Making Tax Digital For Income Tax: The Complete Guide For Sole Traders And Landlords
The biggest change to personal tax since self assessment arrived in the 1990s is now live. Making Tax Digital for Income Tax started on 6 April 2026, and if you are a sole trader or landlord earning above £50,000, it already applies to you.
We have been preparing clients for this at Arcus for the past two years. And here is the honest truth. The rules sound worse than they are. Most of the panic we see comes from headlines, not from the actual requirements. But the people who leave it until their first deadline is a week away do have a hard time. The ones who set up properly find it fairly painless, and quite a few tell us their finances are in better shape because of it.
This guide covers everything you actually need to know. What the rules are, who they apply to, the key dates, how the quarterly cycle works, what records you need to keep, what happens if you get it wrong, and how we handle all of this for our clients in Oakham, Stamford, Uppingham and across Rutland.
What Is Making Tax Digital For Income Tax?
Making Tax Digital for Income Tax, which HMRC shortens to MTD for ITSA (Income Tax Self Assessment), changes how sole traders and landlords report their income to HMRC.
Under the old system you kept records however you liked, then filed one self assessment tax return after the year ended. Under the new system, three things change:
- You must keep digital records. Your income and expenses need to be recorded in software, not in a paper ledger or a folder of receipts you sort out in January.
- You must send quarterly updates. Four times a year, your software sends HMRC a summary of your income and expenses so far.
- You must finish the year with a final declaration. This is submitted through your software by 31 January, the same deadline you already know.
It is best understood as a self assessment replacement rather than an extra layer on top. The annual return you used to file through the HMRC website disappears for those within MTD. Everything now runs through HMRC-recognised software (like xero) instead.
One thing that does not change is when you pay. Payment deadlines stay exactly where they were, 31 January for your balancing payment and 31 July for your second payment on account. MTD changes the reporting, not the paying.
If you registered for VAT in the last few years you have seen this before. MTD for VAT rolled out from 2019 and, after some early grumbling, it became routine. We moved every affected Arcus client across back then and not one of them has asked to go back to the old way. Income tax is following the same path.
Who Does It Apply To Right Now?
This is where most of the confusion sits, so let’s be precise.
MTD for Income Tax applies to individuals with qualifying income over £50,000 from 6 April 2026. Qualifying income means your combined gross income from self-employment and property, before any expenses are deducted.
‘Gross’ matters more than people realise. It is your turnover and your rent added together, not your profit. A landlord with £30,000 of rent and a sole trade turning over £25,000 is over the line, even if their combined profit after expenses is £20,000. We have had several conversations with clients who assumed they were safely under the threshold because they were thinking in profit. Check your turnover, not your bottom line.
HMRC looked at your 2024/25 tax return, the one filed by January 2026, to decide who is in the first wave. If that return showed qualifying income over £50,000, your digital start date was 6 April 2026 and you should already be keeping digital records.
The thresholds then drop in stages:
- April 2026: qualifying income over £50,000 (around 780,000 people, on HMRC’s own estimate)
- April 2027: qualifying income over £30,000 (roughly another 970,000)
- April 2028: qualifying income over £20,000
So even if you are outside the rules today, there is a decent chance you are inside them within two years. Our advice has been the same for every client: do not wait for your wave. The businesses that moved to digital records early had the easiest time, and most found the switch useful on its own merits.
Some people are exempt. If you cannot reasonably use software because of age, disability, location or religious grounds, you can apply to HMRC for a digitally excluded exemption. This is genuinely relevant in our part of the world. Rural broadband around Rutland has improved a lot but it is still patchy in some villages, and we have helped a small number of clients make that application. It is not a loophole though. HMRC expects a real barrier, not a preference for paper.
Partnerships are not in scope yet, and neither is income you earn through PAYE, dividends or savings. Those do not count towards qualifying income. It is trade and property income that matters.
Key Dates For Your Diary
Here are the dates that matter for the 2026/27 tax year, the first year of mandatory MTD:
- 6 April 2026: Digital start date for the first wave. Digital record keeping begins.
- 7 August 2026: First quarterly update due, covering 6 April to 5 July.
- 7 November 2026: Second update, covering the period to 5 October.
- 7 February 2027: Third update, covering the period to 5 January.
- 7 May 2027: Fourth update, covering the full year to 5 April.
- 31 January 2028: Final declaration and tax payment for 2026/27.
