What is Making Tax Digital ?

Making tax digital is referred to as MTD

Stay compliant with HMRC’s MTD regulations with the full support of SES

What is making Tax Digital (MTD) ? Why and who does it apply to:

This is an enforced change by HMRC affecting all self employed workers.

First Announced in 2015, since then tax payers have been feeling the effects of a changing system.

MTD for income tax is on the horizon and is due to affect over 800,000 self employed workers in 2026 and a lot more in 2027.

Primary Legislation for MTD was laid out in Sections 60 to 62 of the Finance (No2) Act 2017. Outlining how taxpayers should keep digital records for frequency of submissions. The legislation introduces the idea of giving Periodic updates, End of period statements (EOPS) and Final Declarations.

Making Tax Digital thresholds for Income Tax

From April 2026, sole traders and landlords earning above £50,000 need to follow MTD for Income Tax rules.
From April 2027, sole traders and landlords earning above £30,000 need to follow MTD for Income Tax rules.
From April 2028, sole traders and landlords earning above £20,000 need to follow MTD for Income Tax rules.

How to comply with MTD legislation ?

MTD law dictates that business owners use software to keep digital records and submit returns.

For MTD for Income Tax, it looks like this:

Keep digital records of all business income and expenses
Submit quarterly updates using HMRC-recognised software
Submit a Final Declaration by 31 January following the end of the tax year

What Are the Consequences of Not Complying with MTD ?

Failing to comply with Making Tax Digital (MTD) requirements can lead to penalties.

Since January 2023, HMRC has introduced a points-based penalty system for late submissions.

Each time you miss a filing deadline, you receive one penalty point. Once you reach a certain number of points—based on how often you're required to submit—you’ll face a financial penalty.

Late payments also attract interest, so settling any outstanding amounts promptly is important to avoid additional costs. This system currently applies to MTD for VAT and will extend to MTD for Income Tax (MTD for ITSA) once it comes into effect.

It’s also worth noting that penalties for inaccuracies in VAT, Income Tax, and Corporation Tax remain unchanged. These operate separately from the new points-based system, so it’s a good idea to review HMRC’s official guidance to stay fully compliant.

MTD Legislation FAQs:

Is it a legal requirement to use accounting software?

Yes. Using MTD-compatible accounting software is a legal requirement under Making Tax Digital (MTD) regulations. Without it, you won’t be able to submit compliant returns for Income Tax.

Failure to submit MTD-compliant returns can result in penalties under HMRC’s points-based system. To avoid fines, make sure you file returns on time and pay any tax owed by the deadline.

Who needs to comply with Making Tax Digital for Income Tax—and when?

MTD for Income Tax (also known as MTD for ITSA) will be phased in based on annual income levels:

From April 2026: Sole traders and landlords earning over £50,000
From April 2027: Sole traders and landlords earning over £30,000
From April 2028: Sole traders and landlords earning over £20,000

What are the penalties for not complying with MTD?

A points-based penalty system is in place for both MTD for VAT and MTD for Income Tax. Each missed submission deadline earns one penalty point. Once you reach your threshold (based on how often you submit returns), a £200 fine is issued.The thresholds are as follows:

Annual submissions – 2 points
Quarterly submissions – 4 points
Monthly submissions – 5 points

In addition to late filing penalties, late payment penalties also apply:

After 15 days, a 3% charge on the outstanding amount
After 30 days, an additional 3% is applied
From day 31 onwards, a daily penalty of 10% per annum accrues on any remaining unpaid tax

To avoid these penalties, it’s essential to stay on top of both your filing and payment deadlines.

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