Making Tax Digital: What Self-Employed People Need to Know

Making Tax Digital (MTD) is HMRC's initiative to modernise the UK tax system. The core idea is simple: instead of filing one annual tax return, businesses and self-employed individuals will keep digital records and submit quarterly updates to HMRC using compatible software.

HMRC's goals for MTD are to:

• Reduce errors caused by manual data entry and paper-based record-keeping
• Give taxpayers a clearer, more up-to-date picture of their tax position throughout the year
• Reduce the tax gap (the difference between tax owed and tax collected)
• Move the UK tax system closer to real-time reporting, as many other countries have done

MTD has been rolling out in phases. MTD for VAT has been mandatory since April 2022 for all VAT-registered businesses. MTD for Income Tax Self Assessment (MTD for ITSA) — which is the part that affects the self-employed — has been delayed several times but is now on a confirmed timeline.

If you are self-employed and earn above the threshold, MTD for ITSA will fundamentally change how you report your income and expenses to HMRC. Instead of one Self Assessment return per year, you will submit five updates: four quarterly summaries plus a final end-of-period statement. This is a significant change, and preparation is key.

MTD for Income Tax Self Assessment is being introduced based on income thresholds:

April 2026: MTD for ITSA becomes mandatory for self-employed individuals and landlords with gross income (turnover, not profit) over £50,000. This is the first wave and is now confirmed by HMRC.

April 2027: The threshold drops to £30,000. Self-employed individuals and landlords with gross income over £30,000 must comply from this date.

Beyond 2027: HMRC has indicated that the threshold will eventually be lowered further, potentially to the current Self Assessment threshold. However, no confirmed dates exist for thresholds below £30,000. Individuals earning under £30,000 are not currently required to join MTD for ITSA but may opt in voluntarily.

Key detail: The threshold is based on your gross income (total turnover), not your profit. If you invoice £55,000 per year but have £20,000 in expenses (giving you £35,000 profit), you are above the £50,000 threshold based on turnover and must comply from April 2026.

If you are below the threshold, MTD for ITSA does not yet apply to you, and you continue filing an annual Self Assessment tax return as usual. However, it is worth preparing early — the threshold will likely come down, and getting used to quarterly digital reporting now will make the transition smoother.

Under MTD for ITSA, you will submit five updates per year instead of one annual return:

Four quarterly updates:

• Quarter 1 (6 April - 5 July): submit by 7 August
• Quarter 2 (6 July - 5 October): submit by 7 November
• Quarter 3 (6 October - 5 January): submit by 7 February
• Quarter 4 (6 January - 5 April): submit by 7 May

Each quarterly update is a summary of your business income and expenses for that period. It does not need to be a full tax calculation — think of it as a snapshot. You report your total income received and total expenses incurred during the quarter.

End of Period Statement (EOPS):

After the end of the tax year (5 April), you submit a finalisation statement — similar to the current Self Assessment return. This is where you make any adjustments, claim capital allowances, account for any income not captured in the quarterly updates, and finalise your figures for the year. The deadline for the EOPS is 31 January following the tax year, the same as the current Self Assessment deadline.

The quarterly updates do not change when you pay tax. Payment dates remain 31 January and 31 July (for payments on account), just as they are under the current system. MTD changes how you report, not when you pay.

This quarterly rhythm is actually beneficial for many self-employed people. Instead of scrambling to reconstruct a year's worth of records in January, you stay on top of your finances throughout the year.

MTD requires you to keep digital records and submit updates through HMRC-compatible software. You cannot file MTD updates through the HMRC website — you must use approved third-party software.

What counts as MTD-compatible software?

The software must be able to:

• Store digital records of your income and expenses
• Submit quarterly updates directly to HMRC via their API
• Submit your End of Period Statement
• Receive information back from HMRC (such as your tax calculation)

Popular MTD-compatible options include:

• FreeAgent — Popular with freelancers and sole traders. Offers a clean interface and automatic bank feeds. From around £15/month.
• Xero — Widely used by small businesses and their accountants. Comprehensive features. From around £15/month.
• QuickBooks — Well-known globally. Good mobile app. From around £12/month.
• Sage — Long-established UK accounting software. Various plans from around £12/month.
• HMRC's free software — HMRC has indicated that free compatible software will be available for those with the simplest affairs, though details are limited.

HMRC maintains a list of compatible software on gov.uk. Check this list before purchasing, as it is updated regularly. Your accountant may also recommend software that integrates with their systems.

If you already use invoicing tools like OwnedWork to track your income and generate invoices, you will have a head start — your income records are already digital. You will just need compatible software to submit the quarterly updates.

Whether MTD applies to you from April 2026, April 2027, or later, preparing now will save stress and money:

1. Go digital with your record-keeping today.

If you are still using spreadsheets, paper receipts, or a shoebox of invoices, now is the time to switch to digital tools. Start tracking all income and expenses digitally. Use invoicing software to create and store invoices. Photograph and digitally file receipts as you get them.

2. Choose your MTD software early.

Do not wait until the deadline. Try out different options, find one that suits your workflow, and get comfortable with it. Many offer free trials. If you use an accountant, ask what they recommend — you want software that integrates with their systems.

3. Set up bank feeds.

Most MTD-compatible software can connect directly to your business bank account, automatically importing transactions. This dramatically reduces manual data entry and makes quarterly reporting much faster. Open a separate business bank account if you have not already — it makes everything cleaner.

4. Get into a quarterly rhythm.

Start reviewing your income and expenses quarterly now, even before MTD requires it. Set calendar reminders for the end of each quarter. Reconcile your records with your bank account. Fix any discrepancies. This habit will make the formal MTD submissions routine rather than stressful.

5. Talk to your accountant.

If you use an accountant, discuss MTD with them. They can advise on the best software, help you set up your digital records correctly, and may offer to handle the quarterly submissions for you (though this may increase their fees).

HMRC has confirmed a new points-based penalty system for MTD, replacing the existing fixed penalties. Here is how it works:

Late submission penalties:

• Each time you submit a quarterly update or final statement late, you receive one penalty point
• Once you reach the penalty threshold (4 points for quarterly obligations), you receive a £200 penalty
• Every subsequent late submission while at the threshold triggers another £200 penalty
• Points expire after a period of compliance — submit all updates on time for 24 months and your points reset to zero

Late payment penalties:

• Tax paid up to 15 days late: no penalty
• Tax paid 16-30 days late: penalty of 2% of the tax outstanding at day 15
• Tax paid more than 30 days late: 2% of tax outstanding at day 15, plus 2% of tax outstanding at day 30, plus a daily rate of 4% per year on the outstanding balance from day 31

This is actually more lenient than the current system for occasional late submissions, since you get several chances before a financial penalty applies. However, the daily accruing penalties for late payment can add up quickly.

HMRC has also indicated that there will be a soft landing period during the first year of MTD for ITSA, with a more lenient approach to penalties while people adjust. However, relying on this is not a strategy — prepare properly and submit on time. The quarterly rhythm, once established, is actually easier to maintain than the annual scramble many self-employed people currently experience.