What you need to know: MTD for Income Tax complexities
Sara White, Editor, Business & Accountancy Daily
With nearly 40 days until Making Tax Digital for Income Tax starts, Sara White asked HMRC to clarify some of the more complex aspects from use of bridging software, to what happens when income drops below threshold and how to get out of MTD once registered
As the deadline for mandatory Making Tax Digital (MTD) for Income Tax for affected taxpayers with income over £50,000 hurtles towards us on Monday 6 April, HMRC has confirmed it will be possible to use bridging software to file quarterly returns, although their preference is for taxpayers to file using MTD compatible software.
HMRC said the use of bridging software is permitted, but stressed: ‘Customers can choose to use an all-in-one software product that creates digital records or a bridging software product that connects to existing records kept in spreadsheets or other accounting tools.
‘HMRC’s software choices guidance provides further information and customers can use our interactive tool to check which software products meet their needs, including bridging products.’
The requirement to report quarterly will be mandatory from the new tax year.
From 6 April, the first wave of sole traders, landlords and self employed people, totalling 864,000 individuals will enter MTD. They have all been contacted by letter several times by HMRC but awareness levels are still quite low across some of the affected base.
Letters have been sent by HMRC informing the nearly 900,000 taxpayers that they must register for MTD. The decision is based on HMRC assessments of earnings in the 2024-25 tax year.
When is the final registration deadline for MTD?
HMRC wants affected taxpayers, ie, the initial wave of the £50,000 cohort, to register by 6 April 2026 so they are ready for the new MTD quarterly reporting in good time. But this date is not mandatory.
When asked whether there was a final deadline day to register, HMRC responded: ‘Those who are required to use Making Tax Digital for Income Tax from 6 April 2026 should sign up before that date. This is an important step which allows customers to provide and confirm up-to-date information, before their records are transferred to HMRC’s new service and before or as they start to use Making Tax Digital for Income Tax.’
It is highly recommended that MTD registration is completed in good time before the first quarterly reporting deadline on Friday 7 August.
There is work to be done at HMRC’s end preparing systems for MTD, while taxpayers need to make sure they have the necessary MTD software from a commercial provider or correct bridging software at least a few weeks before the first quarterly filing deadline.
This is crucial to ensure there are no hiccups or problems with HMRC, that your software works, and all the quarterly numbers are ready to access and submit to HMRC.
Bear in mind this is the first time HMRC has required quarterly figures so this will be a major break from normal accounting and bookkeeping practices for many taxpayers.
Registration can be done online through personal tax accounts with links from the HMRC app for individual taxpayers who are unrepresented, and it is always recommended to discuss MTD with your accountant or tax adviser, particularly if your tax affairs are complex.
When is the first quarterly reporting deadline?
Friday 7 August 2026 is the first deadline for filing the Q1 quarterly update for qualifying income and expenses for the 2026-27 tax year. Note this is not a single figure or total – the income has to be split between individual earnings from each trade, and a separate quarterly report for property income.
It is very important to note that MTD for Income Tax quarterly reporting to HMRC is in addition to, and does not replace existing self assessment tax returns, which will still have to be completed in the normal way by 31 January 2027 for 2025-26 earnings.
What happens if your income goes over £50,000 threshold mid tax year?
If your income goes over the £50,000 threshold during a tax year, you will not have to use MTD until the following tax year, and will be able to continue to submit a single year end self assessment tax return.
HMRC confirmed: ‘To assess your qualifying income for a tax year, we’ll look at the self assessment tax return that you submitted in the previous tax year.
‘When you need to start using MTD for Income Tax depends on your qualifying income for a tax year. If your qualifying income is over:
- £50,000 for the 2024-25 tax year, you will need to use it from 6 April 2026
- £30,000 for the 2025-26 tax year, you will need to use it from 6 April 2027
- £20,000 for the 2026-27 tax year, you will need to use it from 6 April 2028
How do you get out of MTD if your income drops below the threshold?
The question here is what happens if a landlord, sole practitioner or self employed is inside MTD for Income Tax as they qualified due to 2024-25 tax year income, then mid-way through 2026 they stop earning property income and their income drops substantially, meaning the revert to sub £50,000 annual qualifying income.
Is there an easy mechanism to cancel their MTD registration as they are no longer liable?
HMRC stated: ‘Once you are required to use MTD, you will continue to use it until your qualifying income has been below the MTD threshold for three consecutive years – unless all your qualifying income sources have ceased.
‘After three consecutive years with income below the MTD threshold, you can choose to opt out and will no longer need to keep digital records or send quarterly updates. Updates you’ve sent will be deleted for the tax year you’re opting out for. You’ll still need to submit a self assessment tax return.’
What happens when an MTD taxpayer retires and no longer has relevant income for reporting in MTD?
Retirement is treated differently to a drop in annual income. The question here is whether retirees will also have to stay in MTD for three years, despite no longer working and not having qualifying income.
HMRC clarified the process for retirees, who will be able to update their new financial position through their personal tax account.
‘If your only source of qualifying income has ceased entirely you need to notify HMRC using your online account,’ HMRC confirmed.
‘This can be done in the “Managing your Income Tax” section and entering the date the income source stopped. You will also need to:
- send the final quarterly update for the period that includes the date the income ceased;
- include the ceased income in your self assessment tax return - you must still send your tax return using MTD software for the tax year in which the income ceased.’
Will people be able to change their VAT return filing dates to coincide with new MTD for Income Tax filing date of 7th every quarter? How does this work?
VAT-registered businesses can make a request to change their quarterly filing date using their online account. This can be sorted on the gov.uk website at Register for VAT: Changing your VAT details.
What happens if you disagree with HMRC that you need to use MTD based on 2024-25 income?
Taxpayers who disagree with HMRC that they need to use MTD will have to contact HMRC directly to discuss this. There are some exemptions for digitally excluded for example.
For any taxpayers receiving a letter from HMRC and disputing their income from 2024-25, the chances are that there will be few grounds to get out of MTD. The 2024-25 income figures are based on self assessment tax returns for that year end.
I mainly live abroad, does MTD apply to non-UK residents?
Non-UK residents have a one-year deferral and will not have to use MTD until April 2027, a year later than UK-residents. This deferral applies automatically to taxpayers who filed SA109 supplementary pages with their 2024-25 tax returns.
Are there any penalties for non-compliance?
HMRC is taking a soft landing approach initially and will be waiving penalties in year one of MTD for Income Tax, no doubt accepting that there are likely to be teething problems. From April 2027, the full penalty regime will kick in based on the traffic light system used by HMRC.
