Overview
MTD for ITSA requires sole traders and landlords with qualifying income to maintain digital records and submit updates to HMRC quarterly using approved software.
The introduction of MTD for ITSA will occur in two phases:
· April 2026 for those with qualifying income over £50,000;
· April 2027 for those with qualifying income over £30,000.
Currently, partnership businesses are excluded from MTD for ITSA, but the government plans to include them in the future. Qualifying income includes combined earnings from both trading and property calculated before expenses.
Policy Objective
The policy aims to streamline the tax reporting process by requiring taxpayers to use software to manage digital records and make regular updates. The key benefits for taxpayers include:
• Reduced risk of errors – digital systems should reduce the chances of unintentional mistakes.
• Time-saving – less time spent managing paperwork and submitting end-of-year tax returns.
• Enhanced productivity – by using digital tools taxpayers should be able to do more in the same time.
• Tailored service – HMRC may be able to offer more personalised support based on digital data.
Simplification Measures
For those below the £30,000 income threshold, MTD will not apply after 2027, though this may be reviewed. Additionally, the following simplifications will be introduced:
• Cumulative quarterly reporting – taxpayers will only need to submit updates on a cumulative basis, eliminating the need to resubmit reports for amendments or errors.
• End of Period Statements removal – taxpayers will no longer need to complete these statements for each income source.
• Flexible reporting for landlords – landlords with jointly owned property can opt not to report expenses in quarterly updates and maintain less detailed records.
In summary, MTD for ITSA will be based on three key components: digital record-keeping, quarterly updates, and year-end declarations. Payment dates for tax will remain unchanged under self-assessment, meaning tax is payable by 31 January after the end of the tax year, with payments on account due on 31 January and 31 July.
Scope of MTD
While members of partnerships are excluded from MTD in relation to their partnership income, they may still need to comply if they have other sources of qualifying income (e.g. self-employment or property income outside the partnership).
Automatic exemptions apply for taxpayers with qualifying income below the relevant threshold.
By default quarterly periods will align with tax years (starting 6 April, ending 5 July), although a calendar quarter option should also be available, allowing quarterly updates to be based on calendar quarters.
If a self-employed individual has both trading and property income, separate quarterly updates will be required for each business/activity. Quarterly updates must be filed by the 7th of the month following each quarter-end. For example the first quarterly submission must be filed by 7 August 2026.
Year-End Submission
After the fourth quarterly update, taxpayers will need to file a “digital tax return,” which will be similar to the current Self-Assessment return but will be pre-populated with the income and expenses from the quarterly updates. Adjustments will be needed for tax and accounting purposes (e.g. removing private use or capital expenditure).
Non-business income (such as bank interest or salaries) must also be reported although MTD aims to pre-populate this data from HMRC records. The digital tax return will also remain where taxpayers can claim tax reliefs such as those for pension contributions.
Timeline for Implementation
HMRC plans to notify taxpayers in spring/summer 2025 if their 2023/24 tax return indicates they may need to comply with MTD in the future, assuming their income remains similar in 2024/25. More detailed communications will follow after 31 January 2026, based on the income reported in 2024/25 tax returns.
Taxpayers will not be automatically registered for MTD. If your income meets the relevant threshold, you will need to sign up manually, similar to the current Self-Assessment registration process. The exact sign-up procedure is still to be confirmed.
Penalties and Compliance
Penalties for late submissions and payments will transition to a points-based system, similar to the system used for late VAT payments and submissions. Taxpayers will receive a point for each missed deadline (for both quarterly updates and year-end submissions). Once a threshold is reached, a £200 penalty will be issued. After that, any further late submissions will incur an additional £200 penalty. To then reset the penalty count, taxpayers must maintain compliance for a set period (e.g. submit 4 quarterly updates or 2 end-of-year returns) and ensure that all required returns for the previous 24 months have been submitted.
The existing Self-Assessment penalty regime will remain in place until taxpayers join MTD or if they fall outside its scope.
Agents will be able to sign clients up for MTD though a bulk sign-up service will not be available. This process may be time-consuming but the sign-up facility is expected to open well ahead of April 2026 to allow time for registrations.
Speak to an Expert
If you are a sole trader or landlord who may be affected by the upcoming changes, please get in touch with our team. We would be delighted to help ensure the transition to MTD for ITSA is as seamless as possible for you.
Authored by: London Tax Team
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