Making Tax Digital: The Complete UK Guide

1. What is Making Tax Digital?

Making Tax Digital (MTD) is HMRC's long-term programme to modernise the UK tax system. The core idea is simple: instead of filing annual tax returns on paper or through the HMRC website, businesses and self-employed individuals keep digital records and submit returns using compatible software connected to HMRC's API.

MTD was first announced in 2015 and has been rolled out in phases. VAT-registered businesses were the first to be required to use MTD-compatible software (from April 2019 for businesses above the VAT threshold, and from April 2022 for all VAT-registered businesses). Income Tax Self Assessment (ITSA) is next, with the first mandatory filing period beginning on 6 April 2026.

The goal is to reduce errors, close the tax gap (estimated at £39.8 billion in 2022-23), and make tax administration more efficient for everyone. For taxpayers, it means more frequent but simpler submissions — quarterly updates rather than a single annual return.

2. Who needs to comply with Making Tax Digital?

MTD affects different groups at different times. Here's the current picture:

Important:The income threshold is based on your gross income from self-employment or property, not your profit. If your total self-employment and/or rental income exceeds the threshold, you're caught by MTD for ITSA regardless of how much profit you actually make.

3. MTD for VAT

MTD for VAT has been mandatory since April 2019 for businesses above the VAT registration threshold, and since April 2022 for all VAT-registered businesses. If you're VAT-registered, you must:

• 1.Keep digital records of all your VAT transactions
• 2.Use MTD-compatible software to submit your VAT return to HMRC
• 3.Submit your return by the deadline (usually one month and seven days after the end of your VAT period)

Your VAT return must include Box 1-9 values. MTDFile calculates these automatically from your records and submits them directly to HMRC via the official VAT API. You can view your open obligations, enter your figures, and submit — all in under five minutes.

Read our guide to submitting VAT returns online

4. MTD for Income Tax (ITSA)

MTD for Income Tax Self Assessment (ITSA) is the next major phase. From 6 April 2026, sole traders and landlords with qualifying income over £50,000 must keep digital records and file quarterly updates to HMRC using compatible software.

Under MTD for ITSA, you'll need to:

• 1.Submit quarterly updates to HMRC (by the 7th of the month after each quarter ends)
• 2.Submit an End of Period Statement (EOPS) for each source of income
• 3.Submit a Final Declaration (replacing the SA100 tax return) by 31 January following the tax year

The quarterly periods follow the tax year: Q1 is April-July, Q2 is July-October, Q3 is October-January, Q4 is January-April. Each quarterly submission includes your income and expenses for that period.

Read our guide to MTD for sole traders

5. Key deadlines

View all MTD deadlines for 2026/27

6. Penalties for non-compliance

HMRC uses a points-based penalty system for late submissions. For quarterly filers under MTD for ITSA, the penalty point threshold is 4 points. Here's how it works:

• Late submission: You receive 1 penalty point for each late quarterly update or annual submission
• At the threshold (4 points): You receive a £200 penalty
• Beyond the threshold: Every subsequent late submission triggers a further £200 penalty
• Late payment: 2% charged on tax outstanding after 15 days, rising to 4% after 30 days, plus daily interest

Points can be reset by submitting all outstanding returns on time for a set period (typically 12 months). The best way to avoid penalties is to use software that tracks your obligations and reminds you of deadlines — which is exactly what MTDFile does.

7. What software do you need?

To comply with Making Tax Digital, you need software that is recognised by HMRC and connects to their API. You cannot submit returns directly through the HMRC website if you're mandated for MTD.

Key features to look for:

• HMRC MTD API:The software must be on HMRC's official list of compatible software
• Direct API submission: It should submit directly to HMRC, not require you to re-enter data elsewhere
• Digital record keeping: Built-in record keeping to maintain your digital trail
• Deadline tracking: Automatic obligation tracking so you never miss a filing date
• Both VAT and ITSA:If you're VAT-registered and self-employed, you need software that handles both

MTDFile is connects directly to the HMRC MTD API software that handles both VAT returns and Income Tax quarterly filing. Prices start at £9.99/month for a single module, or £16.99/month for both.

Compare MTD software options and pricing

8. How to get started with Making Tax Digital

Getting set up for MTD takes about 10 minutes:

1. 1
   Sign up for MTD with HMRC — You need to register for MTD through your Government Gateway account. For VAT, this is done through your VAT online account. For ITSA, HMRC will send you an invitation letter.
2. 2
   Choose your software — Select connects directly to the HMRC MTD API software. MTDFile handles both VAT and Income Tax, so you only need one subscription.
3. 3
   Connect to HMRC— Authorise the software to submit on your behalf. MTDFile uses HMRC's OAuth flow — you log in to your Government Gateway account and grant permission.
4. 4
   Keep digital records — Enter your income and expenses as they happen. MTDFile tracks everything and calculates your quarterly totals automatically.
5. 5
   Submit on time— When a deadline approaches, MTDFile notifies you. Review your figures, click submit, and you're done. The whole process takes about 5 minutes.