Making Tax Digital for Income Tax 2026: Complete Guide

From April 2026, Making Tax Digital for Income Tax requires self-employed sole traders and landlords with qualifying income over £50,000 to maintain digital records of every individual transaction. Each record must capture the date, amount, and category. Paper receipts stuffed in a shoebox and end-of-year spreadsheet summaries will no longer meet HMRC's requirements. Instead, all records must be stored in MTD-compatible software that can communicate directly with HMRC's systems.

The scale of this shift is significant. HMRC estimates more than 860,000 sole traders and landlords must adopt digital tax reporting from 6 April 2026, with over 20,000 quarterly updates already successfully submitted through a voluntary testing programme. Making Tax Digital Income Tax 2026 is not a distant policy proposal; it is an operational change with a fixed start date.

Most existing guides on MTD ITSA requirements explain the rules clearly enough, but they skip the practical question that matters most: you have a stack of supplier invoices, expense receipts, and bank statements sitting on your desk or scattered across email inboxes. How do you actually turn those into compliant digital records? This guide covers the full transition for self-employed individuals and landlords facing MTD for Income Tax, including:

What records you must keep and the specific data points HMRC expects for each transaction
The practical workflow for converting paper invoices and receipts into digital format
Quarterly reporting deadlines and exactly what you submit in each update
Special rules for landlords who also have self-employment income
The bridging software path if you prefer to keep using spreadsheets
The penalty regime and the first-year soft landing that gives you breathing room while you adjust

This is a practical, step-by-step guide built around what you actually need to do, not just what the legislation says. The starting point is understanding exactly what records MTD ITSA requires you to keep and who falls within scope.

Who Must Comply and What Records You Need to Keep

From April 2026, Making Tax Digital for Income Tax Self Assessment applies to self-employed sole traders and landlords with qualifying income over £50,000. Qualifying income means gross income before expenses or allowances are deducted, not your taxable profit. If your total self-employment and property income crosses that threshold, you are in scope regardless of how much profit you actually make.

HMRC is rolling out MTD ITSA in phases based on income thresholds. Here is the confirmed timeline:

Phase	Start Date	Qualifying Income Threshold
Phase 1	April 2026	Over £50,000
Phase 2	April 2027	Over £30,000
Phase 3	April 2028	Over £20,000

An estimated 864,000 sole traders and landlords fall into the first cohort. If you have multiple income sources (for example, freelance work and rental income), your combined gross income determines which phase applies to you.

MTD ITSA applies specifically to sole traders and landlords filing through Self Assessment. Limited companies, partnerships, and anyone whose qualifying income falls below the threshold are not in scope. Partnerships will be subject to separate MTD rules at a later date.

What Digital Records You Must Keep

The record-keeping requirements under MTD ITSA go well beyond what most people currently do for self-assessment. You must maintain a digital record of every individual transaction, capturing three core data points for each:

Date of the transaction
Amount received or paid
Category (the nature of the income or expense)

This applies to all income and all expenses. The critical difference from current self-assessment is that summary entries are not acceptable. You cannot group a month's worth of office supply purchases into a single line or record weekly totals instead of individual transactions. Each purchase, each payment, and each receipt of income must exist as its own record in your digital system.

Paper Records and Spreadsheets Are Not Enough

HMRC has been explicit: paper receipts, handwritten ledgers, and manual spreadsheets do not qualify as digital records under MTD ITSA. Your records must be stored in MTD-compatible software that can communicate with HMRC's systems. A shoebox of receipts or a notebook of figures, even if meticulously maintained, will not meet the legal requirement.

That said, digital records under MTD are in addition to your normal record-keeping obligations. You must still retain your original invoices, bank statements, and other source documents — and for specific guidance on how long HMRC requires you to keep those records, the retention periods vary depending on your business structure and tax obligations. The digital record in your software does not replace the underlying evidence; it supplements it. Businesses that also handle VAT should review UK VAT invoice compliance requirements separately, as those obligations run alongside MTD ITSA with their own specific data fields.

The individual transaction requirement is where MTD ITSA creates real operational pressure. Every supplier invoice you receive and every expense receipt you collect needs its data extracted and entered into a compliant digital format, which raises an immediate question: what does that process actually look like?

How to Turn Paper Invoices and Receipts into Compliant Digital Records

This is where MTD for Income Tax gets practical. You have supplier invoices arriving as email PDFs, paper invoices from trade suppliers, expense receipts crumpled in a van glovebox, and phone photos of fuel station receipts. Each of these documents contains transaction data that HMRC expects you to record digitally: the date, the amount, the category of expense, and the supplier. Under MTD ITSA digital record keeping, every one of these documents must become an individual digital transaction record in your accounting software or spreadsheet.

The document-to-digital workflow breaks down into three steps.

Step 1: Gather and Digitize All Paper Documents

Start by collecting every paper invoice, receipt, and expense record from the quarter. Scan paper documents using a desktop scanner or photograph them with your phone camera. The goal is to get every document into a digital file format (PDF, JPG, or PNG) stored in a single folder on your computer or in cloud storage. For documents that already arrive digitally, such as emailed PDF invoices from suppliers, save them directly to the same folder. This single collection point prevents documents from being missed during extraction.

Step 2: Extract the Required Data Fields

Each digitized document now needs its data pulled out into a structured format: date, amount, expense category, and supplier name at minimum. This is the step where most self-employed professionals lose the most time. If you are a freelancer or tradesperson processing 40 to 80 supplier invoices and expense receipts per quarter, manually typing each field into a spreadsheet or accounting package takes hours of concentrated work per quarterly submission. Multiply that across four quarterly updates and an end-of-period statement, and you are looking at a significant annual time cost before you even consider the risk of data entry errors.