You can choose calendar quarters instead (ending 30 June, 30 September and so on) if that fits your bookkeeping better. The deadlines stay the same. Most of our clients stick with the standard tax year quarters because it keeps everything aligned with the tax year basis that now applies to all sole traders, following the basis period reform that took effect from 2024/25. If your accounting year used to run to something other than 5 April or 31 March, that change already moved you onto tax year reporting, and MTD builds on it.
How The Quarterly Update Cycle Actually Works
The quarterly updates are the part people worry about most, so let’s take the drama out of them.
A quarterly update is a simple summary of your income and expenses for the year so far, sent from your software to HMRC. It is not a tax return. There are no accounting adjustments, no claims for reliefs, no final figures. Nobody at HMRC assesses it. Your tax bill is not calculated from it.
And the figures are cumulative, which is a detail that saves a lot of stress. Each update reports the year to date, so if you made a mistake in quarter one, you just correct it and the right numbers flow through in quarter two. You do not have to resubmit anything.
If you keep your bookkeeping reasonably current, a quarterly update takes minutes. In Xero it is close to a non-event. You review the numbers, check nothing looks odd, and submit. The clients we look after on this basis mostly do not think about the deadlines at all, because we handle the submissions as part of their normal quarterly routine.
There is a genuine upside here that gets lost in the complaints. Four times a year, you see a live picture of what you have earned and what your tax position looks like. Under the old system, plenty of sole traders had no real idea what they owed until January, sometimes a full 22 months after the income was earned. We wrote about that shock in our payments on account post, and it is one of the most common problems we see with new clients. Quarterly visibility largely kills it. You can put the right money aside as you go, and January stops being frightening.
That is our experience from the VAT rollout too. The record keeping was sold as a burden, but better records meant clients captured expenses they used to lose, spotted problems earlier, and made decisions on real numbers instead of guesswork. We expect the same pattern here.
Digital Records: What You Actually Need To Keep
The digital records requirement is the foundation of the whole system, and it is less demanding than it sounds.
You need to record each business transaction digitally: the date, the amount, and the category of income or expense. That is it. You do not need to scan every receipt, although we would recommend it anyway because apps like Hubdoc make it nearly effortless and it protects you if HMRC ever asks questions.
What counts as digital? Accounting software is the obvious answer. Spreadsheets are technically allowed, but only if they connect to HMRC through bridging software, and in our view that route is a false economy for most people. You keep all the admin of a spreadsheet and gain none of the automation. Bank feeds alone save more time than any spreadsheet ever will.
What does not count: paper records typed up once a year, a diary, a shoebox. The days of handing your accountant a carrier bag in January are over, and honestly, nobody misses them. Not even the people who used to bring the bags.
For landlords there are a few wrinkles. If you own property jointly, each owner reports their share, and there are easements that let you report less detail on jointly owned property during the year. If you have both a trade and rental property, they are treated as separate businesses and each needs its own quarterly updates. This is exactly the sort of thing worth a short conversation with us rather than an evening of Googling.
Software: Why We Recommend Xero
The rules say you must use HMRC-recognised software, meaning software that can keep your records and talk to HMRC’s systems directly. There is a growing list of products that qualify.
We use Xero. At Arcus, we are Xero Silver Partners; our whole team is certified in it and we work in it every day across a large client base. That is not us being loyal to one brand for the sake of it. We picked Xero because it does the MTD work quietly in the background while giving you the day-to-day tools that actually help you run a business: automatic bank feeds, invoicing, receipt capture on your phone, and a real-time view of your cash position.
Xero has been deeply involved in Making Tax Digital since the VAT rollout, and their Making Tax Digital hub is a useful plain-English resource if you want to read more about how the software side works. They also have a detailed page on MTD software and what HMRC recognition means if you want to understand what is happening under the bonnet.
A word of caution from experience. The software is the easy part. The habit is the hard part. Buying a Xero subscription in March and expecting to be ready in April is like buying running shoes the night before a marathon. The clients who do well are the ones who build a small routine, ten minutes a week reconciling the bank feed, and let the software do the rest. We set that routine up with every client we move across, including training, because the setup fortnight determines whether the next five years are easy or annoying.
Penalties: How the Points System Works
HMRC has moved to a points-based system for late submissions, and it is fairer than the old regime.
Each late quarterly update earns one penalty point. Nothing happens until you reach four points. At four points you get a £200 fine, and every further late submission after that costs another £200 while you stay at the threshold. Points expire over time if you keep a clean record, so one bad quarter does not follow you around forever.
