What is Making Tax Digital?
Making Tax Digital (MTD) is government's programme to digitise the tax system, covering VAT and Income Tax Self Assessment (ITSA) and VAT. It was previously set to cover Corporation Tax too, but HMRC has confirmed that it now does not intend to go ahead with this.
The idea behind MTD is to make managing taxation more effective, efficient and accurate for both taxpayers and HMRC, by submitting digital financial records on a quarterly basis.
It’s being rolled out in stages; MTD for VAT already applies to all VAT-registered businesses regardless of income. But the next step is the introduction of Making Tax Digital for Income tax.
MTD for VAT and MTD for Income Tax Self-Assessment are separate systems, so you’ll need to sign up for both if appropriate.
Deadlines for Making Tax Digital
MTD is being rolled out in stages, with different deadlines for individuals and businesses depending on their circumstances. Here's a breakdown of the MTD deadlines for Income Tax, VAT and Corporation tax.
MTD for Income Tax
MTD for Income Tax will be required for sole traders and landlords:
- From April 2026, for those with an income of more than £50,000.
- From April 2027, for those with an income of more than £30,000.
- From April 2028, for those with an income of more than £20,000.
MTD for VAT
MTD for VAT is already in place, and any VAT-registered businesses need to use a compliant accounting application or software to make their digital records of VAT collected and paid.
- MTD for VAT was introduced for businesses over the VAT Registration Threshold (£90,000) in April 2019.
- It became a requirement for all VAT-registered businesses, regardless of income, from April 2022.
MTD for Corporation Tax
There are currently no plans to introduce MTD for Corporation Tax.
The government previously consulted on the feasibility of extending MTD to Corporation Tax reporting. However, as part of its Transformation Roadmap published on 21st July 2025, HMRC confirmed that they "do not intend to introduce MTD for CT".
How MTD for Income Tax works
The main requirement is that the financial records of your business income and expenses will need to be digitally linked to HMRC. This can be done by using compatible accounting software. You can find out which software currently works with Making Ta Digital for Income Tax by visiting this Gov.uk page.
These details will need to be submitted as quarterly updates, every three months. You’ll also need to submit one End of Period Statement (EOPS) every year, for each source of income, and also a final declaration, which includes details of all other taxable income, including investments and savings.
Quarterly updates will be required on the following schedule:
- Quarter 1 (April 6th – July 5th) – August 5th
- Quarter 2 (July 6th – October 5th) – November 5th
- Quarter 3 (October 6th – January 5th) – February 5th
- Quarter 4 (January 6th – April 5th) – May 5th
The End of Period Statement must be filed by January 31st following the relevant tax year and you will be required to use compatible software to fill your end of year tax return.
Tax payments will still be required annually by 31st January of the next year, as is currently the case, along with your final declaration.
What are the benefits of Making Tax Digital Income Tax?
The good news is that for many freelancers and self-employed professionals, the switch to Making Tax Digital for Income Tax should carry some benefits in dealing with tax returns and payments. Many people are likely to already be using MTD compatible software to manage their finances, so the difference will be minimal.
Potential benefits of MTD for Income Tax for the self-employed include;
- You’ll have a more complete idea of your tax obligations throughout the financial year, meaning less chance of a nasty shock when your payment is due.
- It means your tax information should be right on the first submission, reducing complications and stress.
- Less paperwork to keep and store, which is more environmentally friendly, and also means less filing.
There are some downsides, however. The main ones are;
- The time and resources to ensure that your accounting and records are kept up-to-date, and that you’re using a Making Tax Digital compliant solution properly. This includes potentially researching and switching your accounts to new software and learning how to use it, along with making sure you schedule appropriate time to manage your financial details going forwards.
- The costs of MTD for Income Tax, which could include investing in new software, and any associated accountancy or admin fees. For example, if you currently use an accountant to check your tax information annually, this might switch to a quarterly assessment to ensure every submission is correct, meaning extra costs even if your final submission will be much more streamlined. HMRC estimate the average additional amount will be around £300 for businesses or individuals to switch to MTD for Income Tax.
- There’s the potential that in the future, tax will be paid on a quarterly basis. If this happened, it would reduce income from annual interest on funds stored in your tax accounts.
Making Tax Digital Penalties
With the rollout of a new system as big as Making Tax Digital, there’s inevitably going to be some issues. And along with changing how information is submitted, there will also be new sanctions for late submissions and payments. It'll work on a points system, similar to driving licences.
The current system will continue to apply for any one-off tax submissions. For MTD for VAT, the new penalty system came into effect for customers with accounting periods beginning on or after 1 January 2023.
However, for Income Tax Self Assessment, the new MTD penalty system will come into effect for taxpayers once they are mandated to join it.
Every time you miss a deadline, you’ll receive a penalty point. And when you reach a set limit, you’ll be issued with a £200 fine.
- Monthly submissions (VAT only): 5-point penalty limit
- Quarterly submissions: 4-point penalty limit
- Annual submissions: 2-point penalty limit
There’s a separate point total for each tax submission obligation. So, if you were late with both your MTD VAT and MTD ITSA returns, you would get a mark against each, rather than having them both combined into one penalty figure.
And if you make two or more failures relating to the same submission in one month, you’ll generally only receive a single point, with some exceptions.
Points won’t expire and reset when you hit a penalty limit but do have a lifetime of two years. If you want to go back to zero after being issued with a fine, you’ll need to meet a period of compliance and submit everything which was due within the preceding 24 months.
There are also time limits for HMRC to issue points for failures. And HMRC has the discretion to not deliver points or penalties, along with a review and appeals process if you wish to challenge decisions. You can find more details on the Making Tax Digital penalty points system in this policy paper.
HMRC have said they will initially apply a light touch to penalties and fines as people adjust to the new system, but you shouldn’t rely on this to mean you’ll get away with late submissions or payments.
What you should be doing now for MTD Income Tax if you’re self-employed
Even if your deadline for signing up for VAT feels far away, starting the work towards compliance now will make the transition easier - and you'll be less likely to incur needless penalty points.
If you manage your own finances and tax obligations, schedule some time to look at the various accountancy tools and applications which you might need to start using for MTD compliance. It always takes a little time to learn new systems, or transfer data across. And you’ll also want to get into the habit of staying on top of your financial and tax records, ensuring you don’t end up being liable for more tax than you need to pay.
Anyone working with accountants or other financial professionals should check any guidance already available, or arrange a quick chat to ensure that the transition will be handled smoothly.
And if you’re one of the many freelancers who sometimes struggles to stay on top of their accounting and financing, then it’s time to tackle those challenges.
With MTD ITSA coming into force from April 2026, you’ve got some time to build up your skills and knowledge, and apply them to your business, without having to panic at the last minute. It’s a great time to refresh your knowledge of invoicing, tax, expenses, dividends, and more.
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