Category: Making Tax Digital

We are increasingly hearing from sole traders and landlords who know that Making Tax Digital started in April but remain unsure what must be sent to HMRC in August. The first making tax digital quarterly update must be submitted by 7 August 2026 by individuals who entered MTD for income tax on 6 April 2026.

HMRC says more than 864,000 sole traders and landlords are within the first phase of the system. The update is not a completed tax return, and no tax payment is due solely because the quarterly submission has been made.

Quick Answer

• The first quarterly update is due by 7 August 2026.
• It normally covers records from 6 April to 5 July 2026.
• Those using calendar quarters will report from 1 April to 30 June 2026.
• The update contains cumulative income and expense category totals for each relevant business.
• HMRC will not issue quarterly-update penalty points during 2026/27, but all four updates must still be submitted before the annual tax return can be filed.

What Is the First Making Tax Digital Quarterly Update?

The first Making Tax Digital quarterly update is a digital summary of income and expense records for the opening part of the 2026/27 tax year. It must be sent to HMRC through compatible software by 7 August 2026.

It is a summary rather than a tax return. Taxpayers do not normally need to make year-end accounting adjustments, capital allowance claims, or other tax adjustments before submitting it.

The software adds together the digital records entered for each income and expense category. HMRC receives category totals, not individual invoices, receipts, or bank transactions.

Who Must Submit an Update by 7 August 2026?

The deadline applies to sole traders and landlords who were required to begin using MTD for income tax on 6 April 2026. This generally means all the following conditions apply:

• The individual is registered for self-assessment.
• They receive income from self-employment, property, or both.
• Their qualifying income was more than £50,000 in the 2024/25 tax year.
• They do not have an automatic or HMRC-approved exemption.

HMRC should have written to taxpayers it identified as being within scope. However, not receiving a letter does not remove the responsibility to check qualifying income and sign up.

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How Is Qualifying Income Calculated for MTD?

Qualifying income is the total gross income from self-employment and property before expenses are deducted. Income from several sole trades and property businesses is combined when testing the threshold.

The phased thresholds are

These are gross-income thresholds, not profit thresholds. A business can therefore be within MTD even where deductible expenses leave a comparatively small taxable profit.

Qualifying income does not normally include:

• Employment income taxed through PAYE
• Dividends, including dividends from the individual’s own company
• State or private pension income
• An individual partner’s share of partnership profits

A person’s share of income from a jointly owned property normally counts. For example, if a jointly owned property generates £50,000 of rent and two owners are entitled to equal shares, each person would generally have £25,000 of qualifying property income.

Worked Example

A sole trader reported £36,000 of gross trading income and £18,000 of gross rental income in 2024/25.

Their combined qualifying income is £54,000. They are therefore within the first MTD phase, even if business and property expenses reduce their total taxable profit below £50,000.

What Must Be Included in Quarterly Updates for Making Tax Digital?

The quarterly updates for making tax digital must include cumulative totals for the income and expense categories recorded in compatible software. A separate update is generally required for each self-employment and property business.

The submission may therefore contain totals for categories such as

• Sales or business income
• Rental income
• Staff costs
• Travel costs
• Premises expenses
• Professional fees
• Repairs and maintenance
• Other allowable business expenses

The categories broadly follow those used for self-assessment. The first update does not require every figure to be final or adjusted for tax purposes.

Even where a business has received no income and incurred no expenses during the period, an update must still be submitted to tell HMRC that there was no activity.

For jointly-let properties, HMRC allows taxpayers to include either income and expenses or income only during the quarterly cycle. Expenses omitted from the quarterly updates must be added after the tax year by resending the fourth update before submitting the annual tax return.

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Which Period Does the First Update Cover?

The standard first update covers cumulative records from 6 April to 5 July 2026. Taxpayers using calendar update periods report records from 1 April to 30 June 2026 instead.

The deadline is 7 August 2026 under either method.

Calendar periods may be more practical where accounts are prepared to 31 March. They must be selected in the software for each income source before the first update is submitted.

Once the first update has been sent, the reporting-period method cannot be changed for that tax year.

Which Making Tax Digital Submission Dates Follow the First Deadline?

The four Making Tax Digital submission dates for the 2026/27 tax year are 7 August 2026, 7 November 2026, 7 February 2027 and 7 May 2027.

Each update is cumulative. This means the second standard update covers 6 April to 5 October, rather than covering only the three months from July to October.

The 2025/26 self-assessment return must still be submitted through the usual process by 31 January 2027. The first annual return completed through the MTD system, covering 2026/27, will be due by 31 January 2028.

Can Mistakes Be Corrected After an Update Is Sent?

Mistakes can normally be corrected in the digital records and reflected in the next cumulative quarterly update. Taxpayers do not generally need to reopen and resubmit every earlier update.

For example, if an invoice dated in May is entered incorrectly and corrected in September, the cumulative update sent in November should contain the corrected year-to-date figures.

This cumulative method is an important distinction. Some explanations describe each submission as a completely separate three-month return, but HMRC’s guidance confirms that each update runs from the beginning of the tax year or calendar reporting year to the end of the relevant period.

