional software. Real losses are also possible: software costs, learning time, more reporting checkpoints across the year, and penalties if you stay disorganised.
- There is a real soft-landing window, but it is not risk-free: the cohort entering from April 2026 will not get penalty points for late quarterly updates in the first tax year, but penalties for the late annual return and for late payment still apply.
What is Making Tax Digital for Income Tax (MTD ITSA)?
Making Tax Digital (MTD for short) is HMRC's programme requiring UK taxpayers to keep records of income and expenses in authorised software, instead of paper or Excel disconnected from any tax tool. For income tax, the programme is officially called Making Tax Digital for Income Tax Self Assessment, abbreviated MTD ITSA.
Across England, Wales, Scotland and Northern Ireland, MTD ITSA replaces the "single annual filing" version of Self Assessment with a model where, during the year, you send four quarterly updates from MTD-compatible software. At year end you submit your tax return, broadly what you did before, except the data already lives in your digital records.
This is part of HMRC's wider digital tax system: the same modernisation programme already covers Making Tax Digital for VAT (since April 2019, then mandatory for all VAT-registered businesses from April 2022), and Corporation Tax for limited companies is expected to follow in a later phase. For now, sole traders and landlords must focus on MTD ITSA, which is the new way for sole traders and landlords to report their income and expenditure to HMRC.
What MTD changes compared with Self Assessment
The classic Self Assessment model was, for most people, an annual exercise: gather invoices, statements and receipts, complete the return after the tax year ends, and pay by 31 January with payments on account on 31 July where applicable. Under MTD for Income Tax, the focus shifts to digital records kept throughout the year and quarterly updates sent from compatible software to HM Revenue & Customs. HMRC is clear that the final annual return remains and is submitted, as before, by 31 January.
The comparison below summarises the old model and the new model based on official HMRC guidance on Self Assessment, MTD for Income Tax, quarterly updates and penalties.
| Dimension | Old Self Assessment | MTD for Income Tax | What it means in practice |
|---|---|---|---|
| Records | Paper, Excel or Google Sheets, gathered at year end | Mandatory digital records in compatible software | Less "catch up in January", more monthly discipline |
| Reporting frequency | Essentially annual | Four quarterly updates + final return | More deadlines to manage |
| Annual return | Yes | Yes, still required | MTD adds in-year reporting, not a replacement |
| Tax payment | 31 January + 31 July payments on account | Same payment dates | Reporting more frequent. Cash flow timing unchanged |
| Software | Optional | Mandatory inside MTD | Cost and learning curve |
| Tax visibility | Often late, year-end only | Better through the year, especially with monthly updates | Helps planning, avoids surprises |
| Penalty regime | Fixed initial penalty + escalation | Points-based for filings + revised payment penalties | Single slip-up softer. Repeated negligence builds up |
| Multiple activities | All converges into the annual return | Separate records + sometimes separate updates | Complexity grows for multi-source taxpayers |
The biggest source of confusion is this: quarterly updates are not four full tax returns on top of the annual one. They are aggregated summaries of income and expenses from your digital records. They are still real compliance obligations with deadlines and consequences, especially after the soft-landing year.
Who is in MTD ITSA and what are the thresholds
MTD for Income Tax applies to individuals already registered for Self Assessment who have:
- Self-employment income as a sole trader (including CIS (Construction Industry Scheme) workers receiving deductions at source).
- Property income (landlords with residential, commercial, or holiday-let rentals, in the UK or abroad).
- Or both combined.
The threshold is not based on your total personal income. It uses qualifying income, that is the gross income from self-employment and property combined, before expenses, taken from your last filed tax return. If you own a property jointly, your share counts. PAYE wages and limited-company dividends do not add to the MTD threshold, and they continue to be reported separately.
MTD ITSA thresholds: the official timetable
| Cohort | Qualifying income in | Mandatory entry |
|---|---|---|
| Wave 1 | over £50,000 in 2024/25 | 6 April 2026 |
| Wave 2 | over £30,000 in 2025/26 | 6 April 2027 |
| Wave 3 | over £20,000 in 2026/27 | 6 April 2028 |
| Below threshold | £20,000 or less | Automatic exemption (for now) |
A few important nuances. Partnerships are not yet required to enter MTD for Income Tax, and HMRC will announce their timetable later. The share of profit received by an individual partner does not count towards qualifying income and does not require digital records or quarterly updates for that source, although that income must still be included in the final return, through compatible software, if the person is in MTD for another activity.
Limited companies are not yet in MTD for Income Tax. If you are a company director or you receive dividends, that does not by itself bring you into MTD ITSA. You can still be affected if you also have sole-trader activity or rental income above the relevant thresholds.
