We’ve just completed the first quarter of Making Tax Digital for Income Tax (“MTD”) under full rollout. So how has it gone and what do you need to know if you’re still not sure whether this affects you?
HMRC introduced MTD to bring UK taxpayers into the digital age. You’ll keep digital records and file quarterly, which means more reliable numbers, better business information and fewer January panics. Building a tax return from a shoebox of receipts should become a thing of the past. Instead, you’ll have a running picture of your tax position all year and could be ready to file a tax return the moment the tax year ends.
Who does it affect?
If your qualifying income was over £50,000 on your 2024/25 tax return, HMRC has already mandated you into MTD for 2026/27.
Qualifying income means gross self-employment turnover plus gross rental income, before expenses. It’s the combined total that counts, even if neither source alone breaches the threshold.
More taxpayers are brought in in future years:
- Over £30,000 — from April 6, 2027
- Over £20,000 — from April 6, 2028
Some taxpayers are exempt, so check HMRC’s guidance.
What do you have to do?
Two things: keep digital accounting records and report income and expenses to HMRC every quarter via a digital link. Each record needs a date, an amount and a description.
Quarterly reports show cumulative totals per income/expense category, filed by the 7th of the month after each quarter ends. For example, the first quarter (April 6 – July 5) is due by August 7.
Miss deadlines and you’ll rack up penalty points on a points-based system; reach four points and it’s a £200 fine. There’s a grace period for 2026/27, but it pays to build good habits now.
One thing hasn’t changed and that is when you actually pay your tax. For now, MTD affects reporting rather than payment dates.
Choosing your software
Once you know your start date, the priority is to decide how you’ll keep records and report. Plenty of commercial software handles MTD, but a spreadsheet plus bridging software often does the job just as well. HMRC has a software finder tool to help you choose.
Work out what you need to submit first. Each trade needs its own separate quarterly report, but all rental income is combined into one. If, for example, you run two trades plus a rental property, that means that you need to file three reports a quarter.
Packages like Sage, Xero and QuickBooks have built-in MTD reporting, so you set up your taxpayer details once and then it’s a case of running the module, checking the figures and filing. If you keep spreadsheet records, then bridging software will pull your totals across and file them in the right format.
We have come across a few challenges worth considering when making your decision:
- Does your accounting package handle multiple trades, or will you need separate licences?
- If you co-own several rental properties, how will you isolate your share for reporting?
- If different accountants handle different income streams, who is responsible for actually submitting each quarterly return?
The catch
Once you’re in MTD, you lose the option of filing your own year-end return through HMRC’s online forms. You will need commercial software instead. It’s frustrating that HMRC has withdrawn the free route, but there is the option to use free websites that should keep DIY filing realistic; HMRC’s software list flags which packages cover the year-end return. If none appeal, this might be the nudge that sends you into an accountant’s office instead.
Whatever you choose, it’ll pull through the data HMRC already holds such as PAYE income and deductions, bank interest and your quarterly MTD submissions, so much of the groundwork is done for you.
Getting set up
Before your first submission, sign up for MTD reporting through your HMRC online account. It only takes a few minutes. Then link your chosen software to HMRC (plenty of video guides exist if you get stuck), or, if you’re working from a spreadsheet, set up your bridging software to extract and file your totals.
How has it gone so far?
We’ve come through the first quarter and it was surprisingly straightforward. We filed for clients across the spectrum: those who handed us a bag of paper receipts, those on spreadsheets, and those on commercial software. Minor snags aside, such as switching on cash-basis reporting in Xero or linking bridging software for the first time, it went smoothly. In every case, taking the time to plan ahead has delivered the best results.
So do your research now. Work out what you’ll need to file and read HMRC’s website, which has loads of useful information. If it’s still a puzzle, talk to an accountant. Get this right and January becomes stress-free with your return filed months ago, and up-to-date management information just a click away.
Clare Feather and Luke Parker are chartered accountants at Gilberts Chartered Accountants.
