Making Tax Digital for Income Tax: What ITSA really means in practice

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) sounds abstract until you map it onto real clients, real income sources and real workflows.

At its core, MTD for income tax is a shift away from the annual self assessment tax return towards more frequent digital reporting. But what does that actually mean for self-employed individuals, landlords and the accountants supporting them?

Here’s how MTD ITSA plays out in practice.

Who MTD ITSA applies to – and when

MTD ITSA applies to sole traders, landlords, and limited companies, as well as VAT registered businesses that meet the relevant criteria. It will become compulsory from the date of 6 April 2026 for self-employed individuals and landlords with gross income above £50,000 from qualifying income sources. Qualifying income includes business income and UK property income, including rental income from jointly owned properties.

Individuals with qualifying income over £30,000 must comply by the date of 6 April 2027. From 6 April 2028, the threshold for compliance will lower to £20,000. Those with income under £30,000 are currently exempt from MTD ITSA, but this decision is under review. If you have more than one trade or property business, you must combine all relevant income sources to determine if you exceed the threshold.

If you are automatically exempt from MTD, you will not be able to sign up for MTD. Exemption from MTD may apply for reasons such as digital exclusion, and digitally excluded individuals can apply for exemption. If you think you are digitally excluded, the process to apply for an exemption depends on whether you are already exempt from MTD for VAT. If you believe your business should be exempt from MTD, you need to contact HMRC.

Further phases will follow with lower thresholds in later tax years, but the direction of travel is clear. This government initiative is part of a broader effort to modernise tax administration across the UK tax system.

HMRC will contact affected taxpayers in writing to confirm when income tax requirements apply. There is no bulk enrolment – each individual must complete the sign up process themselves.

From one tax return to four quarterly updates

Under income tax self assessment today, most taxpayers file one self assessment return after the end of the tax year. From April 2026, MTD for ITSA will require self-employed individuals and landlords to send quarterly updates to HMRC every three months, known as a ‘Quarter’, using MTD-compatible software. MTD ITSA replaces the annual return with:

• Quarterly updates for each income source
• A period statement at year end
• A final declaration, which replaces the traditional self assessment tax return.

You will need to submit quarterly updates every three months, and the deadlines for submitting quarterly updates are typically on the 7th of the month following each quarter-end. The deadlines for submitting quarterly updates will be the same for everyone who has to follow the MTD for Income Tax rules. Quarterly updates will not need to include tax or accounting adjustments. The requirement to submit updates every quarter leads to increased administration work, but the new system aims to provide better visibility of tax liabilities throughout the year and reduce errors. Late submission of quarterly updates or final declarations will incur penalty points and fines.

That means submitting quarterly updates throughout the tax year, followed by a final submission confirming total income, tax reliefs and the overall tax calculation.

The key difference is timing. Income is reported closer to when it’s earned, rather than being reconstructed months later.

What counts as an income source

Quarterly reporting isn’t done once per taxpayer – it’s done per income source.

In practice, that means separate quarterly submissions for:

• Sole trader or self employment income
• UK property income from a property business
• Partnership income (reported separately)

If you have more than one trade or property business, you must combine all relevant income sources to determine if you exceed the MTD threshold. A digital system is required to manage and report multiple income streams efficiently.

Employment income, bank interest and other income sources are not included in quarterly updates, but they still form part of the final declaration.

This is why early scoping matters. Accountants need a clear picture of each client’s income streams before MTD ITSA begins and should consider centralised MTD management tools for accountants to coordinate obligations efficiently.

Digital records are no longer optional

Under MTD ITSA, taxpayers must keep digital records of all business income and expenses. Paper records alone will not meet the digital for income tax requirements.

This includes:

• Recording income and expenses digitally
• Keeping electronic records throughout the accounting period
• Using MTD compatible software or approved commercial software to submit data

HMRC will not provide a free tool for submissions; individuals must use commercial software. Eligible individuals need to purchase or upgrade to user-friendly MTD software for businesses, sole traders and landlords for compliance. Most existing accounting software programs are compatible with MTD, but you should confirm with your supplier that your software will work with MTD. If your chosen software provider does not appear on HMRC’s list of MTD-compatible software, you should inquire about their plans to become compatible. You should also check that your accounting software is compatible with HMRC’s current system for submitting tax information.

