Making Tax Digital in 2026: VAT & Income Tax

Making Tax Digital, often shortened to MTD, is HMRC’s plan to move tax record keeping and reporting fully online. Instead of adding up figures once a year on paper, you keep your records in software and send updates to HMRC through it. For VAT this is already the law. For Income Tax it begins on 6 April 2026 for the first group of sole traders and landlords, with more brought in over the following two years.

This guide explains both parts in plain English: what Making Tax Digital means, who has to follow it and when, what qualifying income is, how the quarterly updates work, and how to get ready. Whatever you sell, getting your VAT figures right feeds straight into your digital records, and our free calculator can help with that.

What is Making Tax Digital?

Making Tax Digital is the biggest change to the way the UK runs tax in a generation. It has three simple rules. You keep your business records in a digital form, you use software that can talk to HMRC, and you send your figures to HMRC through that software rather than typing them into a website or posting a form. The goal is to cut the small mistakes that cost businesses and HMRC billions each year, and to give you a running picture of what you owe instead of a once a year surprise.

The programme is arriving in two waves. The first wave, for VAT, is already complete and in force. The second wave, for Income Tax, starts in April 2026 and is phased in by income level over three years. A third wave for Corporation Tax has been talked about but has no confirmed start date, so limited companies do not need to act on that yet.

Making Tax Digital for VAT

This part is done and dusted. Since April 2022, every VAT registered business has had to follow Making Tax Digital, whatever its turnover. That means keeping digital VAT records and sending each VAT return through compatible software. The old HMRC online form for typing in your nine box figures is closed for regular returns.

If you keep your books in full accounting software, it handles the records and the filing together. If you prefer a spreadsheet, you can use bridging software, a small tool that reads the figures from your spreadsheet and sends them to HMRC. We cover the mechanics in detail in our guide on how to do a VAT return.

Making Tax Digital for Income Tax

This is the new part for 2026, and it is the one most people are asking about. It applies to sole traders and landlords who are registered for Self Assessment and whose qualifying income is above a set level. Rather than filing one Self Assessment tax return a year, you keep digital records, send HMRC a short update every quarter, and then confirm everything once at the end of the year.

It is being phased in by income, starting with the highest earners and lowering the bar each year.

HMRC decides whether you are caught by looking at the qualifying income on your most recent Self Assessment return. For the April 2026 start, that means your 2024 to 2025 return. If you are over the line, HMRC writes to you, and you must be ready to keep digital records from the start of the tax year.

What counts as qualifying income?

Qualifying income is your total gross income from self employment and from property, added together, before you take off any expenses. It is the turnover figure, not the profit. So a sole trader with £35,000 of sales and a flat that brings in £18,000 of rent has qualifying income of £53,000, which is over the £50,000 line, even though the profit is far lower. Income from a job, a pension or savings does not count towards the threshold, though it is still taxed as normal.

How the quarterly updates work

Making Tax Digital for Income Tax has four updates during the year and one declaration at the end. Each update is a running total of your income and expenses for the quarter, sent from your software. It is not a bill and it is not final, it simply keeps HMRC up to date. The standard quarters and their deadlines are shown below.

After the fourth quarter you send a final declaration by 31 January, in which you confirm your figures, add anything else such as savings or job income, and claim any reliefs. This final declaration replaces the Self Assessment tax return you file today, and the tax is still due by 31 January in the usual way.

What you need to get ready

1. Check your numbers. Add your self employment and property income together and see if the gross total is over the threshold for the next start date.
2. Choose software. Pick a package on the HMRC compatible list, or bridging software if you want to keep using a spreadsheet.
3. Keep digital records from day one. Once your start date arrives, record income and expenses as you go rather than in a rush at the year end.
4. Sign up and file. Send your quarterly updates on time and finish with the final declaration by 31 January.

Penalties for missing a deadline

Making Tax Digital uses a points system for late submissions, the same design that already applies to VAT. Each late update or return earns one point, and when you reach the threshold for how often you file you get a £200 penalty, with another £200 for each late submission after that. Paying late is charged on its own. Since April 2025 the first late payment penalty is 3% of the tax owed at day 15, plus a further 3% at day 30, and from day 31 a second penalty builds up at 10% a year. HMRC also adds interest at the Bank of England base rate plus 4%.

Frequently asked questions