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. MTD for ITSA will begin on 6 April 2026, but the start date will be later for some affected taxpayers.

Although legislation is already in force for MTD for ITSA, most of it is expected to be replaced before 6 April 2026 following the publication of draft legislation on 21 July 2025. Most of the differences relate to easements that were announced in the Spring Statement. This note is a high-level summary of MTD for ITSA, taking account of the draft legislation.

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. 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 draft 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.

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 below £20,000 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 are likely to qualify for the ITSA exemption but will need to contact HMRC.

Other exclusions and deferrals announced in the Spring Statement

Individuals who are unable to satisfy HMRC’s identity verification procedures can apply to be excluded from MTD for ITSA. This will typically arise where the individual does not have a national insurance number.

The following groups of taxpayers will not be required to join MTD 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.

Although not yet reflected in the draft regulations, HMRC confirmed in March 2025 that individuals will not be required to join MTD before April 2027 if they expect to need to make disclosures in the supplementary pages for residence for the 2026/27 tax year. 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 expect to claim relief for foreign income and/or gains under the new residence-based regime that replaces the remittance basis of taxation from 6 April 2025. The deferral is also expected to apply to individuals who are making use of the “Temporary Repatriation Facility” for past remittance basis income and/or gains. The deferral 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 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 already being carried on immediately before 6 April 2025, and the individual is not exempt, the draft regulations currently state that MTD for ITSA will be mandated from 6 April 2026 by default. 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.

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 have written to many individuals that 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, complexity and being within the MTD penalty regime even if participating in MTD for ITSA on a voluntary basis as part of the beta (see below).

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 3 October 2025 together with draft primary and secondary legislation published on 21 July 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.