Making Tax Digital explained: what is it and who does it affect?

If you’re a sole trader or a landlord the way you’ll have to report your taxes is changing. HMRC is looking to shift more people to report their taxes online through a system called Making Tax Digital for income tax.

More than 860,000 sole traders and landlords – those earning more than £50,000 from self-employment and property – need to start using digital income tax reporting from 6 April and are being urged to act now with two months left to prepare.

Eventually all sole traders and buy to let landlords with self-employed income over £20,000 a year will have to report their income and expenses to HMRC digitally on a quarterly basis. Businesses registered for VAT are already using the system.

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Craig Ogilvie, director of Making Tax Digital at HMRC, said: “With two months to go until Making Tax Digital for income tax launches, now is the time to act. A range of software is available and the system is straightforward and helps reduce errors. Thousands of volunteers have already used it successfully.

“This will make it easier for sole traders and landlords to stay on top of their tax affairs and help ensure everyone pays the right amount of tax.

"Spreading your tax admin throughout the year means avoiding that last minute scramble to complete a tax return every January.”

This article explains what Making Tax Digital is, how it works and who it affects.

What is Making Tax Digital?

Making Tax Digital for income tax is a new way for sole traders and landlords to report their income and expenses to HMRC. 

Eligible sole traders and landlords, or your accountant if you have one, will need to use recognised software to keep digital records and send HMRC light-touch quarterly updates of your income and expenses. These are not extra tax returns.

The software you choose will need to work with Making Tax Digital in order to: 

• create, store and correct digital records of your self-employment and property income and expenses  
• send your quarterly updates to HMRC  
• submit your tax return and pay tax due by 31 January the following year

Who does Making Tax Digital apply to?

Approximately 2.9 million self-employed individuals and landlords with qualifying incomes over £20,000 will be affected by Making Tax Digital as it rolls out between 2026 and 2028.

Making Tax Digital is being implemented in stages and individuals must comply within the following deadlines based on their income:

• April 2026: Around 864,000 individuals with qualifying income over £50,000
• April 2027: 1,077,000 individuals with income between £30,000 and £50,000
• April 2028: Approximately 975,000 individuals with income between £20,000 and £30,000

HMRC will assess your gross income (income before you deduct expenses, also called your turnover). You should also check your qualifying income yourself. To assess your qualifying income for a tax year, HMRC will look at the self-assessment tax return you submitted in the previous tax year.

For example, your gross income could be:

£12,000 from rental income

£39,000 from self-employment income

In this example, your total qualifying income would be £51,000.

Once you start using Making Tax Digital, if your qualifying income drops below the relevant threshold for three tax years in a row, you can choose to opt out.

What software do I need to use for Making Tax Digital?

There are different types of software to help you use Making Tax Digital. You can get software that either creates digital records or connects to your existing records, such as those held in spreadsheets.

Depending on the type of software you choose, you can use either one compatible software product that does everything more than one product that works together, for example, one for creating digital records and another for submitting information to HMRC

If you use more than one product, you’ll need to make sure they can work together to meet all your Making Tax Digital requirements.

HMRC has a software finder tool to help you find compatible software that meets your needs as well as search for your existing software to check if it works with Making Tax Digital. You’ll be asked a few questions to get a personalised list of software options depending on what you need.

All the software listed on the tool has been through HMRC’s recognition process – but HMRC does not recommend any product or software provider.

What happens if I have to use Making Tax Digital in 2026?

Thousands of sole traders and landlords have already signed up for Making Tax Digital, with more than 12,000 quarterly updates successfully submitted through a voluntary testing programme, HMRC said.

The advice from HMRC is that those joining Making Tax Digital in April 2026 will still file their tax return for the 2025/2026 tax year in the usual way by 31 January 2027, as this covers the period before MTD begins. The first Making Tax Digital tax return, covering the 2026/2027 tax year, will be due by 31 January 2028.

To support the transition, the government said taxpayers joining Making Tax Digital in April 2026 will not receive penalty points for late quarterly updates, for the first 12 months.

Under the new system, penalty points will be given for each late submission, with a £200 penalty only applied once four points are reached. This means occasional slip-ups won't result in immediate fines.

HMRC is urging those in scope of Making Tax Digital for Income Tax to act now: read the guidance, choose software and sign up on gov.uk. Those who use a tax agent should speak to them about preparing.