What is Making Tax Digital for Income Tax?

What changes

Today, most sole traders and landlords do one Self Assessment tax return a year, often in a rush before 31 January. Under Making Tax Digital (often shortened to MTD), three things change:

• You keep digital records. Every business or property income and expense goes into software, not a paper notebook or a shoebox of receipts.
• You send quarterly updates. Four times a year, your software sends HMRC a summary of your income and expenses so far. It's a summary, not a tax bill.
• You do your tax return through your software. After the tax year ends, you add anything the quarterly updates didn't cover and submit your return, still by 31 January.

What doesn't change: when you pay. Your tax bill and any payments on account are still due on 31 January and 31 July, the same as now.

Who it's for

Making Tax Digital for Income Tax is for people who pay Income Tax through Self Assessment on income from self-employment, property, or both. Whether you need to join depends on your qualifying income: your self-employment and property income added together, before any expenses are taken off.

Wages from a job, pensions, savings interest and dividends don't count towards these figures. Our guide Does Making Tax Digital apply to me? explains how HMRC works out your qualifying income, which tax year it looks at, and who is exempt.

Quarterly updates

A quarterly update is a summary of your income and expenses, grouped into HMRC's categories. You send one for each of your income sources: one for each self-employment, one for all your UK property together, and one for any overseas property.

Each update is cumulative. It covers everything from the start of the tax year (6 April) to the end of that quarter, so the fourth update covers the whole year. If you spot a mistake, you fix it in your records and the next update corrects it.

You can choose calendar quarters instead (starting 1 April), but the deadlines stay the same. See quarterly updates and deadlines for the full detail.

The tax return

Once the tax year is over and all four quarterly updates are in, you finish the year in your software. You add the things bank transactions can't show, such as private use of a van or phone, equipment you bought, and any other income like a job or savings. HMRC then works out your tax, you check it, and you submit your return by 31 January.

HMRC calls this your tax return. Software, and some of HMRC's guidance, also calls it the "final declaration".

What you need to do

1. Check whether and when it applies to you, using your qualifying income.
2. Choose software that works with Making Tax Digital. HMRC keeps a list of compatible software on GOV.UK.
3. Sign up on GOV.UK, or ask your accountant to do it for you. HMRC writes to people it expects to join, but signing up is up to you.
4. Keep digital records from your start date, and send your first quarterly update by its deadline.

Our guide How to get ready for Making Tax Digital goes through each step.

Is it worth it?

Making Tax Digital asks a little more often, but less at once. If your records are kept as you go, a quarterly update takes minutes, there's no January rush, and you can see roughly what tax you owe all year rather than finding out at the end. Most of the work is sorting each payment as business or personal, and good software does most of that for you.