Making Tax Digital (MTD) for Small Businesses: The 2026 Mandate

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is the single largest change to UK small-business tax compliance in a generation. From 6 April 2026, every UK-resident sole trader and landlord with combined property and self-employment income above £50,000 must keep digital records, submit four quarterly updates, and replace the annual Self-Assessment return with a Final Declaration. The threshold drops to £30,000 from April 2027 and is expected to fall to £20,000 from April 2028. For limited companies, MTD ITSA does not apply, but MTD for Corporation Tax is in active development for late-2020s rollout.

For most affected SMEs the transition is manageable. Pick MTD-compatible software, migrate the bookkeeping, agree the quarterly review rhythm with an accountant. The traps are concentrated in five areas: how qualifying income is measured, the quarterly mechanics, software selection, the penalty-points regime, and the digital-exclusion exemption process for the small population who genuinely cannot file digitally.

Who is in scope from 6 April 2026

• UK-resident sole traders, landlords or self-employed individuals.
• Combined gross qualifying income from self-employment and property in 2024-25 above £50,000.
• Currently filing Self-Assessment.
• Not specifically excluded (most trustees, certain non-resident landlords with PAYE-only UK income, recipients of digital-exclusion exemption).

Limited companies are NOT in MTD ITSA. Companies file corporation tax returns under a separate regime. Income drawn from a personal company as PAYE salary, dividends, or pension contributions does not count toward the MTD ITSA threshold. A landlord-director with all property in an SPV and only PAYE/dividend income from the company sits outside MTD ITSA entirely.

Calculating qualifying income

Qualifying income is the sum of:

1. 1Gross UK rental receipts (before expenses).
2. 2Gross overseas rental receipts reportable on UK Self-Assessment.
3. 3Gross self-employment turnover (all sources combined).
4. 4Furnished Holiday Let receipts (now treated as standard rental property income post-April-2025 abolition).

Excluded: PAYE employment, pensions, dividends, interest and savings income, capital gains.

Quarterly updates and the End of Period Statement

MTD ITSA replaces the single annual return with five filings per tax year:

1. 1Q1 update: 6 April to 5 July, due 7 August.
2. 2Q2 update: 6 July to 5 October, due 7 November.
3. 3Q3 update: 6 October to 5 January, due 7 February.
4. 4Q4 update: 6 January to 5 April, due 7 May.
5. 5End of Period Statement (EOPS): finalises business income and expenses, due 31 January.
6. 6Final Declaration: confirms total tax position including non-business income, due 31 January.

Each quarterly update is a cumulative year-to-date summary by category. HMRC uses the data for an in-year tax estimate; the binding liability is set via the Final Declaration. Tax payment dates remain unchanged: 31 January and 31 July payments on account, plus 31 January balancing.

Choosing MTD-compatible software

HMRC publishes a recognised vendor list. The realistic options for SMEs:

The points-based penalty system

Late quarterly updates and late Final Declarations attract penalty points:

• One point per missed quarterly update, capped at four points within a 24-month rolling window before a £200 financial penalty triggers.
• A separate points balance applies to VAT, ITSA and corporation tax.
• Points expire after 24 months of full compliance.
• Late payment penalties remain a separate calculation: 3% of unpaid tax at 30 days, a further 3% at 60 days, then 10% annualised.

Digital exclusion exemption

A small population of filers can apply for exemption from MTD ITSA on grounds of digital exclusion:

• Age, disability or remoteness that makes digital filing impractical.
• Genuine objection on religious grounds (small minority).
• Bankruptcy or formal insolvency proceedings during the relevant year.

Mere preference for paper filing or unfamiliarity with software is not grounds for exemption. Applications go via HMRC; until granted, the filer remains within MTD and must file quarterly updates.

Basis Period Reform: the first MTD year

The 2023-24 Basis Period Reform shifted unincorporated businesses from accounting-period to tax-year basis:

• Businesses with 31 March or 5 April year-ends are unaffected.
• Businesses with non-31-March year-ends recognised transitional profit in 2023-24, optionally spread over 5 years.
• The first MTD year (2026-27) starts on a tax-year basis (6 April 2026 to 5 April 2027).
• Where transitional profit spreading is in progress, the spread continues to flow through Final Declarations until exhausted.