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What Happens If the Making Tax Digital First Quarter Deadline Is Missed?

HMRC will not apply quarterly-update penalty points for late submissions during the 2026/27 tax year. However, the updates remain legally required and must all be submitted before the annual MTD tax return can be completed.

The first-year concession does not protect taxpayers from:

• Penalties for a late annual tax return
• Late-payment penalties
• Interest on tax paid after the payment deadline
• Administrative problems caused by incomplete digital records

From the tax years after 2026/27, missing a quarterly deadline will normally result in one penalty point. The threshold is four points, at which stage a £200 penalty is charged. A further £200 penalty can apply for each later missed deadline while the taxpayer remains at the threshold.

Only one point can be issued for a particular deadline, even where a person has several businesses and submits several quarterly updates late. MTD for Income Tax penalty points are also separate from any penalty points arising under MTD for VAT.

What Should You Do Before Submitting the First Update?

Taxpayers should check their registration, software connection and digital records before pressing submit. The update should be generated from records created since the start of the applicable reporting period.

A practical review should include:

1. Confirm that you are within MTD. Recheck the gross self-employment and property income shown on the 2024/25 return.
2. Complete the MTD sign-up process. Being registered for self-assessment does not, by itself, complete MTD registration.
3. Authorise compatible software. HMRC provides a software finder for MTD for Income Tax.
4. Check every relevant income source. A separate update may be required for each trade and property business.
5. Update digital records. Record income and expenses from 6 April, or from 1 April when using calendar periods.
6. Review the cumulative totals. Look for duplicate bank transactions, omitted invoices, personal costs and incorrect category allocations.
7. Retain submission confirmation. Keep evidence showing when the update was accepted by HMRC.

Taxpayers can continue to use spreadsheets, provided suitable bridging software creates the required digital connection and submits the information to HMRC. A spreadsheet on its own cannot send an MTD update.

Further guidance is available in Apex Accountants’ article on the £50,000 MTD rule for sole traders and landlords.

Who Can Be Exempt From the First Quarterly Deadline?

Some individuals and entities are automatically exempt, while others must apply to HMRC. An exemption from MTD changes the reporting method but does not normally remove the requirement to report taxable income through self-assessment.

Automatic exemptions include certain trusts, personal representatives, non-resident companies filing an SA700 and individuals without a National Insurance number before the start of the relevant tax year. Partnerships are not currently required to use MTD for income tax, although the government intends to set out their timetable separately.

A person may apply for digital-exclusion exemption where it is not reasonable for them to use software because of factors such as:

• Age, disability or a health condition
• Religious beliefs incompatible with digital record-keeping
• Lack of internet access because of location, with no suitable alternative available

HMRC considers applications individually. Cost, limited experience with software or having only a small number of transactions is not normally enough on its own. A more detailed explanation is available in Apex Accountants’ guide to MTD exemptions.

FAQs About MTD Quarterly Update Deadline

Is Any Tax Payable on 7 August 2026?

No tax payment becomes due simply because the first quarterly update is submitted. The update provides income and expense totals that can generate an estimated tax position, but the normal annual tax-payment deadlines continue to apply.

Can an Accountant Submit the Quarterly Update?

Yes. An authorised accountant or tax agent can sign a client up, manage digital records and submit quarterly updates through compatible software. The taxpayer remains responsible for providing complete and accurate information to the agent.

Do I Need to Submit an Update When There Was No Income?

Yes. HMRC requires a quarterly update even where no income was received and no expenses were incurred during the latest period. The software should submit a nil or no-activity update for the relevant business.

Can I File the Update Through My Personal Tax Account?

No. Quarterly updates must be submitted through software that works with MTD for Income Tax. HMRC does not provide a form within the ordinary online Self Assessment service for manually entering the quarterly figures.

Do Quarterly Updates Replace the Annual Tax Return?

No. Four quarterly updates must be followed by an annual tax return submitted through compatible software. The annual return includes other income, reliefs, claims and final adjustments that may not have appeared in the quarterly summaries.

How Much Does Accountant Support for MTD Cost?

The cost depends on the number of businesses, transaction volume, quality of existing records, software requirements and whether bookkeeping is included. A straightforward sole trade with organised digital records will generally require less work than a taxpayer with several trades and rental properties.

How Can Apex Accountants Help With the First MTD Update?

Where records are incomplete, software has not been connected or several income sources must be reported, the sensible next step is to resolve the position before the figures build into the next cumulative period.

Apex Accountants can check eligibility, arrange software, review digital records and manage quarterly submissions through its Making Tax Digital accountant service. To discuss the 7 August deadline, book a consultation with the team.

Slow adoption despite clear government deadlines

HM Revenue & Customs (HMRC) achieved a major milestone on 6 April 2026, when the first phase of Making Tax Digital for Income Tax officially launched. From this date, landlords and sole traders with an annual income above £50,000 from self‑employment or property must digitally record their income and expenses and submit quarterly updates using compatible software. However, despite extensive consultation and a gradual timetable, the response has been slower than expected. A recent report revealed that three-quarters of the affected businesses missed the registration deadline, raising concerns about awareness and readiness ahead of the upcoming quarterly reporting deadlines.