Digital record keeping sits at the heart of tax digital for income. Whether clients use cloud accounting software, spreadsheets with digital links or bridging software, the requirement is the same – data must flow digitally into HMRC. Digital links between different software must be maintained, preventing manual data entry errors. Software choices are important, and you should explore available options, including spreadsheets and bridging software, to ensure compliance and efficiency.

HMRC expects everyone to take reasonable care with their digital records, and you could get a penalty if you don’t keep adequate digital records. You should consider encouraging clients who don’t already have one to sign up for a business bank account to facilitate digital record keeping. The HMRC app can also be used to access tax and benefits information, including historical income and employment records, which can help improve record-keeping practices and make it easier to manage tax information digitally in conjunction with MTD-compatible accounting software.

Quarterly updates are not tax bills

Quarterly updates are often misunderstood. They do not replace payments on account and they do not calculate a final tax bill. Instead, they provide HMRC with a running view of income and expenses during the tax year.

Taxpayers will still only pay one tax bill every year, which is due on 31 January, plus payments on account by 31 January and 31 July, if applicable. The deadline for submitting your final declaration will be the same as the current Self Assessment tax return deadline, which is 31 January following the end of the tax year. You will still need to submit tax returns digitally under Making Tax Digital for Income Tax, ensuring all required information is provided to HMRC.

For VAT registered businesses, you must submit VAT returns electronically through HMRC-recognised MTD for VAT software. Failing to submit VAT returns on time can result in penalties, so it is important to meet all deadlines and compliance requirements.

The actual tax position is still finalised through the end-of-year process, including accounting adjustments, claims such as residential finance costs for property income, and reliefs declared in the final submission.

That distinction is important for managing client expectations.

Signing up, software and agents

MTD ITSA requires each taxpayer to sign up individually, even if they use an agent. There is no bulk sign-up facility, and each client must be registered for the correct tax year quarters.

It is important to start preparing for MTD ITSA as soon as possible to ensure a smooth transition by April 2026. Being MTD ITSA ready will help avoid last-minute challenges and ensure compliance. The introduction of MTD for ITSA will be phased, with different income thresholds determining when individuals must comply.

Once signed up:

• Quarterly updates must be submitted via compatible software
• Agents access and manage submissions through the Agent Services Account
• Multiple agents can be involved where clients have different income sources.

Choosing the right software early reduces friction. Accountants need tools that support multiple income streams, digital record keeping, quarterly reporting and final declarations in one place.

This is where Capium’s MTD software can play a practical role – supporting MTD for income tax with integrated digital records, quarterly submissions and agent-friendly workflows, alongside dedicated MTD for Income Tax software for quarterly submissions.

What this means day to day

In practice, MTD ITSA brings:

• More frequent reporting
• Higher administrative effort if processes aren’t streamlined
• A greater reliance on software and digital confidence

But it also creates structure. Quarterly reporting encourages better record keeping, clearer visibility of income reported and fewer last-minute surprises at year end.

At the end of the tax year, taxpayers will need to complete a year-end filing to adjust quarterly update information and claim reliefs, finalising their tax position under HMRC’s digital reporting system.

For accountants, it’s a shift in rhythm rather than an entirely new system.

Final thought: preparing now makes everything easier

MTD ITSA is a significant change, but it’s not an overnight one. Clients will move across in phases, thresholds will evolve, and the rules will bed in over consecutive tax years.

The firms that find MTD easiest to manage will be the ones that, alongside tax compliance, also keep on top of broader regulatory obligations using tools such as AML compliance and verification software:

• Identify affected clients early
• Standardise software and digital record keeping
• Test workflows well before deadlines arrive.

If you want to see how Capium’s MTD compatible software supports quarterly submissions, digital records and agent-led workflows for MTD ITSA, take a look at our MTD solution and explore how it fits into your existing practice processes.