If you run a business as a sole trader or own rental properties, April 2026 changes how you report income to HMRC. Making Tax Digital (MTD) for Income Tax becomes mandatory next month. The time for preparation has run out.
This moves you from annual self-assessment to quarterly digital reporting. The penalties for non-compliance are substantial. Here’s what you need to know and what you need to do.
Who this affects
MTD for Income Tax applies to sole traders and landlords with qualifying gross income over £50,000. This is gross income, not profit. That distinction catches people out. If your turnover exceeds this threshold, you’re in scope regardless of profit.
From April 2027, the threshold drops to £30,000. If you’re anywhere near these figures, act now, not after the deadline passes.
What changes
You move from annual reporting to quarterly submissions. This changes how you manage your tax affairs completely.
Gathering receipts once a year and filing a single self-assessment return is over. Under MTD, you keep digital records of all income and expenses throughout the year. These records must be maintained using HMRC-compatible software. Spreadsheets you manually update won’t work.
Every quarter, you submit a summary of your income and expenses to HMRC through this software. At the end of the tax year, you still complete a final declaration, but the quarterly submissions give HMRC a real-time view of your financial position.
The software question
HMRC doesn’t provide free software for MTD compliance. You need commercial accounting software that meets their technical requirements. Popular options include Xero, QuickBooks, Sage, and FreeAgent.
Choosing software matters. Look for a solution that integrates with your bank feeds and handles your type of income (service fees, product sales, or rental income). If you have an accountant, pick something that connects with their systems to avoid duplication.
Software costs vary. Expect to pay £10 to £30 per month for basic packages. More complex operations need higher-tier subscriptions.
Why HMRC is doing this
The stated aim is to make tax administration more efficient and reduce errors. Quarterly updates let HMRC provide more accurate estimates of tax liability throughout the year.
There’s also enforcement. Real-time visibility into business income makes it harder for tax to slip through the cracks. The tax gap (the difference between what should be collected and what actually is) runs into billions. MTD is designed to close that gap.
What happens if you don’t comply
HMRC operates a points-based penalty system for MTD failures. Miss a quarterly submission and you receive a point. Accumulate enough points within 24 months and financial penalties kick in.
The penalties aren’t trivial. For businesses with turnover above £10,000, the first penalty is £200, rising to £400 and beyond for subsequent failures. Larger businesses face higher penalties.
Non-compliance creates scrutiny. HMRC’s risk-assessment algorithms flag accounts that don’t submit on time, potentially triggering investigations.
Steps to take now
If you’re caught by the April 2026 threshold and haven’t moved to digital record-keeping, here’s your plan:
Choose and set up accounting software. Many providers offer free trials. Find something that fits your workflow. The earlier you start, the more time you have before the first quarterly deadline.
Digitise your existing records. If you’ve been using spreadsheets or paper, get everything into your chosen software now. This gives you a baseline and helps spot gaps in your record-keeping.
Set quarterly reminders. Submission deadlines are one month after the end of each quarter. Missing them by even a day starts the penalty clock.
Talk to your accountant if you use one. Make sure they’re set up for MTD and understand what they need from you and when. If you don’t have an accountant, consider whether managing quarterly submissions on top of running your business is realistic.
Corporation tax is going digital too
MTD for Income Tax isn’t happening in isolation. Corporation Tax filing is also going digital-only from April 2026. HMRC is retiring its free online forms.
Digital records, frequent submissions, and real-time visibility for HMRC are the new reality. Businesses that adapt early will find the transition easier than those who wait until enforcement becomes the motivator.
Don’t leave it until March
April is next month. Setting up software, migrating records, and learning new processes takes longer than you think.
If you haven’t started MTD preparation, start today. Review your income figures. Assess whether you’re caught by the threshold. If you are, begin going digital. The penalties for getting this wrong are real. Staying on top of your finances in real-time is better business practice anyway.
Making Tax Digital might feel like an administrative burden. It’s also a chance to get a clearer, more current view of your business’s financial health. The businesses that see it that way will be better positioned for what comes next.