Using the ‘Making Tax Digital’ (MTD) service for Income Tax will become mandatory for sole traders and landlords with qualifying incomes over £20,000 from 6 April 2028, based on 2026-2027 tax year income. The phase-in will require those affected to use HMRC-approved software for digital record-keeping and quarterly reporting. It follows earlier, higher thresholds of £50,000 (April 2026) and £30,000 (April 2027).
Sole traders and landlords with a total qualifying income (gross turnover from self-employment and property) above the thresholds will be affected, and the threshold gets lower each year.
A new way of doing things
The UK government wants people to “Think of this as a transition to the new way of doing things”. They believe it will make the process of declaring income to HMRC “simpler in the long run”.
The UK government says, “It’s part of the UK government’s goal to modernise the tax system and close the tax gap – the difference between what tax should be paid and what people actually pay.”
But what does it mean in effect? It means many people will have to sort out their finances and list earnings and business outgoings four times a year instead of once, they will need to download new software and learn how to use it, and send an update on their earnings to HMRC every three months. The final tax return will still be due at the end of January each year.
Is tax still paid annually?
Tax is still expected to be paid annually. MTD just means you have to fill in some forms every three months rather than all in one go every year.
According to the Association of Tax Technicians:
‘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.’
After the fourth and final quarterly update has been submitted, you will need to file a ‘MTD tax return’. This will have similarities with the current Self-Assessment return, but will pre-populate with the income and expenses from the quarterly updates already filed. Those entries will need to be adjusted for accounting and tax purposes (e.g. disallowing elements of private use or capital expenditure).’
Exemptions can be granted
Listed on the government website are reasons a person could apply for an exemption from MTD. These include ‘age, disability, health condition or location stops you from using a computer, tablet or smartphone.’
There is also an exemption for members ‘of a religious society or order, whose beliefs are incompatible with using digital communications or keeping digital records.’
A ‘higher reporting burden’
This is Money argues that MTD will put a ‘higher reporting burden’ on both businesses and the self-employed.
Accountancy firm Blick Rothenberg states:
‘Making Tax Digital, which requires taxpayers to report quarterly rather than annually, would not lead to any additional revenue for HMRC.’
Fiona Fernie, a partner at Blick Rothenberg believes it will cost businesses money to fork out money ‘for third-party software to do their returns as opposed to these free methods’.
‘I find it difficult to believe… that businesses already using MTD are reporting saving on admin time, reductions in input errors and increased confidence in managing their tax affairs.
It is not possible to determine whether people are making more accurate returns because they use MTD. Data entry is just as likely to be done incorrectly on an MTD platform as on a spreadsheet or the Government Gateway.’
The finance website Finance Box shares Fiona’s concern over cost.
‘Businesses may need to invest in new technology and software to ensure compliance with MTD requirements. This can be a significant expense, particularly for small businesses with limited resources.’
Jack Ross chartered accountants report:
‘Many accountants have expressed concerns about MTD, stating that switching to a fully digital system is not as straightforward. They claim that the sudden shift to digital platforms can lead to significant challenges, such as system glitches and the additional costs of digital infrastructure.’
Taxpayers are not prepared for MTD
A survey by QuickBooks has found that 21% [of those affected] don’t believe they are affected by MTD, while 1 in 4 taxpayers are unsure whether MTD for income tax applies to them.
QuickBooks says ‘awareness is not the issue, but understanding is. Without it, taxpayers risk being non-compliant and facing penalties’.
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