What is Making Tax Digital for Income Tax?
If you’re a sole trader or a landlord, you might have heard about Making Tax Digital for Income Tax (MTD for short).
It’s a new initiative from the government that changes how you report income and expenses to HMRC. It will affect sole traders and landlords with income over the qualifying thresholds (more on those later). Because it’s the law, you’ve got to do it — unless you think you might be exempt.
This guide covers the MTD basics, how the new rules affect you, and how to get ready in good time. Before we get into it, a reminder that we can’t give you tax or financial advice. You’ll need to speak to a professional adviser for that.
Why it’s happening
HMRC introduced Making Tax Digital for VAT back in 2019. Now it’s the turn of income tax.
The idea is that doing everything digitally will help you stay on top of your taxes year-round, cut mistakes and whittle down the admin.
And because you’ll update HMRC more often, you’ll get a better estimate of your tax and National Insurance liability. So you have a clearer picture of your cash flow and how much to set aside for your tax bill.
For HMRC, it’ll help them make sure everyone pays the right tax.
Who needs to get ready for MTD?
MTD will affect around 2.65 million sole traders and landlords across the UK. But not all at once. HMRC are rolling out the new initiative in phases, starting with higher earners.
It’s all based on your gross income known as ‘qualifying income’. That’s everything that comes in before anything goes out.
Here are the different phases by gross income.
Over £50,000 start to use MTD from 6 April 2026.
Over £30,000 start to use MTD from April 2027.
Over £20,000 start to use MTD from April 2028.
These timings are designed so that by the tax return deadline of 31 January, you (and HMRC, if you submit on time) should be able to work out whether MTD applies from 6 April of the same year.
What counts as qualifying income?
Qualifying income is gross income (income before any expenses) of sole traders and landlords. If you have more than one trade or rental business, you need to add them up. PAYE Income as an employee is not included.
If you start trading part way through the year, you’ll need to increase the income to take that into account. If you only traded for 6 months of the year, your qualifying income will be twice what you actually made.
Here are some examples of how MTD might affect different types of businesses.
What’s changing?
Instead of filing one annual tax return, sole traders and landlords who are part of MTD must:
keep up-to-date digital records of their income and expenses
use HMRC-approved software to send quarterly updates of their records to HMRC
submit a final declaration to confirm their figures for the whole year, along with details of other income
This process will replace the traditional single yearly Self Assessment tax return done on the HMRC website.
Timeline for MTD
Here’s a quick look at how the new process will work once you're using MTD.
Quarterly updates: you’ll send an update of your income and expenses to HMRC every three months, using your chosen software. These updates are due by 7 August, November, February, and May.
End of year statement: once the tax year ends on April 5, you’ll have until the following January 31 to send a final report that confirms your yearly earnings and expenses. This will include details of other taxable income not reported under MTD.
Payments: you'll still pay your tax bill as you do now.
Preparing for MTD with Monzo
Getting into good tax habits now can set you up for later.
Start by untangling your personal and business finances. If you haven’t already, think about setting up a business bank account. With ours, you can set up one account for each income stream, up to a total of 3.
A Monzo Business Account comes with smart tools like Pots for setting side money. There’s even one for tax that automatically sets aside money for tax when you’re paid. We can also help you put payments into the right categories.
Tax has its own special place in the heart of our app. With help information on MTD including quick lessons to get you up to speed on the essentials and a timeline to keep you on track.
Questions? Answers.
What’s the point of Making Tax Digital?
The government is introducing MTD to digitise the tax system. The goal is to make tax admin more efficient for businesses, allowing them to keep track of their records throughout the year.
Can my accountant help me with Making Tax Digital?
Yes, your accountant can help you. Some HMRC-approved software will allow accountants to collaborate and send the quarterly updates and final declaration on your behalf.
Do I need an accountant?
No, it’s up to you whether to get an accountant to help or do it yourself.
What’s the threshold for Making Tax Digital?
The gross income threshold for the first phase of Making Tax Digital for Income Tax is £50,000 for the 2024 to 2025 tax year. Sole traders and landlords who meet this threshold must go digital from 6 April 2026.
What can I do now to prepare for the deadline?
Separate your personal and business money now, if you need to. A Monzo Business Account can help you get your numbers in order with smart tools like Tax Pots and categories for payments.
Features vary by plan. Lite is free, Pro is £9 a month and Team is £25 a month. Only sole traders or limited company directors in the UK can apply . Ts&Cs apply.