Making tax doable: Options for managing (MTD)

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Making Tax Digital (MTD) has been a long time coming, and HMRC promises a light touch. Even so, it’s not something the self-employed and landlords can ignore any longer.

It’s over a decade since HMRC first introduced us to Making Tax Digital (MTD): its plan to close the tax gap caused by errors that it says cost the Exchequer billions every year. MTD for VAT finally came into full effect from April 2021, but it’s taken until this April to extend it to income tax.

It’s finally here, though. From 6 April, those with gross income from self-employment or property, that adds up to £50,000 or more, must submit quarterly figures to HMRC.

Quarterly filings

The good news is that the tax payment deadlines remain unchanged. MTD just requires the submission of income and expenses data, not full returns, for each quarter by the deadlines:

• 7 August 2026 for the first quarterly update (covering 6 April to 5 July)
  
• 7 November 2026 for the second
  
• 7 February 2027 for the third
  
• 7 May 2027 for the fourth
  

Your 2025/26 tax return does not fall within MTD, and so you will file this as usual by 31 January 2027.

Under MTD, you will need to file a final return by 31 January following the end of the tax year, which will include tax adjustments to property/self-employment figures and details of all other income sources and gains. That will be straight from the software, which is key to the MTD change.

All updates and filings under MTD require taxpayers to use recognised software. HMRC offers a software finder tool to help users pick an appropriate solution.

The thresholds are also set to come down, bringing more taxpayers into MTD for income tax. These will be based on the gross qualifying income reported on the most recent tax return filed before the relevant date:

• From 6 April 2027 the threshold decreases to £30,000. This is assessed against your 2025/26 gross income from property/self-employment

• From April 2028, the threshold will drop to £20,000, assessed against your 2026/27 gross income from property/self-employment

MTD points and penalties

HMRC concedes that MTD is a big change – particularly for those who haven’t previously used tax software. Consequently, enforcement and penalties will, initially at least, be light touch, operating on a points system: One penalty point for each late return, which will expire after 24 months.

Within that time, those accumulating two points from late annual returns, or four points from late quarterly returns, face a penalty. Consequently, taxpayers could miss updates until next May, but thereafter face a £200 penalty for each return they fail to submit on time.

Taxpayers can also get a clean slate, wiping away all points, if they complete 12 months of quarterly submissions or 24 months of annual submissions on time, and all submissions that were due within the preceding 24 months have also been submitted.

Overall, the system gives some slack for those on the learning curve

Making MTD work for you

How you comply will depend on the complexity of your tax affairs, your familiarity with suitable software and your appetite for administration.

For simple arrangements – income from an investment property with few invoices and expenses, for example – the change may be easily managed, particularly for those already using software for their returns. S&W also offers its own MTD platform for clients to use, from which we can extract details to prepare year-end returns. (See the video here.)

For those with complex businesses and little appetite for more administration, there are various options:

• Incorporation may now be more attractive for more complex businesses already considering it, but currently running as sole traders. The increased demands MTD brings narrows the gap in the administrative burden between operating as a sole trade and a limited company, which can also offer benefits around tax and limited liability
  
• Where clients are happy to produce their own digital records, we can review and submit the quarterly updates on their behalf
  
• We can also provide full book-keeping support with our experts posting transactions, reconciling bank statements and submitting quarterly updates. Our tax experts can also deal with the tax adjustments and annual returns
  

Ultimately, there is no escaping that MTD for income tax means sole traders and landlords must account for their income and expenses more frequently. But, for very simple income streams or those already well on top of their bookkeeping, it shouldn’t add too much work.

For those with more complex businesses, who haven’t always been as disciplined with their record keeping, the impact will feel more significant. But there are benefits, too. It should lead to better visibility of business performance, helping help with forecasting and cash flow management. Enabling more informed, real-time decision making, it will also spread the administrative pressure of the tax return filing deadline throughout the year.

Even if most are not looking forward to changes this year, a few may find MTD takes away some of the stress when next January comes around.

To discuss how MTD may affect you and your options for managing the change contact Stuart Wright, Partner in S&W’s Harrogate office stuart.wright@swgroup.com or visit the website.