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 are already in place (e.g. MTD for VAT), but MTD for Income Tax (MTD for ITSA) has been deferred a number of times 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.

Regulations were originally laid on 23 September 2021 clarifying which taxpayers were to be affected and stating that MTD for ITSA would come into effect from April 2024 for most taxpayers. These original regulations were revised following the laying of new regulations on 22 February 2024, which included the deferral of the start date to April 2026. Further changes were announced in the Spring Statement on 26 March 2025. This note is a high-level summary of the current position, including the latest proposals.

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. Trustees, personal representatives and non-resident companies are all exempt from MTD for ITSA. The regulations include exemptions for foster carers and individuals who do not hold a national insurance number as at 31 January before the start of the tax year for which records would otherwise be required. 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. It was confirmed in the Spring Statement on 26 March 2025 that 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 if profits would be chargeable to income tax except where the income derives from “excluded activities”. These are Lloyd's Underwriting activities and property receipts from collective investment schemes (e.g. REIT distributions and property income dividends).

As MTD for ITSA only applies in years where profits would be chargeable to income tax, non-UK businesses of non-UK residents should automatically fall outside the regime. However, there are currently no special provisions for split year treatment, suggesting that quarterly reporting of a foreign business is potentially required throughout years of arrival to and departure from the UK, even though only part of it is likely be taxable.

Exemptions for individuals

Income exemption

MTD for ITSA will not be mandated for individuals with gross receipts from their trading and/or property businesses of £50,000 or less for 2026/27 or £30,000 or less from 2027/28 onwards. As noted above, a further reduction to £20,000 is expected from 2028/29. Receipts from all relevant businesses are aggregated. For example, an individual with trading receipts of £29,000 and gross rents of £22,000 would be required to use MTD for ITSA for both businesses because the combined receipts exceed £50,000. Individuals who are eligible for the Income Exemption can elect to use MTD voluntarily, provided they are not otherwise excluded.

The receipts threshold in the regulations is based on the amounts that were reported on the last tax return that was due before the start of the tax year under consideration. For example, MTD for ITSA would not be expected to apply in 2026/27 if the total business receipts on the 2024/25 tax return were £50,000 or less (i.e. the return due by 31 January 2026). If the period considered in the tax return is not 12 months, the receipts are adjusted to 12 months’ worth.

An individual who is initially mandated to use MTD for ITSA due to exceeding the receipts threshold may subsequently qualify for exemption if receipts drop below the threshold for three years in a row. 

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 do not need to reapply for MTD for ITSA.

Other exclusions and deferrals announced in the Spring Statement

It was announced that the following groups of taxpayers will not be required to join MTD over the course of the current parliament:

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

Additionally, the following groups may apply for an exemption:

• Individuals who have a Power of Attorney
• Non-UK resident foreign entertainers and sportspeople who do not have another business that would be subject to MTD
• Individuals for whom HMRC cannot provide a digital service

Additionally, HMRC confirmed that individuals will not be required to join MTD before April 2027 if they need to make disclosures in the supplementary pages for residence. As well as individuals who are non-UK resident, subject to split year treatment or claiming reliefs under double tax treaties, we expect this group to include individuals in their first four tax years of UK residence who are claiming relief for foreign income and/or gains under the new residence-based regime that replaces the remittance basis of taxation from 6 April 2025. This delay is to allow HMRC to design elements of the system affecting these groups.

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 submit a final declaration. 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 final declaration process (i.e. the same as the current tax return filing deadline).

HMRC state that the final declaration 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 final declaration, 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 already being carried on immediately before 6 April 2025, and the individual is not exempt, the regulations currently state that MTD for ITSA will be mandated from 6 April 2026. 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. It was confirmed in the Spring Statement that the government intends to allow individuals with an accounting date of 31 March to start operating MTD from 1 April rather than 5 April to avoid the need for adjustments at the end of the year.

It is possible in theory to start using MTD for ITSA now as part of HMRC’s pilot ("beta"), but the conditions for joining are very restrictive. In particular, non-UK residents and taxpayers with income from partnerships or trusts, are currently ineligible. HMRC will shortly be writing to individuals they expect to be mandated from 6 April 2026, inviting them to join the beta if they are eligible. Individuals who have an agent prepare their tax returns should discuss this with their agent before considering joining due to potential issues with cost and complexity.

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. It was announced at the Spring Statement that the percentages applying from 6 April 2025 will be 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 31 March 2025 together with announcements made on 26 March 2025. Further changes may be made prior to 6 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.