Making Tax Digital (MTD) for Income Tax is no longer just a proposal; it is happening. From April 2026, the way self-employed individuals and landlords report to HMRC changes fundamentally.
Yet, most people we speak to either haven’t heard of it or assume it doesn’t apply to them. This ignorance is dangerous because the penalties for non-compliance are real, and HMRC is not offering extensions.
The headline is simple: if your qualifying income is over £50,000, you are in scope from April 2026. However, the devil is in the detail, specifically regarding what “qualifying income” actually means.
The “Gross Income” Trap
A common misconception involves the £50,000 threshold applying to your profit. It does not. Instead, the threshold relies on your gross income (turnover) before expenses.
This distinction catches many people out. For example, if your self-employment turnover is £60,000 but your profit after expenses is only £35,000, you might assume you are safe. You are not. Because your gross income exceeds £50,000, the new rules fully capture you.
Furthermore, if you have both self-employment and rental income, you must add them together. Consequently, a freelancer with £30,000 in turnover and £25,000 in rental income possesses a total qualifying income of £55,000, placing them squarely in the first wave of MTD.
Who Is Safe? (For Now)
We must also clarify what does not count towards this threshold. HMRC excludes PAYE employment income, dividends, interest, and pensions from the calculation.
Additionally, MTD for Income Tax does not directly affect Limited Company directors regarding their company salary or dividends, since they report these through separate systems. However, if a director personally owns rental property, that income is in scope if it exceeds the threshold.
The Rollout Timeline
HMRC is phasing this in over three years to capture the majority of the self-employed workforce:
- First, April 2026: The rule applies to income over £50,000 (Gross).
- Next, April 2027: The threshold drops to income over £30,000 (Gross).
- Finally, April 2028: The system expands to include income over £20,000 (Gross).
If you fall into the £30,000 to £50,000 bracket, you have an extra year to prepare. Nevertheless, you should not use this as an excuse to delay. After all, setting up software and changing record-keeping habits takes time.
What You Actually Have to Do
Under the new system, MTD effectively bans the annual “shoebox of receipts” panic in January. You must now perform three specific tasks:
- Keep Digital Records: You must maintain records in MTD-compatible software. You may only use spreadsheets if they utilize “bridging software” to digitally link to HMRC.
- Submit Quarterly Updates: Every three months, you must send summary figures of your income and expenses to HMRC. Consequently, the deadlines are fixed: 7th of August, November, February, and May.
- Submit an End of Period Statement: After the tax year ends, you submit a final statement to confirm figures and claim allowances, replacing the traditional return.
Note: Quarterly updates are for reporting only, not payment. You typically still pay your tax on the usual deadlines.
The Cost of Ignoring It
HMRC has introduced a points-based penalty system for failures. Each missed quarterly deadline incurs a “point”. Once you reach four points, HMRC issues a £200 penalty, and fines can stack up quickly if you consistently miss deadlines.
To avoid this, you need MTD-compatible software. Fortunately, most major platforms like Xero and QuickBooks are ready, with basic packages starting around £10 to £15 per month. Therefore, considering the potential penalties, this represents a manageable expense for most business owners.