Who does not have to sign up for MTD
There are automatic and on-application exemptions:
- Digital exclusion: if for reasons of age, disability, location without internet access, or religion you cannot use software, you can apply for a formal exemption.
- People without a valid National Insurance number before the start of the tax year.
- Certain special returns filed in 2024/25 (for example trusts, estates, MPs, certain Lloyd's underwriters).
- Transitional cases up to April 2027.
- Qualifying income below your cohort's threshold.
Importantly, if you do not receive a letter from HMRC, it is still your responsibility to check whether you fall within MTD. Lack of notification does not equal exemption.
Timeline and current status of MTD ITSA
MTD for Income Tax is no longer a project, since the service has been live from 6 April 2026 for the first cohort. The wider context: MTD started with VAT in April 2019 and extended to all VAT-registered businesses from April 2022. For Income Tax, HMRC has confirmed the service is live, and the first major deadline for the new cohort is 7 August 2026, when the first quarterly update is due.
This is also where the first financial-risk signal appears for those who haven't prepared. HMRC said in February 2026 that more than 860,000 sole traders and landlords were entering the first wave. The financial press reported that by 14 April 2026 only around 246,000 had signed up. That is not automatic non-compliance, but it is a strong indicator that many have postponed preparation and may walk into the last-minute cost zone: rushed migration, data clean-up under time pressure, software chosen in a hurry, professional help bought under stress.
MTD ITSA timeline: key dates
| Date | Event |
|---|---|
| April 2019 | MTD for VAT becomes mandatory for businesses above the VAT threshold. |
| April 2022 | MTD for VAT extends to all VAT-registered businesses. |
| 31 January 2026 | Self Assessment deadline for tax year 2024/25 (old-style). |
| 6 April 2026 | First MTD ITSA wave: qualifying income over £50,000. |
| 7 August 2026 | First quarterly update due for wave 1. |
| 7 November 2026 | Second quarterly update. |
| 7 February 2027 | Third quarterly update. |
| 31 January 2027 | 2025/26 Self Assessment return (still old-style). |
| 7 May 2027 | Fourth quarterly update for tax year 2026/27. |
| 6 April 2027 | Wave 2: threshold drops to over £30,000. |
| 31 January 2028 | First final annual return filed through MTD ITSA (for 2026/27). |
| 6 April 2028 | Wave 3: threshold drops to over £20,000. |
For the first year of the 2026 cohort there is a limited soft landing: HMRC will not apply penalty points for quarterly updates filed late in 2026/27. That does not mean zero risk, because a late annual return or late tax payment can still attract penalties.
Real gains and real losses for the taxpayer
In the official narrative, MTD promises something reasonable: fewer errors, better records, a system closer to reality than a single annual scramble. HMRC says explicitly that digitalisation aims to reduce errors, cut time spent on corrections and support productivity. Software can also send reminders, scan receipts, reconcile bank transactions and show in-year tax estimates.
The biggest practical gain is rhythm. If you know monthly or quarterly how much you've earned, how much you've spent, and what tax is shaping up, you are far less likely to be hit by a surprise tax bill in January. HMRC even allows updates more frequent than quarterly, for example monthly, if you want a clearer picture of your tax position. Income and expense categories remain broadly the same as under Self Assessment, which softens the transition.
There is also a wider economic argument. In the final evaluation of MTD for VAT, HMRC found that 45% of users of fully functional software reported time savings, with average estimated savings of 26 to 40 hours per business per year. HMRC valued total time saved at between £603 million and £915 million across the studied population. This is not a promise that the same numbers will repeat for Income Tax, but it is the strongest official evidence that digitalisation, done well, can deliver real benefits.
The flip side: MTD for Income Tax is, in practice, more demanding than MTD for VAT. The Institute of Chartered Accountants in England and Wales (ICAEW) warns that Income Tax is more complex than the earlier VAT experience, precisely because it adds more in-year reporting moments. In a survey cited by ICAEW, many businesses and many agents expected higher costs and time pressure without immediately obvious benefits in every case.
In concrete terms, the losses can come from five directions:
- New fixed costs: software, onboarding, data import, support and sometimes training. HMRC does not provide its own software. It publishes a list of recognised vendors, including free options, paid options and bridging software for those who want to stay on spreadsheets.
- Complexity: if you have multiple self-employed activities, you keep separate digital records for each and send separate updates. Property income flows into a different stream. For two or three sources, administrative friction grows clearly.
- Cash flow: MTD helps you see early what tax is shaping up, but it does not change the dates you actually pay. You can have better visibility and still have a liquidity problem if you do not set money aside for 31 January and, where applicable, 31 July.
