Making Tax Digital: Complete guide to MTD for freelancers and landlords

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Note that this guide relates to MTD for income tax. The rules around MTD for VAT are slightly different, so if you’re using ChatGPT or another AI tool to help out, you may want to check that it hasn’t conflated the two.

What is Making Tax Digital?

First announced back in 2015 under then-Chancellor of the Exchequer George Osborne, Making Tax Digital has been in the works for some time.

The goal is to modernise the UK tax system, replacing paper-based record keeping with quarterly digital submissions to HMRC.

You still have to file your tax return once a year, but the hard work should already be done thanks to your quarterly digital submissions.

Crucially, you can’t just keep records in a spreadsheet.

You need to keep them in a format that allows you to submit your details digitally to HMRC, which is why you need special software (more below).

MTD is supposed to reduce errors and, reading between the lines, make more people tax compliant.

Read this: Tips for filing a tax return for the first time

Who needs to comply with Making Tax Digital?

Making Tax Digital applies to three broad groups; VAT-registered businesses, freelancers who are sole traders and landlords.

When MTD applies depends on which group you fall into and how much money you make.

If you’re a VAT-registered business, you should already be using MTD to submit your VAT records.

If you’re a newly VAT-registered business then HMRC will sign you up automatically unless you’ve applied for exemption.

For landlords and/or freelancers who are self employed sole traders, and who already file a tax self assessment once a year, MTD is only mandatory once your qualifying income hits the £20,000 threshold (more below).

I want to reiterate again that the rules around MTD for VAT are different from MTD for income tax so make sure you know which rules apply to you.

Who’s exempt from Making Tax Digital?

Not everyone has to comply with Making Tax Digital.

Self employed freelancers who are in a partnership set up do not need to comply with MTD for income tax for the time being, for example.

Limited companies are also exempt from complying with MTD, unless of course that business is VAT-registered.

And of course you are exempt from MTD if you’re earning below the threshold for MTD compliance (more below).

But as a sole trader or landlord earning over £20,000, you can apply for MTD exemption in certain circumstances.

The main reason for exemption is “digital exclusion”.

For HMRC, this means one of the following:

• your age, health condition or disability stops you from using a computer, tablet or smartphone to keep digital records or submit them to HMRC
• you’re a practising member of a religious society or order whose beliefs are incompatible with using digital communications or keeping digital records, and you do not use a computer, tablet or smartphone for business or personal use
• you cannot get internet access at your home or business because of your location, and cannot get access at a suitable alternative location

If you’re digitally excluded, you must apply for MTD exemption – otherwise you may be fined for not complying when it becomes mandatory for you.

HMRC has a full list of other exemptions on its website.

When does Making Tax Digital come into effect?

The government has been slowly rolling out Making Tax Digital since 2019.

And since April 2022, MTD for VAT has been mandatory for all VAT-registered businesses, regardless of income.

From 6 April 2026, MTD for income tax is rolling out to self employed sole traders and landlords who meet certain income thresholds.

If you made qualifying income of £50,000 for the 2024/2025 tax year, you will need to comply with MTD from 6 April 2026.

If you make qualifying income of £30,000 for the 2025/2026 tax year, you will need to comply with MTD from 6 April 2027.

If you make qualifying income of £20,000 for the 2026/2027 tax year, HMRC will confirm MTD compliance date in due course but it’s expected to be 6 April 2028.

If your qualifying income is less than £20,000, you don’t need to comply with MTD, although you can enrol voluntarily.

Of course you should still be keeping detailed and accurate records even if you don’t need to comply with MTD yet.

What if your income fluctuates?

As freelancers know, income can fluctuate a lot from year to year.

HMRC determines your eligibility for MTD by using your most recent tax self assessment.

Once you become eligible for MTD, compliance becomes mandatory even if your income subsequently falls below the threshold of £20,000.

However, if your income falls below £20,000 for three consecutive years, you can apply for MTD exemption.

Similarly, if you get a PAYE job and stop your freelance work, you’ll need to inform HMRC to be exempt from MTD.

Read this: Things you should claim in your tax return

What counts as qualifying income?

Under Making Tax Digital, qualifying income is the sum of any and all income from your work as a self employed sole trader and/or landlord.

You don’t need to count PAYE income, money from dividends and partnerships, or State Pension and private pension payments.

So if you make £30,000 a year as a self employed freelancer, plus £10,000 a year as a landlord, your total qualifying income would be £40,000.

If that was your qualifying income for the 2025/2026 tax year, you’d have to comply with MTD from 6 April 2027.

However, if you earn £30,000 from a PAYE job and make £10,000 as a self employed freelancer and/or a landlord, your qualifying income would only be £10,000.

That figure makes you exempt from MTD.

How Making Tax Digital works in practice

To comply with Making Tax Digital, you need to do three things.

Keep digital records

The first thing you need to do for MTD compliance is to keep a digital record of the income and expenses for your business.

You’ll need separate records for each sole trader business and income you receive as a landlord.

It’s not enough to simply keep track of income and expenses in a spreadsheet – you’ll need specific software that’s compatible with HMRC’s systems.

Submit quarterly updates

The software you use must allow you to submit quarterly updates to HMRC on or before set deadlines.

The deadlines to submit the previous quarter’s records are 7 August, 7 November, 7 February and 7 May of each year.

These dates do not change even if the accounting year for your business is different from the tax year.

