Making Tax Digital for Income Tax Self Assessment
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is a major reform of the UK tax system intended to help businesses and individuals get their tax right, with the mandatory use of digital record-keeping and using MTD compatible software to provide HM Revenue & Customs updates and returns digitally. The objective is to modernise the way tax affairs are handled, improve accuracy and reduce the tax lost through manual error.
What is MTD for ITSA?
MTD for ITSA will require certain individuals (sole traders and landlords) and their agents to:
- Keep digital records of their income, expenses and other relevant figures.
- Use software compatible with HMRC’s digital systems.
- Provide quarterly updates to HMRC, rather than just an annual return, and eventually submit their full tax return via the software.
Who must comply and when?
- As of April 2026, if you have qualifying income from property and/or self-employment of over £50,000
- As of April 2027, if you have qualifying income from property and/or self-employment of over £30,000
- As of April 2028, if you have qualifying income from property and/or self-employment of over £20,000
It is important to note the definition of ‘qualifying income’ refers to total income from self-employment and/or property, not profit.
Though the requirement is mandatory above the thresholds, HMRC has made clear that if a business truly cannot go digital, then an exemption may apply: ‘if you are digitally excluded’. For example, if disability prevents the use of computers, you may apply for an exemption.
Why is the reform significant?
- The ‘tax gap’ is the difference between what should be paid and what is collected. Small businesses, which includes sole traders and landlords, account for the largest proportion of this gap. By moving to digital records and more frequent reporting, the hope is that errors, omissions and late updates will be reduced, improving overall compliance.
- Under the old system, many taxpayers only engaged with HMRC once a year, at the self-assessment filing date. With quarterly updates, taxpayers will stay ‘on top’ of their tax position, reducing last-minute rushes, unexpected liabilities and potentially increasing accuracy.
- The government sees MTD as part of a wider digital transformation of tax administration, to make it more efficient, more integrated with technology, and better aligned with how businesses already work.
Challenges and potential drawbacks
- Not all taxpayers are familiar with digital accounting software or the new workflows. The move from paper/Excel to a dedicated MTD-compatible software system may require training, time and cost. Until taxpayers become proficient, quarterly submissions might still generate errors, ironically undermining some of the intended improvements.
- Many sole traders and small landlords may see this as an additional administrative burden. Although they may already use some software or spreadsheets, the requirement to use software compatible with HMRC’s systems and the need for quarterly submission may be seen as a cost of compliance rather than a benefit. Some argue this imposes a disproportionate burden on smaller businesses.
- While exemptions exist for those who cannot reasonably go digital, these may not capture everyone who struggles with technology, broadband connectivity or disability. Some small businesses may fall into a grey area, expecting them to adopt digital systems may still be challenging in practice.
How can taxpayers prepare for MTD for ITSA?
- Check eligibility and thresholds: If you’re a sole trader or landlord with self-employment or property income, calculate your ‘qualifying income’ and check whether you’ll be required to join MTD for ITSA.
- Choose compatible software: Identify an accounting/software system that is explicitly labelled as ‘MTD compatible’ for income tax (not just VAT).
- Get your digital records in order: Begin maintaining your income, expenses and relevant data in the software, so you’re accustomed to the process ahead of the quarterly updates.
- Consider an exemption if applicable: If you believe you cannot reasonably comply due to digital exclusion, investigate the exemption route via HMRC’s guidance.
Making Tax Digital for Income Tax 2026
The rollout of Making Tax Digital for Income Tax Self Assessment represents a pivotal shift in the UK tax system. For those individuals with qualifying self-employment or property income, the move to digital records and quarterly submission is both an opportunity and a challenge.
On the one hand, the enhanced accuracy, improved record-keeping and stronger compliance regime promise a more efficient tax experience. On the other, the technological and administrative demands on smaller taxpayers must be carefully managed and supported. The success of MTD for ITSA will depend on; how smoothly taxpayers transition, how well the support infrastructure operates and whether the burdens placed on small businesses are proportionate and manageable.
At Accounting Solutions Manchester, we have been guiding clients through every stage of the MTD transition, from setting up compliant software to simplifying quarterly reporting and maintaining fully digital records.
Jay Singh FCCA is the managing partner of Accounting Solutions Manchester, a firm of accountants and tax advisers supporting small and medium-sized businesses across Manchester. Jay advises on accounts, tax compliance, and business planning, and works closely with directors and the self-employed to reduce tax, increase profit, and save time.
This article was written for Handpicked Accounts by Jay Singh of Accounting Solutions Manchester.
