Making Tax Digital (MTD) UK: Your 2026/27 Guide to the New Tax Rules

Making Tax Digital (MTD) represents a fundamental shift in how the UK’s tax system operates, moving millions of taxpayers away from the traditional annual tax return. As of 19 June 2026, the deadlines for MTD for Income Tax Self Assessment (ITSA) are fast approaching.

This guide breaks down exactly what Making Tax Digital involves, who it affects, the key deadlines, and the practical steps needed to ensure compliance.

What is Making Tax Digital?

Making Tax Digital is a key part of the government’s strategy to create a modern, digital tax service. At its core, MTD requires businesses and landlords to:

1. Keep and preserve business records digitally.
2. Use MTD-compatible software to submit tax information to HMRC.
3. Send quarterly updates of income and expenses directly from their software.

This system replaces the single annual Self Assessment tax return with a more frequent, digital process. The policy objective is to reduce the “tax gap” caused by avoidable errors and help businesses get their tax right the first time.

Who is Affected by MTD for Income Tax and When?

The rollout of Making Tax Digital for Income Tax is being phased in based on annual income from self-employment and property.

The income threshold is based on the total gross income from self-employment and property in the previous tax year. You must be registered for Self Assessment to fall under these rules.

What Are the Three Pillars of Making Tax Digital

Compliance with MTD rests on three core requirements.

1. Digital Record Keeping

Under Making Tax Digital, you must keep records of your business transactions digitally. This marks a shift away from paper-based accounting for many businesses. The legislation requires these digital records to be preserved using functionally compatible software.

2. Using MTD-Compatible Software

You cannot submit MTD updates directly through the HMRC website. You must use third-party software that is compatible with HMRC’s systems and can communicate via its Application Programming Interface (API). There are two main types of software:

• Fully Functional Software: These are integrated accounting packages that handle everything from invoicing and expense tracking to submitting quarterly updates and the final tax return.
• Bridging Software: This software connects non-compatible software (like spreadsheets) to HMRC’s systems, allowing you to continue using spreadsheets for record-keeping while still complying with MTD submission rules.

HMRC provides a list of approved software on GOV.UK, which includes both free and paid options. However, it does not recommend any specific product.

3. Quarterly Updates and Final Declaration

Instead of one annual filing, MTD requires:

• Four Quarterly Updates: A summary of your business income and expenses sent to HMRC from your software.
• An End of Period Statement (Eops): To finalise your business income for the tax year.
• A Final Declaration: To confirm all other non-business income and make a final declaration of your tax liability.

Benefits and Challenges of Transitioning to MTD

HMRC’s research into the MTD for VAT rollout shows that while there can be an initial adjustment period, many businesses experience significant benefits.

The Benefits of Making Tax Digital (MTD):

• Increased Accuracy: Using software reduces the potential for manual calculation errors.
• Greater Financial Confidence: Businesses report having a more up-to-date and clearer view of their finances.
• Time Savings: Once familiar with the software, many users find completing their tax admin faster and easier.
• Catalyst for Digitalisation: The transition to MTD often encourages businesses to adopt digital tools in other areas of their operations.

The Challenges of Making Tax Digital (MTD):

• Adapting to New Software: The biggest hurdle is often the initial time spent learning a new system.
• Initial Costs: While free software is available, some businesses may face costs for software subscriptions or hardware upgrades, though these are tax-deductible.
• Change in Routine: Moving from an annual process to quarterly updates requires a change in habits.

Experience from the MTD for VAT rollout shows that while some find the first return “painful”, the process becomes much easier with practice.

To prepare for Making Tax Digital, it is advisable to review the official guidance on GOV.UK, explore the list of HMRC-recognised software providers, and consult with your accountant on the best software solution for your specific business needs.