Making Tax Digital for Income Tax

Introduction

For several years HMRC have been in the process of transforming their systems with a view to modernising their management of data and interactions with taxpayers for the digital age. The project is known as Making Tax Digital (MTD) and encompasses different taxes and several processes, which were first consulted on in 2016. Some elements of the plan have been in place for some time (e.g. MTD for VAT), but MTD for Income Tax (MTD for ITSA) will begin in April 2026 following a number of deferrals due to its complexity. MTD for ITSA requires digital record keeping and quarterly digital reporting of receipts and expenses in respect of trading businesses and property businesses that are subject to income tax, subject to certain exceptions. The start date will be later than April 2026 for some affected taxpayers.

Although the broad policy objectives of MTD for ITSA have been known for some time, the final legislation was not published until 24 March 2026. Most of the differences from previous iterations of legislation relate to easements that were announced in Spring Statement 2025 and in July 2025. This note is a high-level summary of MTD for ITSA, based on the regulations published on 24 March 2026. 

Entities and businesses affected

The initial phase of MTD for ITSA from April 2026 only affects individuals who are carrying on businesses in their own right, subject to certain exemptions (see below). Partnerships will be brought into MTD for ITSA at a later undefined date (partners themselves may be subject to MTD if they have separate personal businesses). Trustees, personal representatives and non-resident companies are all exempt from MTD for ITSA. In the initial phase from April 2026, only individuals with over £50,000 of business receipts will be mandated to enter the regime. From April 2027, this will be extended to those with business receipts of more than £30,000. This threshold will be lowered to £20,000 from April 2028.

Most trading and property businesses carried on by individuals will be subject to MTD for ITSA. Some activities are specifically excluded, such as Lloyd's Underwriting activities and property receipts from collective investment schemes (e.g. REIT distributions and property income dividends).

The regulations include exemptions for businesses that consist of foster care and professional income of non-UK resident performers who perform in the UK. If the individual has another business (e.g. a UK property business), that other business may still be in the scope of MTD for ITSA unless another exemption or exclusion applies.

Exemptions for individuals

Income exemption

Individuals will not be mandated to join MTD for ITSA unless their gross receipts from their trading and/or property on the tax return due on 31 January before the start of the relevant tax year exceed a certain threshold. This threshold is normally £50,000 for the 2024/25 tax return, £30,000 for the 2025/26 tax return and £20,000 for subsequent tax years. Receipts from all relevant businesses are aggregated. For example, an individual with trading receipts of £29,000 and gross rents of £22,000 on their 2024/25 tax return (due by 31 January 2026) would be required to join MTD for ITSA for both businesses from 6 April 2026 because the combined receipts exceed £50,000. If the period considered in the tax return is not 12 months, the receipts are adjusted to 12 months’ worth (e.g. if the business commenced 6 months into the tax year, the receipts are doubled for the purpose of this test). As the threshold is tested on an individual basis, landlords with jointly-held property only need to consider the share of receipts reported on their own tax return.

The regulations exclude certain receipts from the definition of income for this purpose. These are amounts received by trustees in their capacity as trustees, foster care receipts and non-resident performer receipts.

An individual who is initially mandated to join MTD for ITSA due to exceeding the receipts threshold may subsequently qualify for exemption if the receipts reported in their MTD quarterly updates drop to £20,000 or less for three years in a row.  

Temporary exemption for 2026/27 tax year

Due to some technical constraints, some individuals who would otherwise be required to join MTD for ITSA from April 2026 will qualify for a temporary exemption until April 2027. An automatic exemption will apply to individuals with any of the following in their 2024/25 tax returns:

• Trust or estate income on the trust supplementary pages.
• Entries on the residence and remittance supplementary pages relating to non-residence, split year, dual residence, claims for reliefs or allowances under double tax treaties, claims for business investment relief or remittances of nominated income.
• Claims for averaging relief for farmers and creative artists.
• Non-resident performer income.
• Foster care income.

In practice, HMRC do not appear to be permitting anyone who completed residence and remittance supplementary pages for 2024/25 to register for MTD for ITSA, irrespective of the reason for completion.

