Making Tax Digital is the government's programme to digitise the UK tax system. The idea is to replace annual paper-based reporting with digital record-keeping and more regular submissions, making tax more accurate and easier to manage for both taxpayers and HMRC.

MTD currently covers two taxes: VAT and Income Tax. It was previously planned to extend to Corporation Tax, but as part of its Transformation Roadmap published in July 2025, HMRC confirmed it does not intend to introduce MTD for Corporation Tax.

MTD for VAT and MTD for Income Tax are separate systems. If both apply to you, you will need to sign up for each separately.

No. MTD for Income Tax does not replace Self Assessment. You still submit one annual tax return and pay your tax bill by 31 January following the end of the tax year, exactly as you do now.

What MTD adds is a requirement to keep digital records throughout the year and send quarterly summaries of your income and expenses to HMRC. Think of it as more frequent reporting alongside your existing Self Assessment obligations, not instead of them.

For a full explanation of how Self Assessment works, see our essential guide to Self Assessment.

MTD for Income Tax applies to sole traders and self-employed people whose qualifying income exceeds the relevant threshold. Qualifying income is your total gross income from self-employment and/or property before expenses, based on your most recent Self Assessment tax return.

The rollout is happening in stages:

• £50,000 or more (2024-25 tax return) – you are now required to comply with MTD
• From 6 April 2027 – those whose 2025-26 tax return showed qualifying income over £30,000
• From 6 April 2028 – those whose 2026-27 tax return showed qualifying income over £20,000

Not all income counts towards the qualifying income figure. Dividends, pension payments and PAYE income do not factor in, only income from self-employment and property. So if you earned £30,000 from freelancing and £25,000 from renting a property in 2024-25, your qualifying income is £55,000 and you are now required to comply with MTD.

Even if you have not received a letter from HMRC, it is your responsibility to check whether you need to comply. You can use HMRC's eligibility tool to find out.

No. MTD for Income Tax applies only to sole traders and landlords. If you operate through a limited company and pay yourself a salary and dividends as a director, MTD for Income Tax does not apply to you.

If you are a sole trader who also has a limited company, only your sole trader income counts towards your MTD qualifying income threshold. Your company's Corporation Tax obligations are separate and unaffected.

Yes, in some circumstances. HMRC can grant exemptions to taxpayers who are digitally excluded, meaning it is not reasonable or practical for them to use compatible software because of age, disability or lack of internet access. Some religious grounds may also qualify.

If you think you may qualify for an exemption or deferral, you can find out more on GOV.UK.

Step 1: Get HMRC-approved software

HMRC does not provide its own software. You will need a compatible product, either an all-in-one app that handles record-keeping, quarterly updates and your tax return, or a combination of tools including bridging software if you use spreadsheets.

Use HMRC's software finder tool to find an approved option. Before committing to a product, take the time to find something that fits how you actually work. Think about whether you want to link it to your business bank account, how much you want to spend, and whether you need a simple app or a more fully featured accounting package. Many providers offer a free trial, so test a couple before you decide.

If you currently track your income and expenses on a spreadsheet, you do not necessarily have to change how you work. Around 66% of sole traders use a spreadsheet, and bridging software can connect your existing records to HMRC's MTD system.

Speak to your accountant if you use one, as they will need permission within your software to act on your behalf. 

For more on good record keeping habits, see the 3 must-dos for self-employed bookkeeping.

Step 2: Keep digital records

You now need to keep a digital record of every income and expense transaction. Each record needs to capture the amount, date and category, the same categories you would use for Self Assessment.

If your accounting period ends on 31 March rather than 5 April, you may be able to use calendar update periods instead, which align to calendar month-ends rather than tax year dates. Check with your software or accountant.

Step 3: Send quarterly updates

Every three months, your software uses your digital records to generate a quarterly update: a category-level summary of your income and expenses. It is not a full tax return and does not require any accounting or tax adjustments before sending.

Importantly, each update covers the cumulative period from the start of the tax year, not just the previous three months. So if you missed something in an earlier quarter, you can correct it in the next update.

