MTD for Income Tax: What Small Businesses Need to Know 

A significant development will reshape the way small businesses in the UK manage their tax affairs from 6 April 2026. VAT-registered businesses are already using Making Tax Digital (MTD) for VAT reporting, which was introduced in 2019; but MTD for income tax self-assessment (MTD for ITSA) is a major change to the reporting and recording of business income. While the aim is to streamline tax collection and improve accuracy, small business owners must be prepared for a range of new obligations and potential pitfalls.

Understanding MTD for ITSA

MTD is an HMRC initiative designed to modernise the UK tax system. HMRC’s goal is to make tax administration more effective, efficient, and easier for taxpayers through digital solutions. From April 2026, this is extended to the income tax and National Insurance contributions liabilities of self-employed individuals and landlords who had annual business or property income of more than £50,000 in the 2024/25 tax year. They will have to keep digital business records and submit quarterly updates to HMRC using MTD-compatible software. From April 2027, the income threshold will reduce to £30,000 for 2025/26, and from April 2028 the threshold will be income of £20,000 in 2026/27. Partnerships and those below the thresholds are exempt from MTD at present, but this may change in future.

What Will Change?

Currently, most self-employed individuals and landlords submit a single annual tax return. Under MTD for ITSA, the process will shift to quarterly digital updates, followed by an end-of-period statement and a final declaration. Paper records and manual submissions will no longer suffice, and approved accounting software becomes essential.

There are exemptions from MTD for ITSA for businesses below the above thresholds, trustees, personal representatives, Lloyd’s members, nonresident companies and individuals who do not have a National Insurance number on 31 January before the start of the tax year. Also exempt are those who are ‘digitally excluded’. This may be because age, health or disability prevents use of a computer, tablet or smartphone to keep or submit digital records or because their religious beliefs are incompatible with digital communications and computers, etc., for business or personal use. Those who are unable to access the internet because of their location are also exempt (see tinyurl.com/MTD-exempt).

Potential Challenges and Warnings

Despite the benefits promoted by HMRC, small businesses should be aware of the potential downsides. There will be an increased burden of quarterly updates and businesses will need MTDcompliant software. Penalties will apply for failure to submit updates on time or providing inaccurate information, and those with limited digital skills or poor internet access may struggle to comply. There have been suggestions that MTD for ITSA (and the associated extra costs) might be avoided by forming a partnership (e.g., with a spouse or civil partner). However, such a structure will come with its own issues, such as joint and several liability, additional tax returns, partnership agreements and possible challenge by HMRC.

How to Prepare

Preparation is key to a smooth transition to MTD for ITSA, so small business owners should:

• check their annual business or property income todeterminewhen and if they will have to comply with MTD for ITSA;
• research and choose MTD-compliant accountingsoftware;
• start digital record-keeping now to ease the transition andidentify problems; and
• seek professional advice from an accountant or tax adviser, asappropriate.

Conclusion

The introduction of MTD for ITSA represents a major shift for small businesses, landlords, and the self-employed. While the digital overhaul offers potential long-term benefits, the transition will be challenging. Early action now should help to ensure future compliance.

Practical Tip

HMRC has notes on when MTD for ITSA must be used (see tinyurl.com/MTDforIT). This web page also has links to other relevant content, as well as an online tool to check whether MTD for ITSA must be used.