Making Tax Digital: UK MTD Rules for Income Tax Explained

Overview

MTD for income tax is the new way for a taxpayer, from 6 April 2026, to report their annual income from self-employment and / or rental property to HM Revenue & Customs (“HMRC”).

MTD for income tax will be phased in over the following three tax years with the level of the taxpayer’s qualifying income (i.e. gross income before expenses and tax deducted) determining when they will be legally required to commence using MTD for income tax.

• from 6 April 2026 – gross income totals over £50,000
• from 6 April 2027 – gross income totals over £30,000
• from 6 April 2028 – gross income is over £20,000

A taxpayer will be required to use their most recently submitted Self-Assessment tax return to identify their qualifying income (i.e. for the 2025/2026 tax year the 2024/2025 tax year will be used).

The current annual Self Assessment tax return obligations will not change for a taxpayer who is not required to use MTD for income tax.  However, a self-employed taxpayer and a taxpayer who is a landlord with qualifying income of less than £20,000 can, if they choose to do so, join MTD for income tax voluntarily at any time.

HMRC has stated that they will send a letter to a taxpayer that they identify as needing to use MTD for income tax before April 2026.

Quarterly Updates

MTD for income tax will require a taxpayer, or their tax agent, to keep digital records and submit quarterly updates of their income and expenditure to HMRC.  This must be done using third party MTD for income tax compatible software as it is not currently available through HMRC.

Annual Self Assessment Tax Returns

At the end of each tax year a taxpayer will still be required submit their annual Self Assessment tax return.

Information submitted through the quarterly updates is to be combined with a taxpayer’s other income details that HMRC will already hold (i.e. income from employment under PAYE and / or pension income etc) to prepare the annual Self Assessment tax return. If necessary self-employment and / or rental property income details can be adjusted at that time.  Any additional personal income that HMRC does not hold (i.e. investment income etc) can also be added at this time, or at any time during the tax year.

It will still be necessary for a taxpayer to satisfy themselves that their annual Self Assessment tax return is correct and complete before submission to HMRC.

Payment of Tax

MTD for income tax will not change the way in which income tax is paid to HMRC, a self-employed taxpayer and a taxpayer who is a landlord will not be required to make quarterly payments of income tax. Income tax will still be payable to HMRC by the usual due dates for payment under Self Assessment (i.e. by 31 January following the end of the tax year for balancing payments; 31 January and 31 July following the end of the tax year for first and second payments on account if applicable).

MTD for income tax will however enable a taxpayer to obtain an estimate of their income tax liability during a tax year if they wish and may be helpful if they wish to make payments on account.

Penalties

When it is mandatory for a taxpayer to use MTD for income tax there will be penalties for late submission of quarterly updates.

In addition, at the same time penalties for MTD for income tax are introduced, the existing penalty regime for the late submission of annual Self Assessment tax returns and late payments of tax will also be overhauled.

Late submission penalties

A points based late submission penalty regime will be introduced.  A taxpayer who misses a submission deadline will incur a penalty point. A penalty of £200 will be charged where a taxpayer reaches a penalty point threshold based on their submission frequency:

• Annual – 2 penalty points
• Quarterly – 4 penalty points
• Monthly – 5 penalty points

And all submissions due within the preceding 24 months have been received by HMRC.

Where a taxpayer continues to miss submission deadlines after reaching the penalty points threshold and a penalty has been charged they will be liable for a further fixed penalty for each missed submission.

Penalties will not be charged, or penalty points recorded, where a taxpayer has a reasonable excuse for not meeting their submission deadlines.  There will also be a right to appeal against penalty points and penalties.

Late payment penalties

A first late payment penalty will be payable 30 days after the payment due date based on a percentage of the balance outstanding.

• Paid within 15 days of the due date – no penalty
• Paid after 15 days of the due date – 3% penalty
• Unpaid 30 days after the due date – 6% penalty
• From 31 days after the due date – 10% penalty per annum accruing on a daily basis

Penalties will stop accruing where a time to pay agreement is reached and penalties will not be charged where a taxpayer has a reasonable excuse for not making payment by the due date. Again there will be a right to appeal against penalties.

Interest

In addition to the above penalties interest will still accrue on tax paid late from the due date until the date on which the tax is paid.

Information provided by TFO Tax Global ( www.tfotaxglobal.com)

Frequently Asked Questions

How will the phased introduction of Making Tax Digital (MTD) for Income Tax be determined for UK taxpayers?

The phased introduction of MTD for Income Tax will be based on a taxpayer's qualifying gross income as reported on their most recent Self-Assessment tax return. Taxpayers with gross income over £50,000 will be required to comply from April 2026, over £30,000 from April 2027, and over £20,000 from April 2028.

What digital record-keeping and reporting obligations are introduced by MTD for Income Tax?

Taxpayers required to use MTD for Income Tax must keep digital records and submit quarterly updates on income and expenditure through third-party MTD-compatible software. HMRC does not provide its own software for this purpose.

In what ways does MTD for Income Tax affect the submission and content of annual Self Assessment tax returns?

Even with quarterly digital updates, taxpayers must still submit an annual Self Assessment tax return. The information from quarterly updates will be combined with other income details for the tax year, and taxpayers remain responsible for ensuring the return is correct and complete.

Will MTD for Income Tax alter the standard payment schedule for UK income tax?

MTD for Income Tax does not change the existing payment deadlines for Self Assessment income tax, which remain at 31 January and, where applicable, 31 July. Quarterly tax payments are not required under MTD, but the system may help taxpayers estimate liabilities if they wish to make payments on account.

What are the upcoming penalty provisions associated with MTD for Income Tax compliance?

A new points-based regime will be introduced for late submissions of quarterly updates when MTD becomes mandatory. Additionally, the existing penalty system for late annual tax returns and late payments will be overhauled at the same time.

Are taxpayers with gross income below the MTD thresholds able to opt in voluntarily, and if so, how?

Taxpayers with qualifying income below £20,000 are not required to join MTD but may opt in voluntarily at any time. They would then adhere to the same digital record-keeping and quarterly update submissions as mandated participants.

What role does a taxpayer’s most recently filed Self-Assessment return play in MTD for Income Tax eligibility?

Eligibility for mandatory participation in MTD for Income Tax is determined by the gross income reported on the taxpayer's most recently filed Self-Assessment tax return. For the 2025/2026 tax year, for instance, the return from 2024/2025 will be used to assess qualifying income.

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