- Penalties: old Self Assessment had an initial £100 penalty for a late return, plus £10 per day for up to 90 days after three months. Under MTD, filings move to a points-based regime: after the soft-landing year, each missed deadline earns one point, and at four points a £200 penalty applies, followed by a further £200 for each subsequent missed deadline. Softer for an isolated slip. Dangerous for those who run chaotically quarter after quarter.
- Security and data protection: moving from paper to cloud reduces some risks but introduces others. The National Cyber Security Centre's small-business guide notes that one in two small businesses suffer a cyber incident every year. The Information Commissioner's Office (ICO) recommends baseline measures: appropriate technical controls, backup, encryption where suitable, and the ability to restore access to data. Good software without MFA and without document backups just relocates the risk. It does not reduce it.
What MTD ITSA might cost
The estimates below are indicative. They draw on public pricing displayed in April 2026 for typical plans from Sage and Xero, HMRC's guidance on free and bridging software, a market reference for accountant fees in the United Kingdom, and HMRC's own evaluation of time savings linked to fully functional software. Software prices are shown excluding VAT where vendors quote them that way.
| Scenario | Estimated cost | Initial effort | Possible upside | Possible downside if you delay |
|---|---|---|---|---|
| Simple, already-digital user with free or bridging software | £0 to ~£84/year | 2-4 hours | Less year-end chaos, more discipline | A single £200 penalty easily exceeds several years of an entry-level solution |
| Sole trader or landlord on paper, basic paid app | ~£84-£192/year | 6-12 hours | Better tax visibility, cleaner receipts and categories, fewer missed deadlines | Rushed migration, incomplete data, penalty and interest risk |
| Case needing more advanced features or automation | ~£192-£444/year | 8-15 hours | More automation, fewer manual errors, time savings closer to HMRC's full-software benchmark | You may pay more than you recover if your activity is very simple |
| Recurring professional support | software + ~£150-£600+ for a simple annual return, or roughly £100-£150/month for full sole-trader packages | small to medium, with professional onboarding | Lower error risk, support on rules and exceptions, billable time freed up | Last-minute panic pushes you to higher costs and a poorly fitting service |
Two simple financial benchmarks worth keeping in mind:
- A £200 penalty for missed filings under MTD is roughly 29 months of software at £7/month, or around 12.5 months at £16/month, before VAT. For many taxpayers, avoiding a single penalty covers a large slice of the basic cost of digital compliance.
- If software saves you a volume of time comparable to HMRC's MTD-for-VAT benchmark (26-40 hours per year), the value of that time is around £520-£800 per year at £20/hour, or £1,040-£1,600 at £40/hour. A useful reference, not a promise, because MTD for Income Tax is more complex than the VAT version.
There is also the late-payment problem. Once payment penalties start, they get expensive fast. On a £5,000 outstanding balance, a 6% penalty rate is £300 before daily interest. In the 2027/28 tax year, the equivalent rate rises to 8%, which is £400, plus interest. Meanwhile, old Self Assessment remains harsh for very late returns, with escalation above the initial £100 penalty.
How to prepare for MTD without losing money
These income tax changes are part of a broader UK government modernisation of the UK tax system, and the new tax rules require sole traders and landlords must use MTD-compatible software once they cross the qualifying threshold. In practice that means three things: you must keep digital records of business and property income on a real-time basis, you keep digital records and send four quarterly updates to HMRC during the year, and you complete a Self Assessment tax return as well, only now using software that works with Making Tax Digital. The tax reporting cadence is what changes; HMRC's penalty regime, the calendar of digital tax returns, and the categories you report income against are otherwise stable.
The best strategy is unglamorous but effective: don't wait until January and don't wait for the letter. HMRC is clear that it is your responsibility to check whether you fall inside the system.
The practical steps that reduce risk most:
- Check the threshold against your last filed return. Look at the gross income from sole trade and property combined, not just at profit. If you are close to the threshold, treat the year before as a preparation year, not a waiting year.
- Choose your technical route early. For a simple case, an all-in-one accounting software app may be enough. If you already keep reasonable records in Excel or Google Sheets, bridging software can be a cheaper bridge. HMRC publishes a list of recognised software providers and software options on GOV.UK. Review them before committing, and pick a tool that supports both quarterly updates to HMRC and the final return. HMRC indicates that the bigger productivity benefits come from fully functional software for Making Tax Digital.
- Clean up your records before the first quarter. In MTD you must have, at minimum, amount, date and category for each income or expense item. Multiple activities = separate digital records. For property, treat each relevant activity separately according to HMRC's rules.