We think this is a reasonable design. It targets the persistently late, not the person who had a bad month. But do not read that as HMRC being relaxed. Late payment penalties are a separate matter and they have got tougher, with charges starting at 15 days overdue and interest running on top. The quarterly rhythm actually helps here, because you should know your rough tax position all year and there is no excuse for the bill catching you by surprise.
For the first year HMRC has indicated a light-touch approach while everyone settles in, as it did with VAT. Sensible, but we would not build a plan around goodwill.
How Arcus Manages Making Tax Digital For Income Tax For Clients
Plenty of accountants will file your quarterly updates. Our view is that this misses the point. If all MTD gives you is four extra deadlines, something has gone wrong. Handled properly it gives you better numbers all year, and better numbers are the raw material for every useful conversation about your business.
Here is what we actually do:
Before your start date. We check your qualifying income and confirm exactly when MTD applies to you, because getting your digital start date wrong causes headaches later. We set up Xero, move your records across, connect your bank feeds and train you on the ten-minute weekly routine. If you are digitally excluded, we handle the exemption application instead.
Each quarter. We review your records, tidy the inevitable miscodings, and submit the quarterly update. Then we tell you what the numbers mean: what you have made, what to set aside for tax, and anything that needs attention. For most clients this is a short email or call. It is also where we catch things early, a margin that is slipping, a customer paying later and later, expenses creeping up.
At year end. We make the accounting adjustments, claim the reliefs, finalise your position and submit the final declaration by 31 January. Because the records are clean all year, this stage is quicker and calmer than the old January scramble ever was.
We are small enough that you deal with the same person each quarter, someone who knows your business and answers the phone. And we have been doing this locally since 2005, so when we say we know how Rutland businesses run, that is 20 years of tax returns talking, not a marketing line.
Get Sorted Before the Next Deadline, Not After It
Making Tax Digital for Income Tax is not going away, and the thresholds only move in one direction. If you are already in the first wave, the priority is making sure your records and routine are solid before the quarterly deadlines start stacking up. If you are in the 2027 or 2028 waves, you have the luxury of time, and the smart move is to use it.
Either way, you do not have to figure this out alone. We have moved clients through two rounds of MTD now and we know where the potholes are.
Call us on 01572 770552 or book a Clarity Call and we will check your qualifying income, confirm your start date and map out what needs to happen. No jargon, no panic, just a plan.
Frequently Asked Questions From Our Clients
Does MTD mean I pay tax four times a year?
No. This is the most common myth we hear and it is wrong. Quarterly updates are information only. Payment dates have not changed: 31 January and, if payments on account apply to you, 31 July. There has been talk in the industry about quarterly payment being a long-term ambition, but nothing is legislated and nothing changes now.
I earn £48,000 from my trade and £6,000 in rent. Am I in?
Yes, from April 2026. Your qualifying income is £54,000 because trade turnover and gross rents are added together. This catches a lot of people who think of their rental as a sideline.
What about my PAYE salary, dividends or pension?
They do not count towards qualifying income and they are not reported quarterly. Only self-employment and property income are in scope. Your other income still goes in the final declaration at year end, as it did in your old tax return.
Can I keep using spreadsheets?
Technically yes, with bridging software. Practically, we talk most clients out of it. The time saved by bank feeds and automatic matching outweighs the spreadsheet’s familiarity within about a month.
What happens if I miss a quarterly update?
You get a penalty point. Fines only start when you reach four points, at £200. Points expire with good behaviour. Miss a deadline once and the right response is to fix it and move on, not to panic.
I am under £50,000. Should I ignore all this?
You can, but we would not. The £30,000 wave lands in April 2027 and £20,000 follows in 2028. Moving early, in a quiet period of your year rather than under deadline pressure, is easier every single time. And you get the benefit of better records straight away.
Can I just sign up voluntarily?
Yes. HMRC has been running a testing programme for some time and voluntary sign-up is open. For some clients we have recommended it, mainly those who wanted a full dry run before their mandatory start.
What does this cost?
Software subscriptions start from a few pounds a month, and Xero pricing varies with the features you need. On fees, our approach is a fixed monthly amount agreed up front that covers the bookkeeping support, quarterly updates and year-end work together. What we tell every client is to weigh the cost against the January version of their old life: the lost receipts, the guessed figures, the surprise bill. Most conclude it is not a close call.
