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Making Tax Digital Software: the 2026 Rules, Explained Plainly

By Rachel Okafor, AAT-qualified bookkeeper · Updated 16 July 2026

The one-paragraph version: if you are a sole trader or landlord who earned over £50,000 from those activities in 2024-25, Making Tax Digital for Income Tax applies to you now, since April 2026. You must keep digital records and send HMRC quarterly updates through recognised software. Over £30,000? You join in April 2027. VAT-registered? You have been in MTD for VAT since 2022. Limited company? Corporation tax is not in MTD yet.

Guidance, not tax advice. MTD has exemptions and edge cases; confirm your own position with your accountant or HMRC's MTD guidance before acting.

What Making Tax Digital is

Making Tax Digital is HMRC's long-running programme to move tax record-keeping and filing from paper and portals into software. The principle: your records live digitally, and the figures flow to HMRC through software with no manual retyping in between (the "digital links" rule). It arrived for VAT first, and income tax is the current frontier.

The timeline that matters

  • April 2019 and April 2022: MTD for VAT phased in; since 2022 it covers all VAT-registered businesses, regardless of turnover. The VAT registration threshold is £90,000 of taxable turnover (checked July 2026).
  • April 2026 (live now): MTD for Income Tax applies to sole traders and landlords whose combined qualifying income from self-employment and property exceeded £50,000 in the 2024-25 tax year.
  • April 2027: the threshold drops to £30,000 (based on 2025-26 income).
  • April 2028: announced extension to those over £20,000.
  • MTD for Corporation Tax: no confirmed start date. Limited companies are outside MTD ITSA; a director's personal rental income, however, can pull the director in personally.

Note the look-back structure: your 2026-27 obligations were fixed by your 2024-25 tax return. This wrong-foots people whose income has since fallen; if that is you, read HMRC's guidance on exemption and deregistration rather than assuming you are out.

What you actually have to do under MTD ITSA

  1. Keep digital records of your business and property income and expenses, in software or a spreadsheet.
  2. Send quarterly updates to HMRC through recognised software. These are cumulative summaries of income and expenses, due roughly a month after each quarter ends (standard quarters run to 5 July, 5 October, 5 January and 5 April, with a calendar-quarter election available). They are not tax returns and no payment is due with them.
  3. File a final declaration after year end, where accounting adjustments, reliefs and other income go, replacing the Self Assessment return for that income. Tax payment deadlines have not changed: 31 January remains the day.

Sole trade and property are tracked as separate income sources, so a plumber with a buy-to-let sends updates for both. Good software makes this a non-event; bad workflow makes it eight filings a year.

Penalties: points, then pounds

Late quarterly updates earn penalty points. For quarterly filers, four points triggers a £200 penalty, and each further late submission at the threshold costs another £200 until a period of clean compliance resets you. Late payment of the tax itself carries separate, percentage-based penalties. The system is deliberately forgiving of a single slip and deliberately expensive for chronic lateness. Details are in HMRC's late submission penalty guidance on gov.uk.

Who can claim exemption

Digital exclusion exemptions exist for people who cannot reasonably use software: age, disability, remoteness (no adequate internet) or religious grounds. Some categories, such as trustees and personal representatives, are outside scope. Exemption is claimed from HMRC, not assumed. If quarterly software filings are genuinely impossible for you, start that conversation early via HMRC's exemption process.

Which software is ready

The authoritative list is HMRC's software finder, which distinguishes full record-keeping software from bridging tools. Our own July 2026 checks across the packages we test:

  • Xero: MTD VAT and ITSA supported. Best all-round package for limited companies, which also makes it a fit for directors with personal property income.
  • QuickBooks: MTD VAT and ITSA supported; the £10 Sole Trader plan is built around quarterly updates and a running tax estimate. Our pick for most people newly caught by the 2026 rules.
  • FreeAgent: MTD VAT and ITSA supported, and free with NatWest, RBS or Mettle banking. The cheapest fully-supported route if your banking cooperates.
  • Sage: MTD VAT and ITSA supported, with landlord-focused options; confirm the exact Sage product on HMRC's list, as packaging shifts.
  • Zoho Books, FreshBooks, Pandle: all file MTD VAT. Their ITSA recognition needed verifying at our check; do not assume, look them up on HMRC's finder before committing.

The spreadsheet-plus-bridging route

You can stay on a spreadsheet if the figures reach HMRC through recognised bridging software with unbroken digital links: formulas and file imports are fine, retyping is not. This works for both MTD VAT and ITSA, and some bridging tools are free or a few pounds per filing. Under ITSA the arithmetic changes: four quarterly updates plus a final declaration means five software interactions a year instead of one. Our free software guide weighs when the spreadsheet stops being worth it.

How to get ready (a short, honest checklist)

  1. Check your qualifying income for the relevant look-back year: self-employment turnover plus gross property income, combined, before expenses.
  2. Open a separate business bank account if you do not have one. Mixed personal-business accounts make digital record-keeping miserable.
  3. Pick software before your first quarter closes, not before the final declaration. The whole point is recording as you go; our rankings are the shortlist.
  4. Sign up for MTD ITSA with HMRC (or have your accountant do it); it is a distinct registration, not automatic.
  5. Do one dry-run quarter early. The first update teaches you more than any guide, including this one.

MTD FAQs

Who does MTD for Income Tax apply to from April 2026?

Sole traders and landlords whose combined qualifying income exceeded £50,000 in 2024-25. The threshold falls to £30,000 in April 2027 and £20,000 in April 2028 under announced plans. Limited companies are not in scope for ITSA.

What do quarterly updates involve?

Cumulative summaries of income and expenses per income source, sent through recognised software about a month after each quarter. No payment accompanies them; tax is still due by 31 January.

Which software should I use?

QuickBooks Sole Trader, FreeAgent (free via certain banks), Xero and Sage all supported ITSA in our July 2026 checks. HMRC's software finder is the definitive, current list.

What happens if I miss a deadline?

You collect a penalty point per late submission; four points (for quarterly filers) triggers a £200 penalty, repeating for further lateness until sustained compliance resets your points. Late payment penalties are separate.

Related reading

Rules and thresholds checked July 2026 against gov.uk guidance. MTD policy has moved before and may move again; we re-check quarterly. Corrections: hello@best-in-the.co.uk.