Exemption is also available if any of the listed entries are expected to apply in 2025/26 or 2026/27, but an application will need to be made. In addition to the above entries, a reasonable expectation of the need to claim relief under the foreign income and gains (‘FIG’) regime for new residents, as well as designations under the ‘temporary repatriation facility’ for former remittance basis taxpayers, will provide grounds for applying for exemption in 2026/27.

Digital exclusion

Individuals can apply for an exemption from MTD for ITSA if they are digitally excluded. This includes those for whom use of computers would not be reasonable or practical due to age, disability or location, and those who object to using computers on religious grounds. Individuals who have already been granted this exemption for MTD for VAT are likely to qualify for the ITSA exemption but will need to contact HMRC.

Other exclusions

The following groups of taxpayers will not be required to join MTD for ITSA until at least April 2029:

• Ministers of religion
• Lloyd’s Underwriters
• Individuals who claim Married Couples’ Allowance or Blind Person’s Allowance

Taxpayers who are subject to a power of attorney will be permanently exempt from MTD for ITSA.

Taxpayers who do not have a national insurance number on the last day of a tax year will be exempt from MTD for ITSA in the subsequent tax year.

More broadly, taxpayers will need to be able to meet HMRC’s conditions for verification of identity to join MTD for ITSA.

Requirements under MTD for ITSA

Digital records and reporting

MTD for ITSA requires taxpayers to obtain software that is compatible with HMRC’s system and use it to maintain digital records, send quarterly reports to HMRC of income and expenditure and file an MTD equivalent of a tax return (‘MTD tax return’). Notices issued on 17 January 2025 included some administrative easements, such as allowing joint property owners to exclude expenses in respect of jointly-held properties from their in-year submissions.

Quarterly reporting periods can follow tax year quarters or calendar year quarters, as follows:

The deadlines for quarterly reports are the 7th of the month after the tax year quarter end (e.g. 7 August 2026 for the first quarter to 5 July or 30 June 2026). The taxable profits will need to be finalised by 31 January following the end of the tax year as part of the MTD tax return process (i.e. the same as the current tax return filing deadline).

The MTD tax return will replace the Self Assessment tax return and will be due by 31 January following the end of the tax year. Prior to submitting the MTD tax return, the individual needs to have provided details of non-business income and any reliefs to HMRC in a digital format.

Timing of MTD for ITSA

Where a relevant business is being carried on as at 6 April 2026, and the 2024/25 tax return included financial information about that business, MTD for ITSA will be mandated from 6 April 2026 by default unless the individual qualifies for an exemption. For businesses that start later, MTD for ITSA will generally be mandated from 6 April of the third tax year in which the business exists. Where the taxpayer elects to report on a calendar year quarters basis, the start date will be 1 April rather than 5 April.

Penalty regime under MTD

Individuals who join MTD are subject to a separate penalty regime from Self Assessment for late submissions and late payment. These rules already apply to VAT and will apply to income tax as and when individuals join MTD, whether this is on mandation or on a voluntary basis as part of the beta.

The penalties for late submission will be a points-based system. Individuals incur a point on missing a submission deadline (VAT and income tax points will accrue separately). Reaching a certain threshold of points results in a £200 penalty. The threshold depends on the frequency of submissions (monthly, quarterly or annual). The points can expire in 24 months or less if the individual either doesn’t meet the threshold or meets their obligations for a set period based on their submission frequency.

Late payment penalties under MTD apply when tax remains unpaid 15 days or more after the due date. The penalty is a percentage of the outstanding balance at certain points after the due date. The rules are summarised here (the link is to HMRC’s guidance on VAT penalties, but these penalties also apply now for income tax purposes for individuals who opt to participate in the MTD for ITSA beta). The percentages applying from 6 April 2025 are 3% of the amount outstanding on day 15, plus 3% of the amount outstanding on day 30, plus 10% per annum on amounts outstanding from day 31 onwards.

Find out more…

This note reflects the law in force as at 25 March 2026 together with the regulations laid on 24 March 2026, which will come into force from 1 April 2026. This note does not cover all aspects of this subject. To find out more about any aspect of the above, please discuss with your usual Deloitte contact. If you do not have a usual contact, please contact Rachel McEleney (rmceleney@deloitte.co.uk). For further information visit our website at www.deloitte.co.uk.