The Making Tax Digital (MTD) initiative has now been rolling out for some time, and on April 6th it will come into play for sole traders and landlords whose annual income is over £50,000.
But what does that mean for you? How do you go about it? Government guidance often doesn’t make this as clear as you’d like, so this week we want to take a look the most important questions concerning MTD.
As always, complex edge cases are beyond the scope of a single blog post. If you have reason to believe that your situation is more complex than this guide covers, we highly recommend contacting a seasoned tax accountant for specific guidance.
What Income Qualifies for Making Tax Digital?
Some income sources do not count toward that £50,000 total. For example, if you’re a salaried individual earning £39,000 annually who rents a floor of their property for a total of £12,000 over the same period, your total income is £51,000. However, your PAYE income is the bulk of that and does not qualify.
The following income sources do not qualify:
- Dividends, including those from your own company
- Any private pension payments
- Any State pension payments
- PAYE salary or wages
- Any share of profit from partnerships taken as an individual partner
If you part-own the property you receive income from, only your share of the property income counts.
It’s important to remember, however, that your gross income qualifies and, if that reaches the threshold, you will need to use MTD going forward. HMRC makes their determination of this based on your tax return for the previous tax year.
You can choose to opt out after qualifying income is below the threshold for three tax years in a row. Of course, if you cease to be self-employed and have no income from property, you should notify HMRC and will not need to continue to use MTD.
How Do You Start Using Making Tax Digital?
You should be signed up for MTD before the tax year where you will need it begins, and should have made any other necessary preparations.
The first step is to ensure you’re using compatible software. If you use an accountant, this is as simple as confirming with them that they do so (and it’s hard to imagine a professional accountant who doesn’t!) but if you’re handling it for yourself, you may want to do some research.
MTD compatible software either creates digital accountancy records directly or provides a ‘bridge’ between your existing digital accountancy records and HMRC submissions. It is allowable to use multiple different programs which each handle part of the process, so long as you can:
- Submit quarterly updates and a tax return to HMRC
- Report all income sources, whether they qualify for MTD or not
- View your data in appropriate accounting periods
HMRC has a tool to help you find appropriate software.
Once you have this software in place you need to sign up for MTD. You can do this now even if you don’t need to do so for the 2026-2027 tax year, and if you expect to need to from April 6th 2027 (for example if you invested in property and know that once leased the income will qualify) you may want to get set up in advance.
HMRC will ask for:
- A confirmation of your first tax year to use MTD
- If you started receiving income from property or if your business started within the last two tax years, the relevant starting dates will be needed.
As a sole trader you will also need to provide:
- Your business name (the one on your invoices) and address
- The nature of your business
If you operate multiple businesses, each one will need to be registered for MTD. Check carefully if anything from your property portfolio is missing!
Once you have that all to hand you can sign up at the portal here.
What Do You Need to Do During the Tax Year?
You should be keeping your digital records up to date concerning income and expenses from self-employment and property. These records must detail, at minimum, the date of the transaction, the amount, and the category of the transaction (this will depend on the type of business you have).
This will be done on an ongoing basis but happily MTD compatible software makes this much simpler (as does using a business accountant to handle this for you).
You will also need to send HMRC quarterly updates. MTD compatible software should alert you when these are due.
You can choose between standard update periods, which are aligned to the tax year, or calendar updates, which each end on the last day of the month. Typically if your own financial year is aligned with the tax year, you should use the standard update periods. If not, calendar update periods will likely make your record keeping simpler.
After the final quarterly update of the tax year, you will need to make certain adjustments. These include:
- Tax adjustments (removing disallowable expenses, etc)
- Accounting adjustments (allowing for prepayments or accruals, etc)
- Claiming tax reliefs or allowances to which you are entitled
- Adjusting income and expenses to the tax year if your accounting period is not aligned to it
With this done, your tax return can be completed and submitted. This must be done by the 31st January following the end of the tax year it applies to. That means the deadline for the 2026/2027 calendar year is 31st January 2028.
If you are still unsure, we recommend making time for a conversation. We’ll be happy to help you.
