The way self-employed individuals and landlords report income to HMRC is undergoing its most significant change in decades. Under the Making Tax Digital (MTD) initiative, the traditional annual Self Assessment tax return is being replaced by a new system of digital record-keeping and quarterly reporting. With the first mandatory deadline starting in April 2026, it is essential to understand how these changes affect you and what steps you need to take to remain compliant.
When does MTD for Income Tax start?
The rollout of MTD for Income Tax Self Assessment (ITSA) is phased based on your gross income (turnover), not your profit:
- From 6 April 2026: Mandatory for self-employed individuals and landlords with an annual qualifying income over £50,000.
- From 6 April 2027: Mandatory for those with an annual qualifying income over £30,000.
- Future Rollout: The government has also committed to bringing those with incomes over £20,000 into the system, with a date to be confirmed.
What are the new requirements?
If you fall within the thresholds, you will no longer be able to submit a single year-end tax return via the HMRC portal. Instead, you must:
- Keep Digital Records: All business transactions must be recorded digitally using MTD-compatible software. Under MTD, manual data entry is out. Every piece of information must move via digital links, ensuring your records and your tax submissions are electronically connected without the risk of manual error.
- Submit Quarterly Updates: You must send a summary of your business income and expenses to HMRC every three months through your software.
- Submit an End of Period Statement (EOPS): This confirms the final adjusted profit for each business or property source.
- Make a Final Declaration: This replaces the current Self Assessment return, bringing together all sources of income (including investments and savings) to calculate your final tax liability.
Basis Period Reform: The Transition
To facilitate MTD, HMRC has introduced Basis Period Reform. This means all unincorporated businesses must now report their profits based on the tax year (6 April to 5 April), regardless of their actual accounting year-end. If your accounting year does not currently align with the tax year, we can help you navigate the transition and manage any resulting “overlap profits.”
Why act now?
The transition to digital record-keeping requires planning. Moving to cloud accounting software now allows you to:
- Gain real-time visibility of your tax liabilities.
- Automate bank feeds and reduce manual data entry.
- Ensure your processes are fully tested before the mandatory deadlines.
- Avoid the new points-based penalty system for late submissions.
How Compass Accountants can help
Navigating MTD doesn’t have to be stressful. As certified Xero partners, we specialise in helping sole traders and landlords transition to cloud accounting. We can set up your digital records, automate your data flow via digital links, and ensure your quarterly submissions are handled accurately and on time.
Whether you are a sole trader or a landlord, we can provide a tailored roadmap to ensure you are fully compliant and tax-efficient ahead of the 2026 deadline. Contact our specialists today to discuss your requirements.
