Making Tax Digital for Income Tax: the rules landlords and sole traders are now living with

By Hussein Bhaiji FCCA CTA, Managing Partner. Last reviewed: October 2026.

Since 6 April 2026, landlords and sole traders whose 2024/25 return showed more than £50,000 of qualifying income from self-employment and property have had to keep digital records and send HMRC quarterly updates through MTD-compatible software such as Xero. The threshold falls to £30,000 from April 2027 and to £20,000 from April 2028. This guide explains what Making Tax Digital for Income Tax means for you, whether and when it applies to you, and what to do now to avoid penalties.

What is Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax Self Assessment (MTD for Income Tax, or MTD ITSA) is HMRC’s move to a fully digital tax system. Instead of one Self Assessment tax return a year, you keep your records digitally, send four quarterly updates and then file your tax return through the same software. It is the biggest change to personal tax reporting in a generation, and landlords and the self-employed are first in line.

When does MTD for Income Tax start, and does it apply to you?

The rollout is phased by qualifying income. This means your gross income before expenses, not your profit. From 6 April 2026, it applies if your combined self-employment and property income exceeded £50,000. From April 2027, the threshold falls to £30,000, and from April 2028, it falls again to £20,000.

There is a detail here that catches people out, and it is the first thing to check. Whether you are in from April 2026 is decided by the qualifying income on your 2024/25 tax return, the one you have already filed. It is not a live test based on this year’s income. So the question is not “will I earn over £50,000 this year”; it is “what did my 2024/25 return say?” The same rule applies to the next two waves. Whether you join on 6 April 2027 depends on the £30,000 test applied to your 2025/26 return, which is due by 31 January 2027. Whether you join on 6 April 2028 depends on the £20,000 test applied to your 2026/27 return. HMRC writes to people it expects to be caught, but signing up is your responsibility whether or not a letter arrives.

MTD for Income Tax does not apply to limited companies, and partnerships are not yet included. Some people are exempt without having to apply, including trustees, personal representatives and anyone without a National Insurance number. Others are deferred. If you claim averaging relief as a farmer or creative artist, claim qualifying care relief as a foster or kinship carer, or file the residence pages (SA109), you do not have to join before April 2027. If you claim Married Couple’s Allowance or Blind Person’s Allowance, you are deferred beyond April 2027. If it is not reasonable for you to use software, for example because of age, health, disability, religious beliefs or a lack of internet access, you can apply to HMRC for an exemption as digitally excluded.

When you join:

Quarterly updates for 2026/27 cover these periods. If you elect calendar quarters, the periods end on 30 June, 30 September, 31 December and 31 March, and the deadlines are the same.

Making Tax Digital for landlords: what changes for rental income

If you let property, the threshold is tested on your gross rents, not your profit. Rent of £52,000 a year brings you into Making Tax Digital for Income Tax even if mortgage interest, repairs and agent fees leave a much smaller profit, and any self-employed turnover is added to your rents. Where you own a property jointly, only your share of the rent counts towards your own threshold, so a couple who split £64,000 of rent equally each have £32,000 of qualifying income from it, and both are in from April 2027 if that is what their 2025/26 returns show.

All your UK lettings count as one property business, so there is one set of quarterly updates however many properties you have. If you also let property abroad, that is a separate foreign property business with its own quarterly updates. Letting agent statements need care: if your agent pays over the rent net of fees and repairs, you still record the gross rent and each cost separately in your digital records, not the single figure that reaches your bank account. Getting the records right is also the starting point for keeping the tax on rental income you pay as low as the rules allow. Our accountants for landlords can set those records up for you.

What sole traders and landlords must do under MTD for Income Tax

Four things change. You must keep income and expense records digitally, either in MTD-compatible software or in a spreadsheet linked to HMRC through bridging software. Paper records and a spreadsheet you copy figures out of by hand are no longer enough. You must use MTD-compatible software that connects directly to HMRC. You must send a summary update every quarter. After the year end, you file your tax return through your software by 31 January. HMRC used to call this the final declaration. It is where any other income, including employment, dividends and savings, is brought in.

How to sign up for Making Tax Digital for Income Tax

You sign up online through GOV.UK, or your accountant signs you up through their agent services account. You need to be registered for Self Assessment and to have filed a return in the last two years. HMRC does not sign you up automatically. Before you sign up, choose MTD-compatible software or bridging software for a spreadsheet, because the first quarterly update has to come from it.

How much will Making Tax Digital cost, and is there a hidden upside?

There is an admin cost to going digital, and it would be dishonest to pretend otherwise. But there is a genuine commercial upside. Quarterly reporting forces real-time bookkeeping, which means you always know your numbers, your tax bill stops being an annual ambush, and you can make planning decisions during the year rather than twenty-two months later. We consistently see clients who treat MTD as the prompt to get on top of their finances end up better off, not worse.

What happens if you ignore MTD for Income Tax?

Late filing. MTD brings a points-based penalty system. You collect a penalty point for each late submission, and at four points a £200 penalty applies, with a further £200 for each late submission after that. For 2026/27 only, HMRC will not issue points for late quarterly updates, although the updates must still be filed and a late year-end return still earns a point. From 6 April 2027 the same regime applies to every Self Assessment taxpayer, not only those in MTD, although someone filing only an annual return reaches a penalty at two points rather than four. Below the threshold, a point expires after 24 months. Once you reach it, the points stay until you have a run of on-time submissions (12 months for quarterly filers) and have filed every return due in the previous 24 months. The system is designed to catch a pattern of lateness rather than a single slip. This means the risk builds quietly until it lands all at once.

Late payment. Late payment penalties run separately and do not apply to payments on account. In your first year under the new rules, there is no penalty if you pay in full, or agree a payment plan with HMRC, within 30 days of the due date. Otherwise the penalties are:

• Day 15: 3% of tax still unpaid (4% from 2027/28)
• Day 30: a further 3% (4% from 2027/28)
• From day 31: 10% a year on the balance

How Merit gets you MTD-ready

Our team includes Chartered Tax Advisers, so MTD is a planning point for us, not just a filing job. We look at whether it changes the case for incorporating, set your records up so the quarterly figures are useful to you as well as to HMRC, and look for ways the switch can cut your overall tax bill. Because our team includes professionals who have worked inside HMRC, we set your systems up the way HMRC expects to see them, so that if HMRC does open an enquiry, your records answer its questions quickly. Because our partners have built their own businesses from nothing to over £1m in turnover, the advice is commercial, not just correct.

If you are already in, three things matter now. First, if you have missed a quarterly update, file it now, before the next deadline in the table above. For 2026/27 HMRC is not issuing penalty points for late quarterly updates, but the updates still have to be made, and the concession does not cover the tax return or late payment of tax. Second, get your software and records working properly for the rest of the year. Third, have someone check that your structure still suits you. We can do all of that with you.