Included in each of your quarterly updates are your income and expenses for the previous quarter as well as any changes you’ve made to previous submissions.

That means if you forget to include an income or expense, it can be added later and submitted with your next quarterly update, as long as any changes are done before you submit your tax return.

File your tax return

Like the current tax system, you still have to file your annual tax return by 31 January of the following year.

This means after your final quarterly submission on 7 May, you still have several months to make adjustments before you file your tax return.

HMRC will already have certain financial information about you, such as PAYE income and student loan repayments, and will have added these to your account.

These should appear in your chosen MTD software but you will need to check they are correct. 

You will also need to add any income from savings, investments or capital gains that haven’t been added.

Once you’ve checked and added everything, your MTD software will calculate how much tax you owe and will send your final tax return to HMRC.

So instead of logging onto the HMRC website to complete your tax self assessment, you’ll do it all via the MTD software.

This means it’s more important than before to do your tax return well ahead of the deadline because if anything goes wrong, you have to contact your software provider instead of HMRC.

What software do you need for Making Tax Digital?

HMRC doesn’t specify which software you need for Making Tax Digital. It does however provide a list of compatible software on its website.

You’ll need to complete a quick quiz to see the suggestions suitable for your business.

For me, it showed well known accounting software companies such as Intuit QuickBooks*, Accounting by Sage*, Xero* and Clear Books.

I was also surprised to see current account providers Monzo and Starling.

Whichever brand you go for, the software needs to do three things to comply with MTD:

• create, store and update digital records of your self employment and property income and expenses – this includes photos of your receipts for expenses
• send your quarterly updates to HMRC
• submit your tax return by 31 January the following year

While all of the brands I mentioned above can create digital records and submit quarterly updates, only software from Clear Books is able to submit your tax return to HMRC at the moment.

All of the other brands have committed to making the tax return feature ready by 31 January 2027, the due date of the first cohort of MTD for income tax filings.

How to choose your Making Tax Digital software

You may be thinking that Clear Books is the clear winner here – and it may well be – but there are a couple of things to think about before you choose your Making Tax Digital software.

For one, Clear Books doesn’t include bridging software as part of the package.

Bridging software allows you to connect your existing records, such as spreadsheets, to the MTD software.

It means if you want to continue using existing spreadsheets to keep track of your income and expenses, you won’t be able to with Clear Books.

Instead, you’d have to double your admin and input the data into Clear Books as well as your own spreadsheets.

Bridging software is very much an optional feature here, and many MTD software products don’t include it.

What you do need to check for are the features that are essential for your tax return.

Can it cope with your accounting period, for example, or income from foreign property and dividends?

What if you’re still making student loan payments or if you also have PAYE income?

And then there’s pricing.

There are several free software options to choose from but you can also upgrade to paid-for versions for extra features.

Unfortunately it means before you start complying with MTD, you’ll need to do a lot of research to find the right software for you.

What if you miss a Making Tax Digital deadline?

At the moment if you’re late filing your tax self assessment, you automatically become liable for a penalty of £100.

After three months the penalty becomes £10 a day, increasing to £300 or 5% of your tax bill, whichever is greater, after six months.

At the same time, you’re also accruing interest on your unpaid tax bill, which is set at the Bank of England Bank Rate plus 4%.

MTD for income tax completely changes the script by using a points-based penalty system.

You’ll get one point if you’re late on your quarterly submissions, your annual tax return or paying your tax bill.

Once you’ve accrued four points, you’ll be liable for a £200 penalty.

The good news is that the points will expire after two years, so if you make the occasional error, you won’t be fined right away.

In addition, if you’re late paying your tax bill, you will also incur a penalty on your outstanding tax bill.

There are two separate charges.

The first will come into effect 30 days after the due date of the tax bill and is a set percentage of the amount owed.

After 31 days, a second charge kicks in. This is also based on the amount owed but is accrued daily.

Other Making Tax Digital penalties

The rules around MTD for VAT include several other penalties.

These include a £400 penalty if you fail to use a HMRC compatible software, and between £5 and £15 a day for failing to keep your records digitally or not transferring data between different software programs using digital links.

These penalties don’t apply to MTD for income tax – or at least not yet.

HMRC has confirmed that those using MTD for the first time in April 2026 will be exempt from penalties as the system is still in transition.

Tax self assessment is still important

The advent of Making Tax Digital doesn’t spell the end of tax self assessments.

For the time being, HMRC is deciding who needs to use MTD for income tax based on their most recent tax self assessment.

That means if you’ve just started your business, you’ll need to file your first tax self assessment before HMRC tells you whether MTD is mandatory for you.

And even when you switch to MTD, you’ll still need to submit one final tax self assessment.

My thoughts on Making Tax Digital

As a freelancer who operates as a sole trader, Making Tax Digital will mean a lot more admin for me.

There’s the initial admin of finding the right software, setting it up and learning how it all works.

The quarterly submissions plus a final tax return mean I’ll have to carve out extra time four or five times a year to prepare my accounts instead of just doing it all in one go.

And then there’s the extra time required to fill out detailed expenses forms for the software.

Over the course of the year, that potentially means an entire working week spent doing my taxes.

Extra admin is one reason why running a limited company is more of a burden than being self employed.

But after MTD, going down the limited company route may well be preferable to MTD.

Read this: Self employed or limited company: Which is best for you?

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