Introduction: The Shift Towards Digital Taxation
The UK tax system has long been recognised as one of the most complex in the world, with millions of individuals and businesses submitting annual returns to HM Revenue & Customs (HMRC). In recent years, the government has embarked on a major modernisation effort, known as Making Tax Digital (MTD). The aim is simple but ambitious: to transform the tax system into one of the most advanced digital administrations globally, reducing errors, increasing efficiency, and making compliance easier for taxpayers.
MTD was first introduced for VAT-registered businesses in April 2019. Since then, companies above the VAT threshold have been required to keep digital records and submit their VAT returns using HMRC-approved software. The rollout was considered successful, and the next logical step is to expand MTD to cover income tax for self-employed individuals and landlords. This change, set to begin in April 2026, represents a significant shift in how millions of people will interact with the tax system.
Who Will Be Affected?
From April 2026, MTD will become mandatory for:
• Self-employed individuals with annual business income of £50,000 or more
• Landlords with property income of £50,000 or more
From April 2027, the threshold will drop to £30,000. This means that even small sole traders and landlords with modest property portfolios will be required to comply. Importantly, the income test is based on the total income from self-employment and property combined. For example, a taxpayer with £30,000 from self-employment and £20,000 from rental income will be required to join MTD from 2026 because their total exceeds £50,000.
Certain groups may be exempt, such as those who are digitally excluded due to age, disability, or remoteness of location, as well as those with religious objections. However, such exemptions are expected to be rare and must be formally approved by HMRC.
How Will Reporting Change?
Under the current Self Assessment regime, individuals submit one tax return each year, due by 31 January following the end of the tax year. With MTD, this system will change to quarterly digital reporting. Instead of pulling together 12 months’ worth of income and expenses at once, taxpayers will need to update HMRC every three months.
The new reporting cycle will include:
• Quarterly Updates – These will summarise income and expenses for the quarter. The deadline is one month and seven days after the end of the period.
• End of Period Statement (EOPS) – At the end of the tax year, an additional report will confirm annual figures.
• Final Declaration – Equivalent to today’s Self Assessment, this is where adjustments, reliefs, and allowances are claimed. The deadline remains 31 January following the end of the tax year.
This means taxpayers will make at least five submissions each year: four quarterly updates and one final declaration.
Quarterly Reporting in Practice
To understand how this works, consider an example:
• Quarter 1: 6 April – 5 July (deadline 7 August)
• Quarter 2: 6 July – 5 October (deadline 7 November)
• Quarter 3: 6 October – 5 January (deadline 7 February)
• Quarter 4: 6 January – 5 April (deadline 7 May)
After Quarter 4, the End of Period Statement is prepared, followed by the Final Declaration by 31 January. For instance, a self-employed consultant earning £55,000 annually will submit four quarterly updates via accounting software, then finalise figures in January. If an expense was missed earlier in the year, it can be added in the final return.
This flexible system ensures greater accuracy while still allowing time to correct mistakes.
Technology and Software
MTD requires the use of compatible digital software. Manual spreadsheets and paper records will no longer be sufficient. Popular software options include QuickBooks, Xero, IRIS, Sage, and TaxCalc, alongside smaller providers offering tailored solutions. Each package allows taxpayers to record income and expenses digitally, connect bank accounts, and send data directly to HMRC.
Cloud-based software offers particular benefits:
• Access from anywhere, on any device
• Automatic backups and reduced risk of data loss
• Real-time financial insights
For small businesses, adopting cloud accounting is more than just compliance – it can provide better control over cash flow and profitability.
Advantages for Taxpayers
The move to quarterly reporting offers several potential benefits:
• Accuracy – With smaller, more frequent submissions, errors are spotted and corrected earlier.
• Reduced stress – Taxpayers avoid the year-end scramble to collate 12 months of data.
• Better budgeting – Quarterly updates give individuals a clearer view of their ongoing tax liability, avoiding large unexpected bills.
• Digital convenience – Software automates calculations, imports bank transactions, and organises receipts.
HMRC has reported that errors in Self Assessment contribute to billions in lost tax revenue each year. By encouraging real-time updates, MTD is expected to close part of this gap.
Challenges and Concerns
Despite the benefits, MTD is not without challenges:
• Cost – While some software is free, many solutions require a monthly subscription. This could be a burden for smaller traders.
• Digital exclusion – Not all taxpayers are comfortable with technology. Older individuals or those in rural areas with poor internet may struggle.
• Increased admin – Quarterly submissions mean more frequent reporting, which some fear could be time-consuming.
HMRC has stated that support will be available, and exemptions can be granted in specific circumstances. However, it is clear that preparation is essential.
Opportunities for Accountants
MTD will significantly affect the accounting profession. While some clients may try to manage quarterly reporting themselves, many will turn to accountants for help. This creates opportunities in several areas:
• Ongoing client engagement – Instead of one annual interaction, accountants will support clients throughout the year.
• Balanced workloads – January’s traditional bottleneck will ease, as work is spread across quarters.
• Advisory growth – With real-time data, accountants can offer more proactive business advice.
• Outsourcing – Businesses may outsource bookkeeping and submissions, creating demand for specialised services.
Overall, MTD is likely to increase the value of professional tax and accounting advice.
Case Studies and Scenarios
Case Study 1: Self-Employed Consultant
Sarah is a freelance marketing consultant earning £55,000 per year. From April 2026, she will need to file quarterly updates via software like Xero. Her accountant will review each submission, ensuring expenses are captured correctly. At year-end, Sarah’s accountant prepares the final declaration, adjusting for pension contributions and other reliefs. The result is accurate, timely reporting with no last-minute stress.
Case Study 2: Property Landlord
James owns three rental properties generating £32,000 annually. In 2027, he will fall into the £30,000 threshold and must comply with MTD. James uses QuickBooks to log rental income and expenses, uploading receipts for repairs. His accountant reviews the quarterly updates and ensures mortgage interest restrictions are applied correctly in the final declaration.
Future Outlook
MTD is not stopping with self-employed individuals and landlords. The government plans to extend the system to limited companies, ensuring a consistent digital approach across all types of taxpayers. In the long term, we may see integration with banking data, real-time PAYE adjustments, and even artificial intelligence assisting with expense categorisation.
While there may be growing pains, the overall direction is clear: a fully digital tax system designed for the modern economy.
Our Services
If you choose to use our services, we will provide you with tailored professional advice. Our experienced team ensures that your taxes are managed efficiently and in full compliance with regulations. By reviewing your records quarterly and annually, we help identify every allowable expense, ensuring that your tax liability is accurate – and often lower than expected. With our guidance, you can feel confident that you are paying only what is due, while keeping your business compliant and stress-free.