Key takeaways:

• MTD for income tax goes live: From 6 April 2026, landlords and sole traders with an income exceeding £50,000 must comply with the digital tax rules.
• Phased introduction: Those earning between £30,000 and £50,000 will need to comply from April 2027, and those earning over £20,000 by April 2028.
• Slow uptake: Of the 864,000 individuals expected to register by 6 April, only 218,000 had done so by 14 April, leaving roughly three-quarters of those affected outside the system.
• Awareness gap: Josh Toovey from the Association of Independent Professionals and the Self-Employed highlighted a significant awareness gap, especially among those without accountants.
• Penalties and reporting deadlines: HMRC confirmed that late registrations will not incur fines, but once quarterly reporting begins in August 2026, businesses must be fully compliant, with no room for error.

Understanding Making Tax Digital for Income Tax Obligations

For those required to use MTD in April 2026, the regime involves a fundamental shift in how records are kept and tax liabilities are calculated, particularly for sole trader tax digitalisation. Taxpayers are required to use approved software to create and maintain digital records of their income and expenses, submit quarterly updates to HMRC, and file an end-of-period statement and final declaration by the following 31 January. HMRC’s guidance emphasises that digital records must be maintained on a continuous basis and that each income source (self-employment or property) may need to be reported separately.

Those who sign up now will enjoy a lenient approach to penalties: HMRC will not apply points for late quarterly updates during the first year (2026‑27), although penalties still apply for late tax returns or payment of tax owed. The department advises taxpayers to sign up early rather than risk missing the first quarterly deadline of 7 August 2026. Early signup also allows time to test software, resolve technical issues, and adapt recordkeeping processes. Agents can enrol clients via a separate process.

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Why the slow take‑up?

1. Lack of Awareness About MTD for Income Tax

Several factors contribute to the low registration rate for Making Tax Digital (MTD). First, awareness of MTD for income tax remains patchy outside the professional services community. The scheme has been delayed several times since its announcement in 2015, leading many sole traders and landlords to assume that MTD compliance for landlords would not be required for years. The re-framing of the start date to 2026 in the 2024 Autumn Statement drew limited attention because the thresholds apply to income earned in the 2024-25 tax year—a distinction that many fail to appreciate. Under the rules, HMRC assesses a taxpayer’s qualifying income after they submit their 2024-25 Self Assessment return; if it exceeds £50,000, they must be ready for MTD from 6 April 2026. This time lag can lull affected taxpayers into a false sense of security.

2. Limited Government Publicity Campaign

Second, the government has not undertaken a high-profile publicity campaign. Tax professionals report that many clients have not received the expected letters from HMRC telling them they need to sign up. The Making Tax Digital brand is often associated with VAT, and some self-employed individuals wrongly assume that because they already keep digital VAT records, they do not need to take further action.

3. Confusion About Software Choices

Third, there is confusion about software. HMRC lists dozens of compatible products, from basic spreadsheets with bridging software to full-scale accounting packages. Picking the right solution requires an understanding of one’s business operations, and many landlords and sole traders are reluctant to invest in new software until absolutely necessary. There is also scepticism about whether quarterly updates will lead to more frequent payment demands, even though HMRC insists that tax will still be payable by 31 January following the end of the tax year.

Business implications and risks

• Penalties for non-compliance:
  • HMRC will implement a points-based penalty regime starting from 2026–27 for late submissions.
  • Each late quarterly update will incur one point.
  • Once a threshold of four points is reached (for annual reporters), an automatic £200 fine will apply to subsequent late submissions until the points expire.
  • Late payment of tax will attract interest and surcharges, regardless of the soft-landing period for quarterly updates.
  • Failure to keep digital records could lead to inaccuracy penalties under existing legislation.
• Operational challenges for businesses:
  • Quarterly updates require businesses to maintain accurate, up-to-date records.
  • Sole trader tax digitalisation will require sole traders, who are accustomed to filing only one Self Assessment return per year, to adjust their processes for quarterly updates.
  • Landlords with multiple properties must:
    • Correctly allocate income and expenses.
    • Maintain digital receipts and ensure letting agent statements are fed into the software.
  • Businesses using spreadsheets will need bridging software to submit updates, adding complexity.
• Potential benefits of MTD for Income Tax:
  • Digital record-keeping offers a clearer view of cash flow, profits, and tax liabilities throughout the year, improving budgeting.
  • It reduces the risk of under-reporting and avoids surprise tax bills.
  • Early adoption of software can help businesses streamline invoicing, integrate banking data, and automate calculations, saving time.
  • Agents will have more timely data to provide clients with advice on tax planning and payment on account. 

