Making Tax Digital: are you ready for HMRC’s self-assessment shake-up?

. UK edition

Handyman working on laptop and talking on phone in kitchen
People earning over certain thresholds will have to use commercial software to send HMRC a tax return. Photograph: Jelena Cvetkovic/Alamy

Tax authorities warn sole traders and landlords to act, as the biggest change to self-assessment in decades looms

Spring is “the time of plans and projects”, wrote Leo Tolstoy in Anna Karenina. For hundreds of thousands of self-employed people and property owners, those words are ringing true – and have never felt more daunting.

This spring, HM Revenue and Customs is introducing the biggest shake-up of the self-assessment tax system in decades.

Known as Making Tax Digital, it will transform the way tax returns are submitted, adding a new “quarterly updates” requirement.

HMRC recently issued an “act now” warning, saying that more than 860,000 sole traders and landlords need to start preparing for the change if they haven’t done so already.

But they are just the first wave of people affected – the number is poised to rise to almost 3 million by spring 2028 as lower-income individuals are brought into the system.

What is Making Tax Digital?

It’s a new system for recording and reporting your tax information to HMRC. It affects self-employed people and people who have property income above HMRC’s income thresholds.,” says Claire Thackaberry, a technical officer at the Low Incomes Tax Reform Group.

From this April, the starting threshold is £50,000. On 6 April 2027, the MTD threshold will fall to £30,000. The figure is for self-employment and property income earned in the 2025-26 tax year (the one we are in now).

And from 6 April 2028, the threshold will fall further: to £20,000 for property and self-employment income earned in the 2026-27 tax year.

People earning over those thresholds will have to use commercial software to send HMRC an annual tax return, as well as quarterly digital records showing their income and expenses from property and self-employment.

The digital records must show the value and date of each transaction and, where appropriate, detail which HMRC category of “allowable expenses” each expense falls into, Thackaberry says.

How do I know if I’m affected?

Check your 2024-25 tax return. If you were registered for self-assessment and your combined turnover from property and self-employment exceeded £50,000, you are legally required to move to the new system, unless you qualify for an exemption. If your combined turnover from self-employment and property exceeds the relevant threshold, you must move to the new system unless you qualify for an exemption this year.

The £50,000 threshold applies to turnover (ie your gross income, before your tax and expenses have been taken into account), not profits.

You must combine your turnover from property and self-employment to assess whether you exceed the threshold. Expect your turnover to be ‘annualised’ – proportionally adjusted – by HMRC if you started your business mid-year.

Other sources of income, including employment or PAYE income, do not count.

Even though they are self-employed, foster carers, kinship carers and shared-life carers who receive “qualifying care relief” on income from their care activities will find this income is exempt from MTD and does not count towards the threshold.

Bear in mind you can also earn up to £1,000 from renting out property or trading each year, or up to £7,500 a year under the rent-a-room scheme, without needing to report this on your tax return – which means HMRC will not take this income into consideration.

HMRC is writing to affected taxpayers in February and March, but even if you don’t receive a letter, it is your legal responsibility to comply with MTD.

“If your letter gets lost in the post, you must still sign up, unless you’re exempt,” says Thackaberry.

You can use HMRC’s step-by-step online guide to sign up.

Who is automatically exempt?

There are some groups of people who do not have to use this system, no matter how much they earn. They include:

A full list of people who qualify for exemptions can be found in the MTD guidance on Gov.uk.

Can I get an exemption?

You can apply to HMRC for an exemption if it is not reasonably practical for you to use digital software (for example because of your age, disability, or because the remoteness of your location means you cannot get internet access at your home or business) or if you are a practising member of a religious order “which forbids you using a computer”, says Andy Levett of the accountancy firm HW Fisher.

Applications are assessed on a case-by-case basis. You should continue preparing for MTD while awaiting a decision.

It won’t be enough simply to say you need an exemption because of your age, Thackaberry warns. “You’d have to explain how your age affects your ability to comply,” she says.

How do I comply?

