MTD for Income Tax 2026/27: Who, When, Penalties

What Is Making Tax Digital for Income Tax?

Making Tax Digital for Income TaxMaking Tax Digital for Income Tax: HMRC's shift to digital tax: from April 2026, sole traders and landlords above the qualifying-income threshold must keep digital records and send quarterly updates instead of one annual Self Assessment return. (MTD for IT) replaces the traditional annual Self Assessment tax return with a system of quarterly digital updates. Instead of assembling a year's worth of income and expenses every January, you report them to HMRC in four light-touch updates throughout the tax year, plus a final declaration that replaces the SA100 return.

The system has been in voluntary testing since 2022, but from 6 April 2026 it became mandatory for the first group of taxpayers. HMRC estimates that 864,000 sole traders and landlords are now in scope.

Who Must Use MTD for Income Tax - and When

MTD for Income Tax is being rolled out in three waves based on your qualifying income - the combined gross income from self-employment and UK property in the relevant tax year.

The threshold is based on gross income, not profit. If your self-employed turnover was £55,000 in 2024/25 but your profit after expenses was only £30,000, you are still in the first wave.

If you have both a PAYE job and a side business, only the self-employment and property income counts toward the threshold - your salary is not included. See our guide to being employed and self-employed at the same time for how these income streams interact.

What Counts as Qualifying Income

Qualifying income is the total gross income (before expenses) from all your self-employment businesses and UK property lettings combined. Two things to note:

Your share of profit from a partnership does not count. Partnerships are not yet within MTD for Income Tax - HMRC will set out a separate timeline. However, if you have personal self-employment or property income alongside a partnership, that personal income does count.

If all your qualifying income ceased before 6 April 2026 - for example, you sold your rental property and closed your sole-trader business during 2025/26 - you are not required to use MTD, even if your historic income exceeded the threshold.

The Quarterly Deadlines

You must send a quarterly update within one month of the end of each quarter. The standard quarterly periods align with the tax year:

Some MTD-compatible software allows you to use calendar-month quarters instead (ending 30 June, 30 September, 31 December, 31 March). Check with your software provider if this option suits you better.

After your four quarterly updates, you submit a final declaration by 31 January following the end of the tax year - the same deadline as the current Self Assessment return. The final declaration confirms your total income, claims any reliefs, and calculates the tax due.

What You Need to Do

MTD for Income Tax has three practical requirements:

Keep digital records. Your income and expenses must be recorded in MTD-compatible software - not spreadsheets alone, and not paper records. The software must be able to communicate directly with HMRC's systems via an API.

Send quarterly updates. Each update is a summary of your income and expenses for that quarter. It is cumulative - Q2 includes Q1 data, Q3 includes Q1 and Q2, and so on. These are "light-touch" updates: you are reporting running totals, not filing a return.

Submit a final declaration. After the tax year ends, you use your software to submit a final declaration that replaces the SA100 return. This is where you declare any additional income, claim reliefs, and confirm the figures for the year.

HMRC does not provide free software for MTD for Income Tax. You will need to choose a commercial product from the GOV.UK software finder. Prices vary - some providers offer basic MTD-only compliance tools from around £15 per month, while full accounting packages with MTD built in cost more.

Penalties - and the 2026/27 Soft Landing

MTD for Income Tax introduces a new points-based penalty system for late submissions. Each quarterly update or final declaration you miss earns one penalty point. When you reach 4 points, a £200 penalty is charged - and every subsequent late submission triggers another £200 until you bring your record up to date.

Points below the 4-point threshold are automatically removed 24 months after the missed deadline. If you reach the threshold, points are only removed once you have submitted all outstanding updates and maintained compliance for a set period.

Crucially, HMRC has confirmed a soft landing for 2026/27: no penalty points will be issued for late quarterly updates during the first tax year. You are still required to keep digital records and send the updates, but occasional late submissions in this first year will not count against you. The soft landing does not apply to the final declaration - that remains subject to the existing Self Assessment late-filing penalties.

Exemptions

You can apply for an exemption from MTD for Income Tax if you are digitally excluded - for example, due to age, disability, a remote location without reliable internet, or religious beliefs that are incompatible with using electronic systems. The exemption must be applied for; it is not automatic.

If you are granted an exemption, you continue to file through the existing Self Assessment process as before.

Related: if you also have a PAYE job, see employed and self-employed; estimate your bill with the self-employed tax calculator; and the Self Assessment bill guide covers the final declaration.