Making Tax Digital for Income Tax: What SMEs need to do before 6 April 2026

Many regulatory changes apply only to specific sectors. Making Tax Digital for Income Tax (MTD ITSA) is different as it applies directly to founders who operate as sole traders, landlords, or both.

Although MTD is a tax initiative, its practical impact is primarily commercial and operational. It affects how records are kept, how founders work with their accountant or bookkeeper, and how much management time is absorbed by compliance throughout the year. In this article, I unpack some frequently asked questions and provide a readiness plan for SMEs. 

1) Who does Making Tax Digital for Income Tax apply to in 2026?

The start date and the thresholds

MTD for Income Tax is being introduced in phases. The first phase applies to individuals whose qualifying income exceeds £50,000 for the 2024–25 tax year. For that group, the mandatory start date is 6 April 2026. A second phase concerns individuals with qualifying income over £ 30,000 for the 2025-26 tax year, and they will be required to comply from 6 April 2027. 

HMRC has also stated that it intends to introduce legislation to reduce the threshold further (to include those with qualifying income over £20,000). However, the commencement details for that stage are not set out in the same way as the 2026 and 2027 phases.

What “qualifying income” actually means

This point causes the most confusion. HMRC defines qualifying income as the total gross income you receive in a tax year from:

• self-employment, and
• property (rental) income.

Qualifying income can come from more than one self-employment or property source.

Importantly, HMRC assesses qualifying income on a gross basis. That is, turnover or rental income before expenses.

Just as importantly, certain other types of Self-Assessment income do not count towards the qualifying income threshold, including:

• PAYE employment income (including a director’s salary paid from your own company),
• partnership income,
• dividends (including dividends from your own company),
• state pension, and
• private pensions.

Are limited companies included?

MTD ITSA does not currently apply to limited companies. If you are a company director, your dividends and/or salary are not relevant for MTD threshold purposes. Any rental income (outside of a limited company) or personal self-employment income may still be in scope. Profits made through a limited company are not relevant for MTD ITSA, as these will continue to be taxed through the usual Corporation Tax rules. Limited companies that are VAT-registered may still need to comply with Making Tax Digital for VAT if their turnover exceeds the VAT threshold.

Are partnerships included in 2026?

HMRC’s current position is that business partnerships will be brought into MTD for Income Tax at a later stage. The timing for that has not yet been confirmed.

For 2026 planning, the relevant audience is therefore sole traders and landlords who complete Self-Assessment.

2) How will the reporting cycle change?

The reporting model changes fundamentally. You move from an annual, retrospective reporting process to one based on digital record-keeping, quarterly updates, and an annual submission made through compatible software.

Making Tax Digital for Income Tax requires the use of MTD-compatible software approved by HMRC to keep digital records and submit information directly to HMRC. In practical terms, this means that spreadsheets alone will not suffice. Many SMEs use full accounting platforms such as Xero, QuickBooks or Sage, which can maintain digital records and submit quarterly updates and annual returns through the software. Businesses that prefer to keep records in spreadsheets can continue to do so, but only if they use recognised “bridging” software to submit the required information to HMRC. In all cases, it is essential to confirm that the specific software and version being used supports Making Tax Digital for Income Tax, not just MTD for VAT, and that it allows agent access where an accountant or bookkeeper is involved.

a) Quarterly updates (four per year)

Under MTD, you must submit quarterly updates for each self-employment and property income source.

Key practical points from HMRC’s guidance:

• Your software totals your digital records into income and expense categories.
• You do not need to make accounting or tax adjustments before submitting quarterly updates.
• HMRC receives totals by category, not transaction-level records.
• Even if there is no activity in a period, a quarterly update must still be submitted (effectively a “nil” update).

Update deadlines (tax year aligned)

Where you use the standard tax-year-aligned periods (6 April to 5 April), HMRC’s guidance sets the following deadlines:

• Period ending 5 July (update due 7 August)
• Period ending 5 October (update due 7 November)
• Period ending 5 January (update due 7 February)
• Period ending 5 April (update due 7 May)

There is also an option to use calendar update periods (ending on the last day of the month), provided your software supports it. For some businesses, this aligns more naturally with internal reporting. The submission deadlines, however, remain the same.

b) The annual submission deadline remains 31 January

Although MTD changes how information is recorded and updated, the annual submission deadline remains unchanged.

You must submit your tax return by 31 January following the end of the relevant tax year. HMRC notes that early submission is permitted. For example, for the 2025–26 tax year, you may submit at any time after 6 April 2026, but no later than 31 January 2027.

MTD does not change how or when tax is paid.

c) Penalties: a practical concession in the first year

For those required to start using MTD from 6 April 2026, HMRC has confirmed a useful concession: penalty points will not be applied for late quarterly updates during the first 12 months.

Penalty points will still apply for late annual tax returns.

This should not be read as an indication that quarterly updates are optional. Rather, it reflects HMRC’s expectation of a bedding-in period, during which processes should be tested and stabilised.

3) Responsibility remains yours

Where qualifying income exceeds the relevant threshold, HMRC states it will write to confirm that MTD applies from the beginning of the following tax year (for example, income over £50,000 in 2024–25 means compliance from 6 April 2026).

Even if no letter is received, HMRC states it remains the taxpayer’s responsibility to determine whether MTD applies and to ensure they are signed up and prepared.

From a commercial perspective, the point is simple: “We did not receive a letter” is not a risk mitigation strategy.

4) The 2026 readiness plan we are using with SMEs

This is the sequence I recommend, in order.

1. Confirm whether you are in scope for 6 April 2026

Calculate qualifying income using HMRC’s definition: self-employment and property income only, assessed on a gross basis.

2. Map income streams accurately

Each self-employment and property source requires its own quarterly updates. This needs to be apparent from the outset.

3. Choose software early

MTD is as much a software compliance change as a tax change. Ensure your chosen system supports quarterly updates, annual submission and agent access where required.

4. Agree responsibilities clearly (you vs your agent)

HMRC’s systems differentiate between roles (for example, the “main agent” who submits the return). Those roles should be agreed upon and documented.

5. Fix the common “admin friction” points

The most common blockers are practical rather than technical:

• mixed personal and business transactions,
• disorganised receipts,
• inconsistent categorisation, and
• unreliable bank feeds.

6. Build a routine for quarterly updates

Quarterly updates are not intended to be a full accounting exercise. HMRC confirms no tax adjustments are required at that stage. A light-touch but consistent monthly or quarterly routine is usually sufficient.

7. Keep the annual return firmly in view

Quarterly updates do not exempt you from the requirement to submit the annual return by 31 January. Diarise this now.

8. Review contracts with bookkeepers and software providers

This is where a commercial solicitor can add value: clarifying the service scope, deadlines, responsibility for errors, data security obligations, and remedies if systems fail to deliver the required functionality.