What is Making Tax Digital — The Simple Explanation
Making Tax Digital (MTD) is the UK government’s programme to move the entire tax system online. Instead of filing one annual tax return, individuals and businesses will maintain digital records throughout the year and submit income and expense summaries to HMRC every three months using approved software.
MTD is not a new tax. Your tax rates, allowances, and obligations remain the same. What changes is how and how often you report to HMRC.
Making Tax Digital is a digital reporting requirement. The same income gets taxed — it is simply reported quarterly via software rather than annually via a paper or online form.
Why Did HMRC Introduce Making Tax Digital?
HMRC estimates the UK tax gap — the difference between tax owed and tax actually collected — stands at approximately £40 billion per year. A significant portion of this gap comes from avoidable errors: figures entered incorrectly, expenses forgotten, and income miscalculated at year end under the pressure of a January deadline.
MTD addresses this in two ways. First, digital records are far less prone to arithmetic errors than paper or spreadsheet entries. Second, quarterly reporting means HMRC receives data much closer to the time transactions actually occur — reducing the risk of forgotten income or inflated expenses.
There is also a secondary benefit for taxpayers: you will have a much clearer picture of your likely tax bill throughout the year, rather than discovering it in January.
The History of MTD — How We Got Here
MTD was first announced in 2015. The rollout has been phased:
- April 2019: MTD for VAT introduced for businesses with turnover above the VAT threshold
- April 2022: MTD for VAT extended to all VAT-registered businesses
- April 2026: MTD for Income Tax Self Assessment (MTD ITSA) begins for those with qualifying income over £50,000
- April 2027: Extended to those with qualifying income over £30,000
- TBC (likely 2028): Extended to those with qualifying income over £20,000
MTD ITSA vs Old Self Assessment — Side by Side
| Old Self Assessment | MTD ITSA (New System) |
|---|---|
| Records kept however you like | Digital records required in approved software |
| One annual tax return | Four quarterly updates + final declaration |
| 31 January deadline each year | Quarterly deadlines (Aug, Nov, Feb) + 31 Jan |
| Tax position known once a year | Running tax estimate updated quarterly |
| Manual data entry common | Bank feeds and automated categorisation |
| Easy to forget transactions | Real-time record-keeping reduces errors |
How the MTD ITSA Reporting Cycle Works
Under MTD ITSA, the tax year is divided into four reporting quarters. After each quarter, you (or your accountant) submit a summary of income and expenses to HMRC. At the end of the year, a final declaration replaces the old Self Assessment return.
What Does a Quarterly Update Actually Contain?
A quarterly update is not a detailed transaction list. It is a categorised summary of your income and allowable expenses for that three-month period. Your MTD software automatically aggregates your records into HMRC’s required categories and submits the totals.
For a landlord, this means submitting totals such as: total rental income received, total repairs and maintenance costs, total letting agent fees, total insurance premiums, and total finance costs. HMRC uses these to update your estimated tax position in real time.
Who Does MTD ITSA Apply To?
MTD ITSA applies to individuals who file Self Assessment and have qualifying income — from self-employment or UK property — above the relevant threshold. The threshold is based on gross income (before expenses), not profit.
Limited companies are not affected. MTD ITSA is specifically an individual income tax obligation. See our full guide on who needs to comply with MTD ITSA for the complete threshold breakdown.
What Software Do You Need for MTD?
You must use HMRC-approved software that connects directly to HMRC’s MTD API. You cannot file quarterly updates through HMRC’s own website. Options include Xero (AccTek’s recommended choice), QuickBooks, FreeAgent, and Sage. See our full MTD software guide for a detailed comparison.
Common Misconceptions About Making Tax Digital
Misconception 1: “MTD Means Paying Tax Four Times a Year”
False. Quarterly updates are reporting submissions only — not payment events. Your tax payment deadline remains 31 January, exactly as under Self Assessment. Quarterly updates simply give HMRC (and you) a running picture of your likely liability.
Misconception 2: “I Can Use My Existing Spreadsheet”
Not directly. A plain Excel or Google Sheets spreadsheet is not MTD-compliant on its own. You either need purpose-built MTD software (like Xero) or bridging software that connects your spreadsheet to HMRC’s API. Most clients find dedicated software far easier.
Misconception 3: “My Accountant Will Handle Everything Automatically”
Only if you have the right arrangement in place. AccTek clients have everything handled — but if your current accountant has not proactively discussed MTD with you, it is worth asking specifically how they plan to manage your quarterly submissions.
Real-World Example: A Landlord Under MTD
Sarah owns two rental properties generating £65,000 per year in gross rent. Under the old system, she compiled her income and expenses each January and filed one Self Assessment return. Under MTD ITSA from April 2026:
- Sarah (via AccTek) logs rent received and expenses in Xero as they occur throughout the quarter
- In August, AccTek submits Q1 data to HMRC covering April–June
- HMRC updates Sarah’s estimated tax position — she can see approximately what she will owe
- This repeats each quarter. By January, Sarah already knows her tax liability closely, and the final declaration is a quick confirmation rather than a stressful calculation
Frequently Asked Questions About Making Tax Digital
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Continue to the next guide: Who needs to comply with MTD ITSA?