How Apex Accountants & Tax Advisors Can Support Landlords with MTD Compliance

The low sign-up rate emphasises the necessity for tailored professional support. Apex Accountants & Tax Advisors guides landlords and sole traders through the transition to MTD compliance for landlords. Our services include:

• Eligibility assessment and sign‑up: Reviewing clients’ qualifying income to determine whether they fall within the £50,000 threshold and managing the HMRC sign‑up process.
• Software selection and setup: Helping clients choose compatible software or bridging tools that suit their operations and budget, and assisting with installation and migration.
• Digital record‑keeping support: Designing bespoke bookkeeping workflows, training staff on digital record‑keeping and ensuring that income and expenses are captured accurately in real time.
• Quarterly compliance and review: Preparing and submitting quarterly updates, reviewing data for accuracy and advising on tax planning opportunities arising from interim profits.
• Representation and troubleshooting: Liaising with HMRC on behalf of clients, resolving technical issues and providing guidance if penalty points accrue.

Our chartered tax advisers focus on minimising disruptions and ensuring compliance. With the first quarterly update deadline approaching in August 2026, now is the ideal time to seek expert help. Contact Apex Accountants today to arrange a confidential consultation and prepare your business for the digital tax regime.

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Frequently asked questions

What is Making Tax Digital for Income Tax?

Making Tax Digital for income tax is a requirement for sole traders and landlords to keep digital records and send quarterly updates of business and property income to the HMRC using compatible software. The regime applies to those with an annual income above £50,000 from self‑employment or property from 6 April 2026.

Who needs to sign up and when?

If your qualifying income from self-employment and property is above £50,000 in the 2024–25 tax year, you must sign up for MTD and start digital record-keeping on April 6, 2026. Those earning £30,000–£50,000 must join from 6 April 2027, and those earning above £20,000 must join from 6 April 2028. HMRC will write to you, but you remain responsible for checking and registering.

What counts as qualifying income?

Qualifying income is the combined gross income from all your sole‑trader businesses and property rental (before expenses). It excludes employment income and most pensions. HMRC reviews your Self Assessment return to calculate qualifying income each year.

Will penalties apply if I miss quarterly updates?

HMRC will not issue penalty points for late quarterly updates in the first year (2026‑27). From 2027 to ’28, each late submission will attract a point, and accumulating four points will trigger a £200 fine. Penalties for late tax returns and late payment still apply during the soft‑landing period.

Do I still need to file a Self Assessment return?

Yes. Even under MTD, you must submit a final declaration—similar to a self-assessment return—by the 31st of January, following the end of the tax year. The quarterly updates do not replace the annual tax return; they provide HMRC with periodic data to reduce errors and improve compliance.

Which software should I use?

HMRC does not endorse specific products but publishes a list of compatible software. Choices range from simple spreadsheet solutions with bridging software to full accounting packages. The best option depends on the complexity of your business. Consider factors such as the number of income sources, the need for invoice functions, bank feed integration, and ease of use. Apex Accountants can assist in selecting and setting up a solution tailored to your needs.

From 6 April 2026, self-employed childminders with qualifying income over £50,000 must use Making Tax Digital for Income Tax. The threshold drops to £30,000 for the 2025 to 2026 tax year and £20,000 for the 2026 to 2027 tax year. For a sector built around home‑based care and shared household resources, MTD means a shift from flat‑rate allowances to meticulous digital records. Understanding the new rules now will reduce disruption later.

Wear and tear: 10% allowance disappears

Currently, most childminders deduct a flat 10% of their income for wear and tear on household furnishings. Under MTD, childminders must follow the normal business-expense rules and keep digital records. Once within MTD, childminders should claim actual allowable business costs, including a business proportion where an item is used partly for personal use, which directly affects expense claims for childminders under MTD UK. If a carpet costs £600 and is used 60% for childminding, you can only deduct £360. Childminders not within MTD may continue using the childminder-specific alternative methods, including the 10% wear-and-tear approach where applicable.

Household costs: apportioning bills

Household expenses fall into two categories:

• Running costs: gas, electricity and water
• Fixed costs: Council Tax, rent or mortgage interest

Under MTD, childminders follow normal business rules and apportion mixed-use costs on a reasonable basis. They keep a clear record of how that percentage was reached as part of accurate expense claims for childminders under MTD UK. HMRC accepts reasonable methods such as the following:

• The number of rooms used for childminding
• The time spent caring for children

For example, if half of your home is used for childminding for eight hours a day, it is reasonable to claim a corresponding share of running costs for that period.

If you do not use MTD and care for children in your home for 40 hours or more a week, HMRC allows the following:

• 33% of running costs
• 10% of fixed costs

Lower hours require proportionate adjustments.

MTD replaces these flat rates with tailored calculations. This improves accuracy but increases the need for consistent records and clear justification.

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Food and drink: from estimates to actuals

Childminders provide meals and snacks as part of their service. Under MTD, you must claim the actual amount spent on food and drinks for children and apportion costs when shared with your family. Before joining MTD, you may continue using estimated costs, and receipts are not required for food.

