1. What is Making Tax Digital?
Making Tax Digital (MTD) is the UK government's initiative to move the tax system online. Instead of one annual Self Assessment return, HMRC now requires digital record-keeping and quarterly submissions of income and expenses throughout the year.
MTD has two phases: MTD for VAT (already mandatory for all VAT-registered businesses), and MTD for Income Tax Self Assessment (MTD ITSA) — which is the phase affecting sole traders and landlords from April 2026.
The core idea: HMRC wants to receive your financial data incrementally through the year, rather than a single return 9–10 months after the tax year ends. The theory is that this reduces errors, makes underpayments rarer, and helps taxpayers budget for their bill in real time.
2. Who is Affected by MTD ITSA?
MTD ITSA applies to you if you are:
- A self-employed sole trader with gross income over £50,000 per year
- A UK landlord with gross property income over £50,000 per year
- Someone with combined income from self-employment and property over £50,000
The £50,000 threshold will drop to £30,000 in a later phase (expected 2027), and eventually to £20,000 (currently proposed for 2028). If you're below £50,000 now, you're not immediately affected — but planning ahead is sensible.
Employees who only have PAYE income are not affected by MTD ITSA. Neither are limited companies (which have their own Corporation Tax obligations).
Your gross income — not your profit — determines whether MTD applies. If you turned over more than £50,000 from self-employment or property in the most recent tax year, you're in scope for April 2026.
3. What Actually Changes?
Here's what's different under MTD ITSA compared to the old Self Assessment regime:
Digital record-keeping (mandatory)
You must keep your business records in MTD-compatible software. Spreadsheets technically qualify if used with an approved "bridging" software, but most accountants recommend dedicated bookkeeping tools. Paper records are no longer acceptable as your primary records.
Quarterly submissions
You must submit a summary of income and expenses to HMRC four times per year. Each quarterly submission must be made within one month of the quarter end:
| Quarter | Period | Submission deadline | Status |
|---|---|---|---|
| Q1 | 6 April – 5 July | 5 August | Due soon |
| Q2 | 6 July – 5 October | 5 November | Upcoming |
| Q3 | 6 October – 5 January | 5 February | Upcoming |
| Q4 | 6 January – 5 April | 5 May | Upcoming |
End-of-period statement (EOPS)
Once per year, you submit an End-of-Period Statement — a final reconciliation of your income and expenses, with any adjustments (such as private use of assets). This replaces the old annual Self Assessment return for sole traders.
Final declaration
This replaces the old SA100 tax return. You confirm your income from all sources, claim reliefs, and crystallise your tax liability. The deadline is 31 January — the same as before.
4. MTD ITSA Penalties for Non-Compliance
HMRC's penalty regime for MTD ITSA uses a points-based system. Each missed quarterly submission earns one penalty point. When you hit the threshold (4 points for quarterly filers), you receive a £200 fixed penalty. Points expire after 24 months of full compliance.
Separate late-payment penalties also apply:
- Day 15: 3% of unpaid tax
- Day 30: Additional 3% (6% total)
- Day 31+: Daily interest of 4% per annum on the outstanding amount
On a £10,000 tax bill, missing the payment deadline by 60 days costs roughly £660 in penalties and interest — before HMRC's investigation costs. The points system sounds lenient but compounds quickly if you're disorganised.
5. MTD-Compatible Software: What You Need
To comply with MTD ITSA, your software must be able to:
- Store your income and expenses digitally (no re-keying from paper)
- Create a quarterly summary of income and expenses in the correct HMRC format
- Submit that summary directly to HMRC via the MTD API
- Receive confirmation from HMRC of receipt
HMRC maintains a list of approved software providers. Options range from established players (QuickBooks, Xero, FreeAgent) to newer MTD-focused tools like Neatly. The key differentiators are price, ease of use, and whether the software integrates directly with your bank account to pull transactions automatically.
Ready to become MTD-compliant?
Neatly connects to your bank, auto-categorises transactions, and files your quarterly MTD submissions automatically.
6. Connecting Your Bank Account
The most efficient route to MTD compliance is linking your business bank account directly to your bookkeeping software via Open Banking. Under the UK's Open Banking standard, banks must provide read-only API access to your transaction data — at no cost to you.
With Open Banking connected, every transaction that clears your account automatically appears in your bookkeeping software. No manual CSV exports, no re-keying. The software then categorises each transaction — either automatically using AI, or with a simple click — and the data flows directly into your quarterly MTD submission.
This is the approach Neatly takes: connect once, and your MTD compliance is effectively on autopilot.
What if I don't want to connect my bank?
You can still comply manually. Most MTD software accepts CSV bank statement uploads, and you can categorise transactions manually. It takes longer — typically 2–4 hours per quarter — but it works. The quarterly submission itself still goes to HMRC automatically via the software.
