Making Tax Digital Explained: VAT and Income Tax Rules for 2026

Making Tax Digital (MTD) is HMRC's move to digital tax records and reporting through compatible software. It's mandatory for every VAT-registered business, and since 6 April 2026 it also applies to Income Tax for sole traders and landlords with qualifying income over £50,000. That threshold is due to fall to £30,000 in April 2027 and, under current plans, to £20,000 in April 2028.

What Is Making Tax Digital?

Making Tax Digital is HMRC's plan to move tax administration onto a digital system. The aim is to help people keep accurate records and stay on top of their tax position through the year, instead of scrambling at a deadline.

It's being introduced in stages, starting with VAT and now extending to Income Tax. The idea is the same each time: digital record keeping, and reporting to HMRC through compatible software, not paper forms or manual entry.

How Do VAT and Income Tax Differ Under MTD?

Our guide to what VAT is explains how VAT works more generally. For the Income Tax side in detail, see our guide to Making Tax Digital for sole traders.

Is Making Tax Digital for VAT Already Mandatory?

Yes, for every VAT-registered business, regardless of turnover. It's no longer a rollout in progress. If you're VAT registered and not yet using compatible software to keep records and file returns, you're not currently following the rules.

The VAT registration threshold is currently £90,000. MTD for VAT applies to every VAT-registered business once registered, including those that registered voluntarily below that figure. See GOV.UK's guidance on charging, reclaiming and recording VAT, and our guides to the VAT threshold and VAT return deadlines and penalties.

What's Changed With Making Tax Digital for Income Tax?

MTD for Income Tax started on 6 April 2026. It covers sole traders and landlords whose qualifying income is over the threshold. Qualifying income is your combined income from self-employment and property, before expenses. Each source isn't tested separately.

The 2028 threshold is currently a plan, not a confirmed rule, so check GOV.UK's guidance on MTD for Income Tax for the latest position. People below the thresholds aren't required to join, though they can choose to.

If you're in scope, you need to:

• Keep digital records of your income and expenses through the year
• Send quarterly updates to HMRC through compatible software
• Make a final declaration at the end of the tax year, confirming your total position

Do I Still File a Self Assessment Return?

MTD for Income Tax sits within Self Assessment, but it changes how you report. If you're in scope, quarterly updates and the final declaration replace the single annual return for that tax year. You may still need a traditional return for an earlier year, before MTD applied to you.

If you're below the threshold, the usual process continues. Our Self Assessment basics covers it in full.

What Software Do I Need?

You need software that connects with HMRC's systems to keep digital records and submit updates. That can be MTD-compatible accounting software, or a spreadsheet paired with bridging software that creates the digital link.

A spreadsheet alone doesn't meet the requirements, because MTD needs both digital records and a digital connection to HMRC. If you're still working manually, it's worth moving to compatible software well before a lower threshold reaches you.

What Happens If I Don't Comply?

MTD for Income Tax uses a points-based penalty system. You get a point for each missed quarterly update or late return, and at four points you receive a £200 fine. Further penalties can follow for continued late submissions.

There's a soft landing in the first year. For 2026 to 2027, HMRC won't apply penalty points for late quarterly updates. That doesn't cover the final return or late payment charges. See HMRC's guidance on understanding MTD for Income Tax for the detail.

What Should I Do Next?

Check your qualifying income against the thresholds, choose compatible software, and speak to an accountant if you're unsure whether you're in scope. HMRC's guidance on GOV.UK is the best place to confirm the latest rules.

FAQs

Is Making Tax Digital for VAT mandatory for all businesses?

Yes, for every VAT-registered business, regardless of turnover, since April 2022. That includes businesses that registered voluntarily.

Who does Making Tax Digital for Income Tax apply to?

Sole traders and landlords with qualifying income over the threshold: £50,000 from April 2026, £30,000 from April 2027, and £20,000 from April 2028 under current plans.

Do I need special software for Making Tax Digital?

Yes. Either MTD-compatible accounting software, or a spreadsheet combined with bridging software that links to HMRC. A spreadsheet alone isn't enough.

What happens if I miss a quarterly update?

You collect a penalty point, and a £200 fine follows at four points. For 2026 to 2027, there's a soft landing with no points for late quarterly updates.

Do I still need to file a Self Assessment return under MTD for Income Tax?

Not in the traditional sense, for a year MTD applies to. Quarterly updates and a final declaration replace the single annual return for that year.

How do I know if I'm in scope?

Check your combined self-employment and property income against the threshold, using the tax year shown in the table above. If you're unsure, an accountant can confirm.

This article is for general information only and does not constitute legal, tax or financial advice. Making Tax Digital thresholds, dates and penalties can change, so please check GOV.UK or speak to a qualified accountant before making decisions.