Digital records and quarterly reporting for MTD expenses for childminders in the UK

The main changes under MTD are digital recordkeeping and quarterly updates through compatible software. In 2026, you must use HMRC-compatible software to record each income and expense transaction and send quarterly updates. The threshold falls in 2027 and 2028. If you are not using MTD, you need receipts for business expenses of £10 or more, or small items bought together totalling £10 or more. Those below the threshold can stay on the current system and rely on cashbooks and attendance registers, but careful recordkeeping remains essential.

Why it matters

HMRC estimates that errors and mistakes in self‑assessment account for 18.5% of the tax gap. MTD aims to reduce this by requiring digital records and regular updates. For childminders, non-compliance could result in penalties, interest, and the loss of legitimate tax deductions for childminders MTD UK. Yet the changes also create opportunities: real-time records can improve your understanding of costs, help you set fees and save time during annual returns.

Practical steps to prepare

• Assess your income and register early: decide whether your total trading and property income exceeds the relevant threshold for 2024–25 or 2025–26 and sign up for MTD.
• Select appropriate software: choose a package approved by HMRC that fits your business size and allows easy allocation of business proportions.
• Document expenses as they occur: record the date, amount and description for each purchase. For items shared with your family, note the percentage used for childminding.
• Keep usage logs: maintain records of hours worked and rooms used to support your calculations.

How Apex Accountants can assist

Transitioning to digital reporting while caring for children is challenging. Apex Accountants & Tax Advisors helps childminders by:

• Reviewing income and advising when you must join MTD;
• Setting up and training you on compliant software;
• Designing record‑keeping procedures tailored to your home‑based business;
• Preparing quarterly updates and year‑end submissions;
• Advising on business percentages and maximising tax deductions for childminders: MTD UK.

Contact Apex Accountants today for personalised guidance and peace of mind.

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FAQs

When does Making Tax Digital apply to me? 

If your income from self-employment and property exceeds £50,000 in 2024–25, you must adopt MTD from April 2026; those above £30,000 will join in 2027. A further reduction to £20,000 is expected in 2028.

Can I still claim the 10% wear‑and‑tear allowance? 

Yes, but only while you remain outside MTD. Once you are mandated to use digital reporting, you must claim the business portion of the actual cost of household items.

How do I work out household expenses? 

Under MTD, calculate a business percentage based on rooms used or hours spent caring for children. The current regime allows flat‑rate percentages of 33% and 10% for running and fixed costs.

Do I need receipts for food and drink? 

No. HMRC guidance says receipts are unnecessary for food and drink provided to children. Receipts are required for expenses over £10 or grouped purchases over £10.

Britain’s drive to digitise tax reporting has finally reached income tax. From 6 April 2026, sole traders and landlords with qualifying income above £50,000 must use software that can record transactions digitally, send quarterly updates and file an annual return. Additional bands of taxpayers will enter the regime later. The result is a new market for MTD compatible software for Income Tax, designed to support the UK’s shift toward digital tax reporting. This article explains what those tools must do, the choices available and the practical implications for small businesses.

Why digital compliance matters

HMRC aims to reduce errors and close the tax gap by requiring businesses to keep digital records and submit updates every three months. This change affects anyone who files through self-assessment and earns qualifying income above the thresholds, including landlords with rental properties and self-employed individuals who will rely on MTD software for landlords and sole traders. Limited companies and most partnerships are excluded for now. To comply, businesses must choose MTD compatible software for Income Tax that meets HMRC’s technical specifications: it must create digital records, send quarterly updates to HMRC and submit the final tax return. If a business keeps separate records for property and self‑employment, it must send separate updates for each, though the data will be consolidated in one return.

What makes MTD compatible software for Income Tax?

HMRC recognises two broad categories of software: Complete accounting packages allow businesses to directly record income and expenses, connect to bank feeds, scan receipts, and issue invoices. These tools manage quarterly updates and annual submissions within one platform. Bridging software connects existing spreadsheets or legacy systems to HMRC, enabling businesses to continue using familiar tools while meeting digital linking requirements. Digital links are essential: data must flow automatically between records and the submission software without manual copying or pasting. Businesses can use more than one product, but they must ensure the tools work together so that each tax update is sent from a single product.

An MTD‑compatible solution must:

• Create and store digital records of income and expenses across all relevant businesses.
• Send quarterly updates directly to HMRC, summarising income and expenditure. HMRC will provide an estimated tax liability after each submission.
• Submit the annual return by 31 January following the tax year.
• Support digital links so that data flows automatically between systems without manual re‑keying.
• Incorporate other income sources (pensions, dividends or partnership profits) in the final return.

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Complete accounting packages

For businesses looking to overhaul their systems, MTD software for landlords and sole traders and other full accounting platforms can offer a comprehensive solution. These products provide bank feeds, automated reconciliations, invoicing, and expense scanning. They are designed for users new to digital record keeping and often include tutorials and reminders. HMRC emphasises that there are both paid and free options, giving users flexibility. When assessing a complete package, consider:

• Ease of use – the interface should be intuitive, particularly if staff will be entering transactions or scanning receipts.
• Integration – the software should link with bank accounts, point‑of‑sale systems and any industry‑specific tools.
• Support for multiple income sources – if you earn from both self‑employment and property, the package must handle separate records and produce separate quarterly updates.
• Cost – providers offer different pricing models. Free software is expected to be available for basic functionality, but more advanced features may require a subscription.

