Making Tax Digital 2026: What UK Small Businesses Need to Know

What is Making Tax Digital?

Making Tax Digital (MTD) is HMRC's long-running programme to move the UK tax system online. The idea is straightforward: instead of filing a single annual tax return, businesses and individuals keep digital records and submit summaries of their income and expenses to HMRC throughout the year using HMRC-recognised software.

MTD for VAT has been mandatory for most VAT-registered businesses since 2019 and 2022. The next phase — MTD for Income Tax Self Assessment (MTD ITSA) — went live on 6 April 2026 and represents the biggest change to how sole traders and landlords report their income in decades.

Who is Affected and When?

MTD ITSA is being rolled out in phases based on income thresholds. Here is the current timetable:

Qualifying gross income means the total income from self-employment and property before any expenses are deducted. If you run a business and also rent out a property, both figures are combined to determine your threshold.

What Do You Need to Do?

MTD ITSA replaces the traditional annual Self Assessment return with a new three-part process. Here is what is now required:

1. Keep Digital Records

You must keep digital records of all your business income and expenses. This means recording transactions in HMRC-compatible software — spreadsheets on their own are no longer sufficient unless they are connected to compliant bridging software. Records must be kept for at least five years after the relevant tax year.

2. Submit Quarterly Updates

Every quarter, you must submit a summary of your income and expenses to HMRC through your software. The four quarterly deadlines each year are:

• 5 August (covering 6 April – 5 July)
• 5 November (covering 6 July – 5 October)
• 5 February (covering 6 October – 5 January)
• 5 May (covering 6 January – 5 April)

These are summaries, not full accounts — you are telling HMRC broadly how much you earned and spent in that period. The detailed reconciliation happens at year end.

3. Submit a Final Declaration

At the end of the tax year, you submit a Final Declaration (which replaces the old Self Assessment return). This is where you confirm your figures, add any other income sources (such as dividends or savings interest), and claim any reliefs. The deadline for the Final Declaration is 31 January following the end of the tax year — the same date as the old Self Assessment filing deadline.

What Software Do You Need?

You must use HMRC-recognised software that can connect directly to HMRC's systems and submit your quarterly updates and Final Declaration. HMRC publishes a list of approved software on their website, which includes commercial products across a wide price range.

The software must be able to:

• Record business income and expenses digitally
• Submit quarterly updates directly to HMRC
• Submit the Final Declaration at year end
• Maintain a digital link between your records and your submissions

Importantly, HMRC requires a digital link between each piece of software used in your process. You cannot, for example, download a report from one system and manually type it into another — the data must flow digitally from start to finish.

How Luca Handles MTD Automatically

For businesses already using Luca AI accounting, MTD compliance is built in rather than bolted on. Here is how Luca handles each requirement:

Digital record keeping

Luca uses a full double-entry general ledger running on PostgreSQL 16. Every transaction — whether posted manually, via bank import, or from the document inbox — is recorded digitally with a full audit trail. The Merkle Chain cryptographic linking means every journal entry is provably unmodified, which satisfies HMRC's digital record requirements and then some.

Bank reconciliation

Rather than manually matching bank transactions to invoices and expenses at quarter end, Luca reconciles your bank account continuously. You import your bank statement and Luca matches transactions automatically, flagging anything it cannot confidently match for your review. By the time a quarterly deadline approaches, your books are already up to date.

VAT and MTD for VAT

If you are VAT-registered, Luca's VAT module calculates your VAT position automatically from the posted transactions and prepares the return. The MTD for VAT submission connects directly to HMRC — no manual entry, no bridging software required.

Quarterly updates and Final Declaration

Luca's MTD ITSA module prepares your quarterly summaries from the live ledger data and submits them directly to HMRC via the Making Tax Digital API. At year end, the Final Declaration is compiled from the same data, with a review step before submission so you can check everything is correct.

What Happens if You Miss a Deadline?

HMRC is introducing a points-based penalty system for MTD ITSA, similar to driving licence penalty points. Each missed quarterly submission earns one penalty point. Once you accumulate enough points to reach your threshold (four points for quarterly filers), you receive a £200 financial penalty. Points expire after 24 months if you maintain a clean compliance record.

As noted above, HMRC has granted a soft landing for the 2026/27 tax year — no penalty points will be issued for late quarterly submissions during the first four quarters. This is designed to give businesses time to adapt their processes. However, this does not mean you can skip compliance entirely: you still need to be registered and using compliant software.

Steps to Take Right Now

If you are affected by the April 2026 threshold and have not yet taken action, here is what to do:

1. Check your income. Add up your self-employment income and rental income for the 2024/25 tax year. If the combined figure exceeded £50,000, you are in scope now.
2. Sign up for MTD ITSA. You must sign up with HMRC before you can submit under MTD. Your tax agent or accountant can do this on your behalf, or you can sign up via your HMRC online services account.
3. Choose compliant software. Select and set up your HMRC-recognised software. Allow time to migrate your records if you are switching from a spreadsheet or a different system.
4. Set up digital record keeping. Start recording all income and expenses digitally in your chosen software from the beginning of the 2026/27 tax year (6 April 2026).
5. Submit your first quarterly update by 5 August 2026 (covering 6 April to 5 July 2026).

Frequently Asked Questions

Summary

Making Tax Digital for Income Tax is live from April 2026 for sole traders and landlords earning over £50,000. The core requirement is straightforward: keep digital records, submit quarterly summaries to HMRC, and file a Final Declaration at year end — all through HMRC-recognised software. The soft landing for 2026/27 means penalties are not yet being issued for late quarterly submissions, but registration and compliant software are required from day one.

The businesses that will find this least disruptive are those using software that handles the submissions automatically in the background, so there is no last-minute scramble before each quarterly deadline. That is exactly what Luca is designed to do.