MTD income tax is the biggest change to income tax reporting for sole traders and landlords in a generation. Taxpayers in scope will need to keep digital accounting records and submit quarterly updates to HMRC using a software product that meets HMRC’s requirements. After the end of the tax year, taxpayers will still need to finalise their tax position. This involves bringing together the information submitted quarterly through MTD income tax with information about the taxpayer's other sources of income and details of other claims, etc, that currently form the self assessment (SA) tax return.

Alongside the Spring Statement delivered on 26 March 2025, HMRC announced several policy changes including:

• MTD income tax requirements will be extended to those with turnover of more than £20,000 from April 2028.
• Taxpayers in MTD will need to use commercial software (rather than an HMRC service) to submit their final income tax return.
• Specific groups of taxpayers will be exempted from MTD, or have their start date deferred.
• Taxpayers that elect to use calendar quarter reporting will be required to join from the relevant 1 April rather than 6 April.
• HMRC will be given powers to cancel or reset late submission penalty points and to cancel financial penalties. 

Extension of MTD income tax

The government announced at the Autumn Budget 2024 that MTD income tax would be extended to taxpayers with turnover of more than £20,000 from self-employment and property by the end of this parliament. The start date has now been confirmed as April 2028.

Caroline Miskin, Senior Technical Manager, ICAEW Tax Faculty, said: “This announcement and the 2028 start date seem premature. The deadline for the first mandatory year-end MTD tax returns is 31 January 2028, so that leaves almost no time to assess how that has gone before the requirements are extended to more taxpayers. Lowering the threshold is expected to bring in about 1m more taxpayers, including most landlords with just one let property. The cost of complying will be even more significant to this group of taxpayers.” 

No HMRC service for end-of-year process

There has been a longstanding expectation that, like now, most taxpayers would be able to use an HMRC online service to finalise their income tax position. However, the Spring Statement has confirmed that taxpayers in scope of MTD income tax must also use an MTD-compatible software product to submit their final income tax return.

The biggest impact is on unrepresented taxpayers, most of whom currently use HMRC’s online service to file their SA returns.  Those that are in scope of MTD income tax must now choose MTD-compatible software that is not only capable of filing their quarterly updates for sole trader and/or property income, but also allows them to bring in their other income sources and file their end of year tax return.

Selecting the right product is not simple as MTD income tax has been designed to offer choice and flexibility in the software market. This means that not all software will cater for the needs of all taxpayers. The risk is that taxpayers will simply choose a product that says it is compatible for MTD income tax without realising that it may not fully meet their needs.

This change in how taxpayers finalise their income tax position will also likely increase the cost of complying with MTD income tax obligations. This could include not only the cost of software (the provision of free MTD income tax software products is still unclear), but could potentially also drive more unrepresented taxpayers to use a tax agent to comply with their obligations.

There is also a compliance risk for HMRC. If the taxpayer’s chosen software product does not allow them to report a certain income source, they might simply not report it.

Accountants and tax advisers are likely to use a tax software product alongside the accounting package. However, they will need to check that their current self assessment software product will be upgraded to be compatible with MTD.

Miskin says: “It is very concerning that such a fundamental design decision has been taken so late in the day – just a year before mandation in April 2026 and just over a week before the expanded testing for the 2025/26 tax year commences.

“Choosing a software product that meets all the taxpayer’s needs is imperative. However, many taxpayers won’t understand the differences between products or know what questions to ask.”

Certain taxpayer groups to be exempt or deferred

Legislative changes will be made to exempt or defer certain groups from using MTD income tax.

Subject to taxpayers notifying HMRC, the following will be exempt from MTD income tax requirements:

• taxpayers who have a Power of Attorney;
• non-UK resident foreign entertainers and sportspeople who have no other income sources that count as qualifying income for MTD; and
• taxpayers for whom HMRC has decided not to provide a digital service. This includes
  • ministers of religion; 
  • Lloyd’s Underwriters;
  • recipients of the married couples’ allowance; and  
  • recipients of the blind persons’ allowance.

Those who use the residence, remittance basis etc (SA109) pages of the SA return will not be required to use MTD income tax until April 2027. This is to allow more time to reflect the changes to the taxation of non-UK domiciled individuals.  

Changes to MTD policy and penalty reform

To avoid the need for end-of-year adjustments in the first year of operating MTD income tax, taxpayers with an accounting date of 31 March will start their MTD obligations on 1 April in the first year of operating MTD.

HMRC will also have a power to cancel or reset late submission penalty points and cancel financial penalties, for example, for periods prior to insolvency. 

Who is in scope of MTD income tax?

MTD income tax requirements will apply to those who receive gross income from self-employment and/or property over a certain threshold. From April 2026, those with gross income of over £50,000 will be mandated, from April 2027 those with income over £30,000 will be mandated and, from April 2028, those with income over £20,000 will be mandated. 

This threshold will be applied to the total turnover/gross income from all sources of sole trade self-employment income and income from property.

Further information

• Modernising the tax system through Making Tax Digital, GOV.UK

Visit ICAEW's hub to learn more about MTD. This includes links to a quiz so that you can test your knowledge, detailed guidance in TAXguide 01/25: MTD income tax and articles intended to help you prepare.