After each update, you will be able to see an estimated tax bill in your software or HMRC online account.

Step 4: Submit your annual tax return through your software

Your annual Self Assessment return is still due by 31 January, but it now needs to be submitted through your MTD-compatible software rather than directly through the HMRC portal. Make sure your software supports this, as some products only handle quarterly updates.

You will also need to add any other income sources (such as savings interest) and claim any reliefs or allowances before you finalise and submit. Tax payments remain due by 31 January following the end of the tax year.

Because quarterly updates are cumulative, any corrections you make to your digital records will automatically be included in your next update. You do not need to resubmit an earlier update to fix an error. Mistakes made in your fourth and final quarterly update will need to be corrected before you submit your annual tax return.

For some, MTD does carry some genuine benefits. Sending quarterly updates gives you a rolling estimate of your tax bill throughout the year, which means fewer surprises when payment is due and more opportunity to plan ahead. It should also mean your tax information is more accurate on first submission, reducing the risk of corrections.

Digital record-keeping means less paperwork to store, and many people who are already using accounting software will find the practical difference is relatively small.

The main challenges for sole traders are:

More frequent admin. Quarterly reporting means tax administration becomes a regular part of running your business rather than an annual task. You will need to keep your records up to date throughout the year.

Software costs. Most MTD-compatible software carries a monthly subscription fee. This is a new ongoing cost for freelancers who previously used free tools or a basic spreadsheet. HMRC estimates the average additional cost of switching to MTD is around £300.

Accountancy fees. If you currently use an accountant once a year, you may find this moves to a quarterly arrangement, which could mean higher fees even if your overall submission becomes more streamlined.

HMRC has confirmed there will be no penalty points for missing a quarterly update deadline in 2026-27. But this grace period does not extend to your annual tax return or late payment of tax, so those penalties still apply. And you cannot submit your tax return until your quarterly updates are done, so it is worth keeping on top of them regardless.

Once the full penalty system is active, it works on a points basis:

• Each missed quarterly update earns 1 point. Hit 4 points in a 24-month period and a £200 fine is issued, with a further £200 for each additional point.
• Each missed annual return earns 1 point, with a lower threshold of 2 points before a fine is triggered.
• Late payment penalties scale depending on how far past the due date you pay.

There is a separate point total for each tax submission obligation. So if you are late with both your MTD VAT and MTD Income Tax returns, you would receive points against each separately.

Points have a lifetime of two years. To reset after being issued with a fine, you will need to meet a period of compliance and submit everything due within the preceding 24 months.

MTD for VAT is already in place. All VAT-registered businesses must use compatible software to keep digital records of VAT collected and paid. You can find full details on HMRC's MTD for VAT guidance page.

• MTD for VAT was introduced for businesses over the VAT registration threshold (currently £90,000) in April 2019.
• It became a requirement for all VAT-registered businesses, regardless of income, from April 2022.

If you are VAT-registered as well as self-employed, MTD for VAT and MTD for Income Tax are separate systems and you will need to comply with both.

There are currently no plans to introduce MTD for Corporation Tax. HMRC confirmed in July 2025 that it does not intend to proceed, and Corporation Tax administration continues under the current system for the foreseeable future.

If you have more than one self-employed business, or you are both a sole trader and a landlord, you combine the income and expenses from all sources for the purposes of your quarterly updates. You only need to submit one set of quarterly updates and one annual tax return covering all your business activities, rather than separate submissions for each.

No. MTD does not require you to keep paper receipts. You need to keep digital records of your income and expenses, but those records can be based on bank statements, digital receipts or photos of paper receipts stored in your software. The key requirement is that your records are digital and categorised correctly, not that you retain physical paperwork.

If your qualifying income falls below the MTD threshold, you do not automatically stop needing to comply. You can apply to opt out of MTD if your income drops below the relevant threshold for three consecutive tax years. If you opt out, you return to the standard Self Assessment system. Bear in mind that the threshold is dropping over the next two years, so what takes you below it today may not keep you below it for long. 

You can find out more about opting out of MTD on GOV.UK.