You may have heard of the “buzz” around Making Tax Digital. From April 2026, it will change the way over 50,000 sole traders manage their taxes. And the biggest shift? Instead of one annual tax return, you’ll now need to file four digital reports each year.
Let’s talk money first, because that’s what matters. If your business is bringing in £5,000 to £20,000, the investment in tools or software to remain MTD compliant will, on average, be between £300 and £350. Above £20,000? Expect to pay up to around £285.
The taxman wants you to have special software to keep track of your money coming in and out. This isn’t optional, HMRC expects your submissions to be via an MTD compliant software in their system. Skip that, and you risk penalties plus interest charges on any tax you owe.
Is the above a lot to take in? Don’t worry. This guide breaks down everything you need to know about MTD for Income Tax Self Assessment. We’ll cover the basics, from keeping digital records to accomplishing those quarterly deadlines.
Understanding Making Tax Digital for Income Tax Self-Assessment
Ready for the biggest shake-up in tax reporting? Check out when your business needs to be on board:
- From April 2026: If your sole trade or rental income is over £50,000, then you’re in the first wave
- April 2027: If you are making between £30,000 and £50,000, This is your start date
- By end of Parliament: If you’re earning above £20,000, You’ll join later
Qualifying income is money from both self-employment and property. You’ll need digital records for every business transaction, plus submit quarterly HMRC updates. Mark these deadlines in your calendar— here’s when your quarterly updates need to be received in HMRC’s system:
- First Quarter (6 April to 5 July): 7 August
- Second quarter (6 April to 5 October): due by 7 November
- Third quarter (6 April to 5 January): due by 7 February
- Fourth quarter (6 April to 5 April): due by 7 May
Not everyone has to comply with these conditions. You will be automatically exempt if you are a foster parent, do not possess a UK National Insurance number, and belong to a religious society that does not use electronic communication. Do you have lousy internet or a disability that makes it tough for you to file digitally? Apply for an exemption.
Explore more on Income tax and Self assessment
Let’s get to the crux of Making Tax Digital for Income Tax Self-Assessment and how it will impact your record keeping. Everything will be required to be maintained digitally using the software that has been approved by HMRC.
Here’s what you need to track:
- Your business name and address
- Income and expense categories
- Time and value of each transaction
- Daily takings (if you’re running a shop)
The software need to be able to handle these tasks and do the following:
- Store all your digital records
- Fire off those quarterly HMRC updates
- Submit your yearly tax returns Pick up messages from HMRC
Record Keeping is crucial for business success
Love your spreadsheets? You can stick with them. You’ll need bridging software to make your submissions HMRC-friendly.
One more thing – make sure you use an HMRC-approved method when moving data between systems. Think linked spreadsheet cells, auto transfers, API connections. So what about small businesses? You can use a three-line account, which requires you to track and submit just total income and expenses.
Now, the prices. Options for landlords go from £4.17 + VAT per month all the way up to packages costing £16-£59 a month. A pretty simple small business? Here’s yet another reason to look out for that promised ‘free software’ from HMRC.
Quarterly Reporting Under MTD
Have you got various income streams from business or property? — Then you will need separate quarterly updates for each. Not to worry – these are not full accounts, but just what’s coming in and going out.
When HMRC wants to hear from you:
- First period (April to July): due by 7 August
- Second period (April to October): due by 7 November
- Third period (April to January): due by 7 February
- Fourth period (April to April): due by 7 May
Does your business operate better on calendar quarters? Still, no problem. You may switch to 30 June, 30 September, 31 December, and 31 March reporting instead.
Under that weighty threshold of running a small business below the VAT threshold? Life’s simpler, just pop in your total income and total expenses each quarter. It’s only for shop owners who sum up daily takings as opposed to averaging out every sale.
And here’s the clever bit these quarterly submissions are just snapshots: see a mistake? Correct it in your next update or at year-end. HMRC has to crunch these numbers to estimate your tax, but remember, it’s only a rough guide until you’ve added your final adjustments and reliefs.
Additional Resources
Conclusion
Tax reporting is about to look very different. April 2026 starts a new era in how you’ll work with HMRC and handle your income tax, and self assessment. Are you scared of moving from yearly updates to quarterly updates? Don’t be. The right software and good record-keeping will make this quite manageable. Plus, a few added handy options by HMRC – choose your own quarterly deadlines or use simplified reporting to make life easier.
Money matters, of course. You’re looking at around £285 to £350 to get started, depending on what you earn. But here’s the good news – if you are a small business under the VAT threshold, you will get access to free software and can perform simple three-line accounting.
Want to nail MTD ITSA? Start now. Don’t wait for 2026 to come knocking. Get your digital systems sorted, know what it is that HMRC wants, and you’ll be running a smoother, more efficient business when the changes hit.