You (or your accountant or bookkeeper) need to use MTD-compliant software to send quarterly digital updates, due just over one month after the quarter ends.

For example, records for the first quarter, 6 April 2026 to 5 July 2026, must be submitted by 7 August 2026. Records for the second quarter must be submitted by 7 November 2026. Late submissions will incur penalties.

You can pay for the software or use a free version. HMRC has created an online quiz to help you assess which is best for you.

Expect to pay about £5 to £8 a month for all-singing, all-dancing access to premium software, such as Xero, Sage, QuickBooks, Clear Books or FreeAgent. This cost can be included in your quarterly updates and offset against your income as a business expense.

Which software should I use?

There are two main types:

If you opt for software linked to your current account, you will need to use it to categorise all the transactions in that account as either “sales” (income from property or self-employment), “expenses” (costs incurred for business purposes) or “drawings” (personal spending, such as on a birthday card for a friend). Any transactions you categorise as “drawings” will be excluded from the digital updates sent to HMRC. Any transactions you categorise as “expenses” should be allowable expenses under HMRC rules.

Even though the software is tracking only the transactions in your linked account, you should be able to manually create digital records for any that accidentally took place from another, unlinked account or were made using good old-fashioned cash.

This means, for example, that if you work from home and pay your rent or utility bills from an unlinked joint account you contribute to, the software will allow you to manually create digital records of these transactions, and show that a relevant proportion of these costs were actually business expenses.

It should also allow you to make manual adjustments to your records so you can allocate the correct portion of some mixed-use transactions (such as your mobile phone bill or petrol costs) to personal use.

Do my updates have to be accurate?

Although you have to send HMRC quarterly updates, the information you record in them does not have to be 100% accurate and can be corrected later.

You can make manual additions and adjustments to the data you recorded before you send your final end-of-year return to HMRC.

Your end-of-year tax return can also show extra transactions which were not included (for any reason, including that you forgot about them) in the quarterly updates.

What’s the biggest challenge?

“It’s going to be a shock to the system,” says Levett.

However, he thinks people may eventually come to see MTD in a positive light. “It will mean you don’t have to keep paper receipts and tot them up, because the digital system can read your bank account.”

This will cut down the amount of work you do, he says, especially at the end of the tax year. “You could eventually get into a situation where you’re having a quick review of your account while you’re sitting on the train or having a cup of coffee, going through your transactions and saying ‘That was a business expense for some books I bought,’ and ‘That was my income,’ and then pressing a button.”

But, he admits, not everyone will enjoy having to categorise all their transactions all the time. “There’s a lot of people who will absolutely detest the idea.”

How can I prepare?

Using a separate account for income and spending related to your business will significantly reduce the number of transactions you need to categorise for HMRC. So one of the best ways to prepare for MTD is to open a current account you use solely for your business, says Levett.

This does not have to be a paid business bank account. It could simply be a free personal current account at your existing bank.

Mettle, a digital banking brand owned by NatWest, offers a free business account for sole traders and landlords. It comes with a complimentary premium version of FreeAgent accounting software, which is MTD-compliant and allows you to create and track invoices.

When Guardian Money tested opening a Mettle account late last year, it took 11 days – longer than expected, apparently owing to “a high number of account applications”. Otherwise, it was seamless.

The customer service provided by FreeAgent was excellent: an expert spent nearly 90 minutes over the phone explaining, step by step, how to use the software to categorise digital transactions, create manual digital records for cash transactions, generate invoices and send digital updates to HMRC. There is also a free webinar you can attend.

What if I don’t do it?

Each late submission incurs one penalty point. You will get a £200 fine when you reach four points. The points expire after two years if you stay below the four-point threshold during that period.

The good news is that for the first year of MTD, HMRC is waiving penalties for late quarterly updates.

There are also no penalties for filing inaccurate quarterly updates, as long as your final tax return is correct.

Levett thinks the first year is going to be “a learning experience” for everyone.

“Even HMRC will probably be aware that this first year is going to be a festival of non-compliance and a learning experience,” he says. “This is why people shouldn’t panic.”