Bridging solutions and spreadsheets

Not every business wants to replace its existing system. HMRC accepts spreadsheets, provided they are linked to bridging software that submits data digitally. Bridging tools act as a conduit between a spreadsheet and HMRC’s systems, generating quarterly updates and the final return. They are particularly useful for landlords with multiple properties or bespoke accounting set‑ups.

However, spreadsheets lack the time‑saving features of dedicated apps. They may also increase the risk of errors if formulas are incorrect or if manual entries break the digital link requirement. When using a bridging tool, ensure that:

• The spreadsheet structure remains consistent across reporting periods.
• Each cell containing figures is linked directly to the bridging software (no copying and pasting).
• You update formulas and macros to accommodate any new income sources.

Using more than one product

It is possible to use a combination of software—for example, a specialist property management tool alongside a separate bookkeeping package. HMRC’s guidance allows multiple products, but each quarterly update must be sent from a single product and the tools must be connected via digital links. Businesses should map the flow of data between systems and test the integration well before quarterly reporting begins.

Selecting the right solution

Choosing Income Tax digital software for small businesses is not one-size-fits-all. HMRC provides an online tool that generates a customised list of options based on your circumstances. To use it, you need to know your qualifying income from self‑employment and property, any other income sources, whether you want to create new digital records or connect existing ones, and your preferred update period (standard tax year or calendar periods). An agent using the tool will see all compatible software and can filter results for clients.

Key considerations when selecting software include:

• Scope – will the software handle all your income sources and support separate records for self-employment and property?
• Compatibility with existing systems – can it import data from your current records, or will you need bridging software?
• Update periods – if your accounting year does not align with the tax year, choose software that supports calendar update periods.
• Agent access – ensure your accountant can access the system easily and that multiple agents can collaborate.
• Future features – consider whether the software can accommodate changes to MTD, such as partnerships joining the regime later.

Once you have selected a product, you must connect it to HMRC by authorising access through a government gateway. HMRC does not recommend specific products but confirms that all listed software has been through its recognition process.

Risks and practical implications

Failing to adopt compatible software by the deadline could result in penalties. HMRC is introducing a points‑based penalty system: missing submission deadlines will accumulate points, and exceeding a threshold will trigger fines. Inaccurate or incomplete digital records could also lead to compliance issues. Businesses should therefore treat selecting Income Tax digital software for small businesses as a long-term investment. Transitioning early allows time to train staff, refine processes and identify any gaps in digital links.

Data security is another concern. Storing financial information digitally requires robust security measures and adherence to data‑protection laws. Businesses should review the provider’s security credentials and consider backup arrangements.

Choosing MTD-Compatible Software for Digital Tax Reporting

Making Tax Digital (MTD) requires businesses and individuals to maintain digital records and submit tax updates to HMRC using approved software. Choosing the right accounting platform can make the transition much smoother. MTD-compatible software helps automate record-keeping, reduce manual errors, and simplify quarterly reporting.

Several established accounting platforms already support MTD for VAT and are preparing or supporting MTD for Income Tax Self Assessment (ITSA). These tools connect directly with HMRC systems and help users manage finances more efficiently.

Popular MTD-Compatible Software Options

Xero

Xero is widely used by accountants, agents, and businesses across the UK. The platform offers cloud-based bookkeeping, bank feeds, automated invoicing, and strong reporting tools. It integrates with HMRC for MTD submissions and works well for growing businesses that want real-time financial data.

FreeAgent

FreeAgent is particularly popular among freelancers, sole traders, and landlords. It supports MTD for Income Tax and helps users track expenses, invoices, and tax estimates in one place. The software is designed to be simple and easy to use for individuals who do not have a full finance team.

Sage

Sage provides a range of cloud accounting products suitable for small and medium-sized businesses. Its MTD-ready software connects with HMRC and allows automated bank feeds, digital record-keeping, and financial reporting. Sage also offers tools for payroll, invoicing, and business management.

QuickBooks

QuickBooks Online is another widely used platform that supports full MTD compliance. It enables automated VAT submissions, expense tracking, invoice creation, and financial reporting. Many accountants recommend it because of its user-friendly interface and strong integration with banking systems.

Clear Books

Clear Books is HMRC-recognised software designed for accountants, sole traders, and landlords. It supports quarterly updates and end-of-year filings under MTD. The platform also includes tools for bookkeeping, invoicing, and financial reporting.

Landlord Vision 

Landlord Vision is specialised property management and accounting software. It helps landlords manage rental income, expenses, property records, and tax reporting. The platform includes features designed to support landlords preparing for MTD for Income Tax.

Other MTD-compatible solutions

Several other platforms also support MTD submissions and digital record-keeping, including APARI, Capium, TaxCalc, and KashFlow. These tools offer different features depending on business size, complexity, and accounting needs.