7. Transaction Categories Under MTD
HMRC requires you to categorise your business income and expenses using specific nominal codes that align with the HMRC categories on the SA103 (self-employment) or SA105 (property) supplementary pages. The main expense categories for sole traders are:
- Cost of goods sold — materials, stock, direct costs
- Motor expenses — business use of a vehicle
- Travel and subsistence — business travel, accommodation, meals
- Premises costs — rent, business rates, utilities
- Repairs and renewals — maintenance of business premises/equipment
- Phone and internet — business-use proportion
- Advertising and marketing
- Accountancy, legal and professional fees
- Other business expenses
The quarterly submission summarises totals for each category — you don't send individual transactions to HMRC. This means the categorisation work happens in your software, not on the HMRC portal.
8. MTD ITSA vs MTD for VAT — What's the Difference?
These are two separate schemes:
- MTD for VAT — already mandatory for all VAT-registered businesses. Quarterly VAT returns submitted digitally to HMRC.
- MTD for Income Tax SA (MTD ITSA) — the new scheme for sole traders and landlords above the income threshold. Replaces the annual Self Assessment return with quarterly income/expense summaries.
If you're VAT-registered, you're already used to the concept of regular digital submissions. MTD ITSA layers the income tax equivalent on top. Good MTD software handles both in one place.
9. Exemptions and Deferrals
HMRC does provide limited exemptions from MTD ITSA:
- Digital exclusion: If it's not reasonably practicable to use computers due to age, disability, or location (e.g., no reliable internet access), you can apply for an exemption.
- Religious objection: Members of some religious groups that prohibit the use of electronic communications may be exempt.
- Insolvency practitioners: Specific rules apply.
If you genuinely can't use MTD software, you need to apply to HMRC in writing before your MTD start date. Doing nothing is not an option — late compliance still earns penalty points.
10. How to Get MTD-Ready: Step by Step
- Check if you're in scope. Gross income (not profit) over £50,000 from self-employment or property? MTD applies from April 2026.
- Choose MTD-compatible software. Sign up for a free trial now. Don't leave this to March 2026.
- Connect your bank account (or set up CSV import). Get at least three months of historical data in the system before your first submission.
- Set up your chart of accounts. Map HMRC's expense categories to how you actually spend money. Good software pre-configures this.
- Register for MTD ITSA with HMRC. You'll need to sign up through your software (not the HMRC portal). Your software provider handles this.
- Submit Q1 on time. Your first quarterly submission covers 6 April – 5 July, due 5 August. Mark it in your calendar.
The most common mistake is leaving MTD setup until the last minute. You need 2–3 months of data in your software before your first submission to accurately reconcile opening balances. Starting now gives you that runway.
11. What Does MTD Compliance Cost?
MTD-compatible software typically costs £10–£40/month depending on features. Some accountants include it as part of their fees. A handful of providers (including Neatly) offer free early-access tiers.
Compare this to the alternative: hiring a bookkeeper at £25–£50/hour for quarterly catch-up work, or the penalties for missing submissions. For most sole traders, the software pays for itself in time saved in the first quarter.
If you currently pay an accountant to prepare your Self Assessment, ask them whether their fees change under MTD. Some accountants charge more for the quarterly work; others include it in a fixed annual fee. The variance is significant — worth a conversation before April.
12. Common Questions About MTD ITSA
Do I still need an accountant under MTD?
Not necessarily. MTD software automates most of the mechanical work — recording transactions, categorising them, and submitting to HMRC. Many sole traders with straightforward income (freelance income, one rental property) find they no longer need an accountant once they're using good MTD software. That said, an accountant adds value for complex situations: multiple income streams, allowable expenses that require judgment, or tax planning advice.
What happens if I miss a quarterly deadline?
You earn a penalty point. At 4 points, a £200 fine is triggered. You can reduce points by filing on time for 24 months consecutively. The key is to set calendar reminders and use software that sends you deadline alerts.
Can I use a spreadsheet?
Technically yes, with bridging software. But in practice, maintaining a spreadsheet and then paying for bridging software to submit it costs more (in time and money) than just using dedicated MTD software. The spreadsheet route is mainly relevant for businesses with unusual accounting systems that aren't yet available in standard software.
Do I need to submit expenses individually?
No. You submit category totals — not line-by-line transactions. HMRC receives, for example, "Motor expenses: £1,240" for the quarter. The underlying transaction records stay in your software. HMRC can request them in an audit, but they're not transmitted automatically.
I have both self-employment and rental income. Does MTD apply twice?
You submit one EOPS per income source per year. So if you have both self-employment income and rental income, you'd submit two sets of quarterly updates (one for each source) and two EOPSs. A good MTD software handles both within the same interface.