- Choose the quarter type wisely. Calendar quarters (1 April - 31 March) can be simpler than the standard 6 April - 5 April periods. The choice is made in software before the first update of the year.
- Build a monthly rhythm, not just quarterly. Monthly reconciliations and document scanning dramatically reduce error risk, and more frequent updates can give better tax estimates for planning. Tax payment remains concentrated at the classic deadlines.
- Treat security as part of compliance. Multi-factor authentication on, regular backups, encryption where appropriate, restricted access to tax data. For small businesses, NCSC and ICO recommend these as baseline controls, not luxuries.
- Get professional help earlier than you think. Especially with mixed income, foreign property, multiple activities, weak record-keeping history, partnerships, exceptions, or corrections to make. If your income drops below threshold, HMRC's rule allows you to opt out after three consecutive tax years below the relevant threshold.
One free consultation is enough to confirm whether you're in wave 1, 2 or 3 of MTD ITSA, and to choose compatible software that fits your activity.
Frequently asked questions about Making Tax Digital in the UK
Do I need to use Making Tax Digital?
If your qualifying income from self-employment and property is above £50,000 in 2024/25, then yes, you need to use MTD ITSA from 6 April 2026. The threshold drops to £30,000 from April 2027 and £20,000 from April 2028, so even a smaller side business or single rental can bring you in. Get ready for Making Tax Digital by checking your annual income from self-employment and property against the cohort table above. If you fall below the threshold and are not exempt, you can still join voluntarily, many sole traders and landlords do, to spread the workload across the year.
Is Making Tax Digital compulsory in the UK?
Yes, for the relevant cohorts. MTD for VAT has been mandatory since April 2022 for all VAT-registered businesses. MTD for Income Tax (MTD ITSA) is mandatory from 6 April 2026 for those with qualifying income above £50,000, with thresholds stepping down to 2028. Those below threshold or in exception categories can stay on classic Self Assessment.
Can I still use Excel for MTD?
Not directly. You can keep digital records and submit them to HMRC by combining Excel or Google Sheets with bridging software, which is software that works with Making Tax Digital by pulling your data into the required format. It is a cheap option for those with already-organised records, but you lose the productivity benefits of full accounting software (receipt scanning, bank reconciliations, automatic income and expenditure estimates).
Do I pay tax quarterly under MTD ITSA?
No. Quarterly updates are reporting only, aggregated income and expense figures for the three-month period. Actual tax payment happens on the classic dates: 31 January for the final return, plus 31 July for payments on account where applicable.
How much does Making Tax Digital software cost in the UK?
From £0 (free options recognised by HMRC, e.g. some landlord apps) up to £300-£500/year for advanced packages. Bridging software for spreadsheets starts at around £0-£40/year. Sole traders often use plans of £7-£16/month (excluding VAT). The official list of compatible software is published by HMRC on GOV.UK.
Do landlords have to join MTD?
Yes, if your gross rental income (combined with any sole-trader income) exceeds your cohort's threshold. For jointly owned property, only your share counts. UK property and foreign property income are assessed together for the qualifying-income test.
Does MTD apply to CIS and PAYE?
CIS (Construction Industry Scheme), which is deductions at source for construction workers, is part of sole-trader records and falls inside MTD ITSA if the threshold is exceeded. PAYE (your salary from an employer) does not count towards the MTD threshold and does not require separate quarterly updates, but PAYE income will still be included in the final annual return.
Can my accountant submit updates for me?
Yes. Agent authorisation under MTD ITSA is slightly more complex than under Self Assessment, since it needs dedicated digital links between your HMRC account and your accountant's. Plan ahead, especially if you change accountant after 6 April.
What happens if my income drops below the threshold?
You can apply to leave MTD after three consecutive tax years with qualifying income below the relevant threshold. Until HMRC confirms, you stay in the system and continue quarterly updates.
Bottom line
The move from old-style Self Assessment to MTD is neither a tax apocalypse nor a free upgrade. For the organised taxpayer, it can mean fewer errors, fewer surprises and more control. For the taxpayer who delays, it can mean software bought in a panic, time wasted, professional fees higher than they needed to be, and perfectly avoidable penalties.
Across 2026-2028, the gain or the loss will not come purely from the rules. It will come from how early you change your habits. If you are a sole trader or a landlord in the United Kingdom and you are close to the MTD thresholds, start preparing now, whether that means choosing authorised software, cleaning up records, or having a conversation with your accountant.
Get in touch with the Emilia Accountancy team for a free assessment of your tax position and support through the MTD ITSA transition.