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Apex Accountants & Tax Advisors: your partner in digital compliance

Navigating MTD’s software requirements can be challenging. Apex Accountants & Tax Advisors offers tailored support to ensure clients select the right tools and remain compliant. Our services include:

• Assessment of qualifying income – analysing your turnover across self‑employment and property to determine when you must adopt MTD.
• Software selection – helping you choose HMRC‑compatible software, whether that is a complete package or bridging solution, and guiding you through the authorisation process.
• Digitising existing records – converting spreadsheets into digital records and establishing digital links to maintain compliance.
• Training and support – providing hands‑on training for staff and setting up processes for scanning receipts and linking bank feeds.
• Quarterly monitoring and year‑end adjustments – reviewing your digital records before each update, checking accuracy and claiming available reliefs.
• Handling exemptions and penalty disputes – assisting clients who may qualify for digital exclusion or need to appeal penalties.

Book a free consultation or contact us today to ensure your systems are ready for the digital era of income tax.

FAQs

What does MTD‑compatible software need to do? 

It must create digital records, send quarterly updates summarising income and expenses, support digital links, and submit an annual return. Complete packages handle all of these tasks; bridging software connects existing records to HMRC.

Do I have to replace my existing bookkeeping system? 

Not necessarily. If you prefer to keep spreadsheets, you can use bridging software to link them to HMRC. However, dedicated packages offer features such as receipt scanning and automated bank feeds.

How do I find software that meets my needs? 

HMRC’s online tool asks about your income sources, update periods and whether you need to create new digital records or connect existing ones. It then provides a list of recognised software.

Can I use more than one product? 

Yes. HMRC allows multiple products provided they are digitally linked and each submission is sent from a single product.

Are there free options available? 

HMRC states there will be both free and paid software options. The availability of free software may be limited to basic functionality, so businesses should assess whether it meets their requirements.

What happens if I miss a quarterly update? 

HMRC plans to introduce a points‑based penalty regime. Each missed submission will incur a penalty point, and accumulating too many points will result in a fine.

A turning point for self‑employed taxpayers

The UK tax system is undergoing a critical juncture in its modernisation. From 6 April 2026, Making Tax Digital for sole traders will require sole traders and landlords with more than £50,000 of gross self-employment or property income to report their earnings digitally each quarter.

The reform, known as Making Tax Digital for Income Tax Self‑Assessment (MTD ITSA), represents one of the biggest changes to reporting obligations since Self‑Assessment was introduced in the 1990s. It will replace the familiar annual return with four “light‑touch” updates during the year, followed by an end‑of‑year tax return. Although HM Revenue & Customs (HMRC) has been piloting MTD for several years, its 2026 launch will be mandatory only for those whose turnover exceeds £50,000; the threshold drops to £30,000 from April 2027 and £20,000 from April 2028.

What counts as qualifying income

Under Making Tax Digital for Income Tax Self-Assessment (MTD ITSA), eligibility is determined by gross qualifying income, not profit.

Qualifying income is the total turnover from self-employment and property rental activities. Several income types are excluded when calculating the threshold.

Income included vs excluded

The threshold for joining the digital reporting system is currently £50,000 of gross qualifying income.

The calculation uses figures from the previous Self-Assessment tax return, and HMRC reviews those figures to determine whether a taxpayer must join the regime.

Example

Because the combined turnover exceeds £50,000, the taxpayer would be required to comply with the digital reporting rules.

A critical detail is that the calculation uses turnover rather than profit. A business with relatively low profits may still fall within the regime if gross income exceeds the threshold.

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Why does the government insist on digital updates?

The shift to digital reporting forms part of the government’s Tax Administration Strategy, which aims to modernise the tax system and reduce reporting errors.

Officials believe that digital records and more frequent reporting will:

• reduce mistakes in tax returns
• give taxpayers clearer visibility of their tax position
• improve overall compliance

Under the system:

• businesses must keep digital records of income and expenses
• updates are submitted through compatible accounting software
• HMRC receives summary totals, not individual transactions

After each submission, the software or HMRC account provides an estimated tax position, reflecting the move towards quarterly tax reporting for sole traders UK and allowing traders to track their likely tax bill throughout the year rather than only at the year end.

What quarterly reporting looks like under Making Tax Digital for Income Tax

Under Making Tax Digital for Income Tax Self Assessment (MTD ITSA), taxpayers must send four updates each year.

The reporting periods normally follow the tax year cycle (6 April to 5 April).

Standard quarterly update deadlines

Some businesses with accounting periods ending at the end of each month can choose to follow calendar reporting periods, but the deadlines remain the same.

What each quarterly update includes

Each update simply reports summary totals, not detailed tax calculations.

Quarterly updates include:

• total income for the period
• total allowable expenses
• basic summary figures submitted through compatible software

Important points to note:

• no tax adjustments are required at this stage
• even if a business has no income or expenses during the quarter, an update must still be submitted 

Compliance risks

Although MTD ITSA is designed to simplify the tax system, it introduces new compliance responsibilities.

