Making Tax Digital (MTD) is a government initiative designed to modernise the UK tax system. While many are now familiar with MTD for VAT, the next phase — MTD for Income Tax Self Assessment (MTD for ITSA) — represents a significant shift for sole traders and landlords.
From April 2026, this digital-first approach will become mandatory for individuals with combined gross income from self-employment and/or property exceeding £50,000. This threshold reduces to £30,000 from April 2027.
What is MTD for ITSA?
MTD for ITSA is part of HMRC’s broader digital transformation strategy. The aim is to make tax more accurate, reduce common errors, and provide a clearer view of tax liabilities throughout the year.
Who Will Be Affected?
MTD for ITSA will apply to individuals who:
- Are self-employed (sole traders), and/or
- Receive rental income from UK property
This only applies where gross income from these sources exceeds:
- £50,000 from April 2026
- £30,000 from April 2027
Note that this threshold refers to gross income, not profit. For example, if you earn £35,000 from self-employment and £20,000 in rental income, your total of £55,000 means you’ll need to comply from April 2026. Rental turnover includes overseas rental income, however you will have to prepare two separate quarterly sets of accounts, one for UK rent and another for overseas rent.
The turnover test for 2026/27 will be based on 2024/25 turnover. Likewise, 2027/28 will be based on 2025/26 turnover.
Partnerships and companies are currently excluded, but HMRC plans to extend the rules to partnerships in the future but no plans for companies yet.
Key Requirements Under MTD for ITSA:
- Maintain digital records: Paper records will no longer meet legal requirements.
- Use MTD-compatible software: You’ll need to select approved software to record and report tax information.
- Submit quarterly updates: Every three months, you must send HMRC a summary of your income and expenses.
- End of Period Statement (EOPS): At year-end, submit a finalised set of figures for each income source.
- Final Declaration: Similar to the current Self-Assessment return, but digitally submitted.
Benefits and Challenges
Benefits
- Improved accuracy: Digital records help reduce manual errors.
- Real-time insight: Quarterly updates offer clearer visibility of your tax position throughout the year.
- Better planning: More frequent reporting enables improved cash flow and tax forecasting.
Challenges
- Initial costs: Software setup cost will need to be considered.
- Ongoing admin costs: Annual compliance costs will increase.
- Learning curve: Those unfamiliar with digital tools may need time and support to adapt.
Operational Considerations
To prepare for the transition:
- Assess your income: Are you above the relevant thresholds?
- Choose software early: Ensure your record-keeping tools are MTD-compatible.
- Train (if applicable): Ensure you understand new systems and reporting timelines.
- Review record-keeping: Move away from paper or spreadsheets to an integrated digital solution.
- Prepare for quarterly reporting: Adjust your processes to ensure regular updates are accurate and timely. Taxpayers will have one month and 2 days from the end of each quarter to submit their quarterly figures to HMRC, using MTD-compatible software.
Exemptions and Support
HMRC may grant exemptions where digital reporting is impractical due to age, disability, or geographic issues (e.g., lack of digital infrastructure). Support and guidance are available directly from HMRC, accountants, and most software providers.
Final Thoughts
MTD for ITSA is a major step toward a fully digital tax system and is a big change (and impact) and will be a complete shift from annual reporting to quarterly reporting. It will require initial investment and adjustment. For sole traders and landlords, acting early to understand and adopt MTD practices will be crucial and help ensure a smooth and compliant transition.
Should you need help preparing for MTD for ITSA and wish to adapt your systems ahead of time, contact Lawrence Grant LLP today on LGmail@lawrencegrant.co.uk.