Who needs to prepare for the next phase of Making Tax Digital?

Whether you’ve come across Making Tax Digital yet or not, the next phase has been confirmed for April 2026 and that means it impacts even more people than before. If you’re a sole trader with self-employed income or a landlord with property income, then you’re the next targeted group and are likely to be affected. Our team of expert accountants is on hand to help you understand and prepare for the upcoming changes so that you don’t get caught out.

What is Making Tax Digital (MTD)?

Making Tax Digital, or MTD for short, is a government initiative that was first announced in 2015. The UK government has big plans to modernise the tax system, digitising it to make it accessible from anywhere with internet access, and increasing the frequency of returns in a bid to reduce mistakes, collect taxes more regularly throughout the year, minimise late payment and penalty accruals, and crackdown on tax evasion.

The first phase was introduced back in 2019 and impacted all VAT-registered businesses that had a turnover of £85,000 or more. If you were voluntarily VAT-registered with a turnover of less than £85,000 it was not necessary for you to comply with the new MTD requirements, however you could also voluntarily join the MTD programme if you wished. It was not until 2022 that MTD for VAT became mandatory for all VAT-registered businesses no matter their turnover.

Now, having been delayed for over two years, it’s been confirmed that the next phase of MTD for income tax will come into force come April 2026.

What is the next phase of MTD?

The next phase of MTD focuses on Income Tax Self Assessment (ITSA) and will impact many of those who are required to submit an annual self assessment tax return to declare their untaxed earnings. Whilst it won’t apply until April 2026, those who are likely to be affected are being advised to start preparing now in order to be able to make the necessary adjustments in time for when it begins.

Who needs to prepare for the next phase of MTD?

The Making Tax Digital for income tax phase specifically targets anyone with self-employed earnings and/or property income such as landlords who receive rental income. If you have multiple sources of income, then you still may fall within the scope where you meet the £50,000 income threshold. It’s important to note that this threshold is based on your gross income (so, before any of your expenses are taken into account). To clarify how this threshold works, here are some examples:

• You’re an employee with an annual PAYE income of £35,000. You also receive a rental income of £11,000 a year. Your total income is under the £50,000 threshold so you do not need to comply with MTD rules.
• You’re a director of your own limited company (therefore also considered an employee as opposed to self-employed) and receive a combined director’s salary and dividends of £45,000 a year. You also have rental income of £25,000 a year. Although your total income exceeds the £50,000 threshold, your property income alone does not, so you’re not required to join the MTD regime come April 2026.
• You’re a sole trader with annual earnings of £60,000 (this can be either from one business or multiple sole trader businesses). This is over the £50,000 threshold and so you will need to comply with MTD from April 2026.
• You’re a sole trader with annual earnings of £38,000 and also have rental income of £15,000 a year. Although both streams of income fall under the £50,000 threshold, the combined income exceeds this, and so you will need to comply with the MTD requirements come April 2026.

What needs to be done?

Sole traders and landlords with qualifying income will need to prepare to complete 3 new procedures when it comes to reporting their personal tax affairs:

• Start keeping digital records of your income and expenses
• File quarterly updates to HMRC instead of submitting a single annual self assessment tax return for the entire year
• Submit an “End of Year Final Declaration” to include any income which is not from your sole trader earnings or property income such as dividends, capital gains, as well as claim tax reliefs if available

For all the above, you’ll have to use HMRC-approved accounting software to complete.

How to prepare for MTD ITSA 2026

If you’re likely to fall into the scope of MTD by April 2026 then you will need to start taking action now. Firstly, you’ll need to register for MTD. If you do this now, you’ll be given the option to start testing the system or simply be registered in advance, ready for April 2026.

Next, choose the cloud accounting software you want to use. Make sure you get trained on how to use it, and if possible, start using it regularly. By becoming familiar with the software and getting into the habit of using it, maintaining digital records will be far easier and less stressful by the time MTD compliance becomes mandatory for you. You may also want to adjust your accounting period so that it aligns with the MTD deadlines. You can choose to adopt the standard quarters which are 6 April to 5 July, 6 July to 5 October, 6 October to 5 January, and 6 January to 5 April. Alternatively, if easier for you, you can opt for the calendar quarters which are 1 April to 30 June, 1 July to 30 September, 1 October to 31 December and 1 January to 31 March. Regardless of which you choose, the deadline for submitting the quarterly updates will be 7 August, 7 November, 7 February and 7 May.

What happens if I don’t join MTD?

Unless you are exempt from MTD, the new tax rules will be mandatory so long as your gross income from trading and property exceeds the threshold. Failure to maintain digital record-keeping and quarterly submissions can still lead to penalties and fines the same way as being late or failing to submit a self assessment tax return used to. However, instead of the usual penalties, a new points system will be introduced.

Each time you are late submitting a quarterly update you’ll receive a point. If you receive 4 points, you’ll receive an automatic £200 penalty. Points will be accrued for two years and then removed so long as you do not receive further points. If you do receive a £200 penalty, then you’ll need to remain compliant for a full tax year before the points are removed from your account. It is worth noting that these points are separate to points gained from late VAT submissions if this applies to you.

Not only this, but late payment fines will continue to be issued. However now, fines will be issued where you are 15 days or more late making your tax payment. The penalty will be 3% of the tax owed if you are 15 days late. If you are 30 days late then a further 3% of the tax owed will be added. After 30 days, you’ll be charged at a rate of 10% of the unpaid tax which will accrue daily. These fines are in addition to interest which will also be charged. To avoid this, you can still utilise Time to Pay arrangements. No penalties are issued for late payments on account, but overall these fines are much harsher than before or for those who are out of the scope of MTD.

Get help with Making Tax Digital for Income Tax Self Assessment

If you need help assessing whether you’ll need to join MTD from April 2026 or you’d like full-on support with compliance, we’re here to help you prepare for the next phase of MTD. Use our online form to get in touch.