Key risks businesses should be aware of

• Quarterly updates will become a legal requirement once the scheme is fully mandatory.
• Late submissions will trigger penalty points under HMRC’s late submission rules.
• A 12-month grace period will apply to quarterly updates for those joining in April 2026.
• Penalties for late final tax returns apply immediately.

Early voluntary registration can also create complications.

Once a taxpayer joins the MTD system:

• they cannot simply revert to annual Self Assessment filing
• digital reporting obligations continue unless they fully exit the system

Another risk is incorrectly calculating qualifying income. Because the threshold is based on gross turnover rather than profit, some taxpayers may register too early or fail to register when required.

Broader implications for businesses

Making Tax Digital for Income Tax shifts the system towards more frequent reporting. Instead of preparing records once a year, businesses will need to keep digital records and submit updates throughout the year. Regular reporting, including quarterly tax reporting for sole traders UK, may encourage better bookkeeping and give business owners clearer visibility of income and potential tax liabilities during the year.

However, the change may also increase administrative work. Some businesses may need to adopt accounting software, adjust their record-keeping practices or seek professional support to manage the new digital reporting requirements.

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Preparing for 2026: Practical steps

With two years until the regime goes live for those earning over £50k, businesses affected by Making Tax Digital for sole traders should act now. Key steps include:

Assess your qualifying income

Review your 2024‑25 Self‑Assessment return to determine whether your gross turnover from self‑employment and property exceeds £50,000. Remember to include ceased income sources if you still have another active trade or property.

Choose compatible software

HMRC does not provide MTD software. Use the government’s software finder tool to identify solutions that fit your business. Some packages integrate bookkeeping and submission functions, while others use bridging software to link spreadsheets to HMRC. Consider whether you need features such as multi-business support, bank feed integration, and real-time tax estimation.

Digital record‑keeping

Start capturing invoices and receipts electronically. Align your record‑keeping to the periods used for quarterly updates—either standard (aligned to the tax year) or calendar periods.

Plan for deadlines

Make note of update and return deadlines. Set reminders or appoint an accountant to manage submissions. Missing deadlines will incur penalty points once the grace period expires.

Seek professional support

Without guidance, early registration can result in irreversible complications, such as premature MTD lock-in. Tax professionals can help interpret the rules about qualifying income, select the right software, and set up the system correctly.

Apex Accountants & Tax Advisors – How we can help

At Apex Accountants & Tax Advisors, we have been guiding clients through digital transformation for years. Our team of chartered accountants and tax specialists can:

• Assess eligibility and timing. We analyse your turnover and advise whether you fall within the initial £50k threshold or subsequent phases. We help you understand if any joint property income or ceased businesses affect your qualifying income.
• Implement MTD‑compliant systems. We assist in selecting and integrating software, ensuring that digital records are accurate and easily exported to HMRC. Our cloud‑accounting specialists can train your team to maintain records in real time and avoid common errors.
• Manage quarterly updates and adjustments. Our accountants prepare and submit the quarterly updates and end‑of‑year adjustments, ensuring that reliefs and allowances are claimed correctly.
• Ongoing advisory and tax planning. We provide cash‑flow forecasts based on quarterly tax estimates, helping you set aside funds and plan for tax payments. We also advise on tax‑efficient business structures, capital investment decisions and future compliance as thresholds drop in 2027 and 2028.

For a personalised consultation, contact Apex Accountants today or book a free consultation via our website. Early preparation will minimise disruption and position your business to comply smoothly when digital reporting becomes compulsory.

Frequently asked questions

What is the start date for Making Tax Digital for Income Tax? 

For sole traders and landlords with more than £50,000 of qualifying income, MTD ITSA starts on 6 April 2026. Those with income between £30,000 and £50,000 join in April 2027, and those between £20,000 and £30,000 in April 2028.

How is qualifying income calculated? 

Qualifying income is the gross turnover from self‑employment and property rental. HMRC ignores employment income, pension income, dividends and partnership profit shares. If you have ceased a source of income but still receive income from other self‑employment or property, the ceased income is still counted.

Do I still submit a tax return? 

Yes. After four quarterly updates and end‑of‑year adjustments, you must submit your final tax return by 31 January following the tax year. HMRC will transfer information it already holds, but you must add other income and confirm the calculation.

What are the penalties for missing quarterly updates? 

If you miss a deadline, HMRC may issue late‑submission penalty points. For those starting in April 2026, penalty points for quarterly updates will not accrue during the first 12 months, but late tax returns will attract penalties from the outset.

Which software should I use? 

HMRC requires compatible software. You can choose all‑in‑one accounting packages or use spreadsheets with bridging software. Some providers offer free versions, but check limits on transactions and bank feeds. Using professional accountants can help ensure you select software that meets your business needs.

If my income falls below £50,000 after joining MTD, can I opt out? 

Once you start using MTD ITSA, you generally cannot opt out even if your income later drops. You must continue sending quarterly updates unless your self‑employment and property income cease entirely. However, if your qualifying income remains below the threshold for three consecutive years after you have joined, you may be able to opt out.