Understanding how invoice data capture works is key to finding a faster path. AI-powered data extraction tools can process batches of invoices and receipts in minutes rather than hours. A tool like Invoice Data Extraction lets you upload an entire quarter's worth of mixed-format files, whether PDFs, scanned documents, or phone photos, in a single batch of up to 6,000 files. You then prompt the AI with natural language instructions such as "Extract date, amount, category, supplier from these expense receipts" and receive a structured Excel or CSV file with every transaction on its own row. Processing runs at 1 to 8 seconds per page, which means a typical quarter of 50 to 100 documents finishes in minutes rather than an afternoon of manual entry. You can save your MTD extraction template in the prompt library and reapply the same instructions each quarter without rewriting them.

For those dealing specifically with paper receipts, the process of scanning receipts into Excel spreadsheets follows the same principle: photograph or scan, then extract invoice and receipt data into structured spreadsheets using a repeatable extraction workflow.

Step 3: Import Structured Data into Your MTD-Compatible Software

The extracted data in Excel or CSV format feeds directly into your MTD-compatible accounting software, whether that is Xero, QuickBooks, FreeAgent, or another HMRC-recognised package. If you prefer working in spreadsheets, the same structured file can connect to HMRC through bridging software, which submits your spreadsheet data via HMRC's API. Either route satisfies the Making Tax Digital requirement for digital record keeping, provided you maintain a digital link from source data through to submission without manual re-keying.

Because the quarterly reporting cycle means this extraction workflow runs four times per year, plus once more for the end-of-period statement, it is worth investing the time now to establish a repeatable process. A consistent workflow of gather, extract, and import, using the same folder structure, the same extraction template, and the same software path each quarter, turns an MTD for Income Tax self employed compliance obligation from a recurring headache into a predictable routine that takes a fraction of the time.

Quarterly Reporting Deadlines and What You Submit

Under MTD for Income Tax, you must send HMRC a quarterly update summarizing your business income and expenses for each three-month period. These are new obligations on top of your existing Self Assessment requirements. For the 2026/27 tax year, the deadlines are:

Quarter	Period Covered	Submission Deadline
Q1	6 April to 5 July 2026	7 August 2026
Q2	6 July to 5 October 2026	7 November 2026
Q3	6 October 2026 to 5 January 2027	7 February 2027
Q4	6 January to 5 April 2027	7 May 2027

Each quarterly update is a summary of the income you received and the expenses you incurred during that period, submitted to HMRC through MTD-compatible software via API. You are not sending individual invoices or receipts. Your software transmits categorized totals derived from your underlying digital records.

Quarterly updates do not replace your annual Self Assessment return. They are an additional reporting layer. After all four quarterly updates, you must also file an end-of-period statement and a final declaration by 31 January 2028. The end-of-period statement is where you make accounting adjustments, such as claiming capital allowances, applying overlap relief, or correcting estimates from earlier quarters. The final declaration then confirms your total income, claims any remaining reliefs, and finalizes your tax position for the year, replacing the current Self Assessment return. The four quarterly updates throughout the year are entirely new.

What this means for your workflow: your invoice and receipt data must be extracted, digitized, and categorized before each quarterly deadline. You either maintain your records continuously throughout the quarter, processing documents as they arrive, or you batch-process everything ahead of each deadline. Whichever approach you choose, the days of gathering a year's worth of paperwork into a single annual filing are over. MTD ITSA demands that your records stay current on a rolling three-month cycle.

If you miss these quarterly deadlines, penalties apply. However, HMRC has confirmed a first-year soft landing period with reduced enforcement, which the next sections cover in detail.

Special Rules for Self-Employed Landlords

If you are both self-employed and a landlord, MTD for Income Tax introduces a requirement that most guides overlook: you must maintain two entirely separate sets of digital records. One covers your self-employment business. The other covers your property income. HMRC treats these as distinct income sources, and your record-keeping must reflect that distinction.

In practice, this means you cannot track everything in a single combined spreadsheet or one accounting file that lumps both income streams together. Your self-employment invoices, business expenses, and mileage records need their own digital trail. Your rental agreements, tenant payment records, property maintenance receipts, and letting agent statements need a completely separate one. Each set must independently satisfy the digital record-keeping requirements outlined earlier in this guide.

How the qualifying income threshold applies is another area that catches people off guard. Your qualifying income for MTD ITSA is the combined total of all your self-employment and property income. If your self-employment income is £35,000 and your rental income is £25,000, your combined qualifying income is £60,000, which puts you in the April 2026 cohort even though neither source alone exceeds £50,000. As the threshold drops to £30,000 in April 2027 and £20,000 in April 2028, more dual-income earners will be drawn into scope.

The burden is real. Two separate income sources means:

Two sets of invoices and receipts to capture, categorize, and store digitally
Two quarterly updates to submit to HMRC each period
Two end-of-period statements to prepare and file
Double the document processing workload throughout the tax year

For landlords who also run a trade or freelance business, this volume of paperwork makes batch processing of invoices and receipts far more relevant than it would be for someone with a single income source. Processing a quarter's worth of property receipts alongside a quarter's worth of business invoices is a significant administrative task, particularly if those documents arrive as paper originals or scanned images that need converting into structured digital records.

Maintaining two separate digital records does not necessarily mean purchasing two separate accounting software subscriptions. HMRC explicitly supports an alternative path for those who prefer spreadsheets or lighter-weight tools.

MTD-Compatible Software and the Bridging Software Path

HMRC does not mandate a single piece of software for Making Tax Digital for Income Tax. Instead, it requires that your records are kept in MTD-compatible software capable of communicating with HMRC's systems. This gives you three distinct paths to compliance.

Full accounting suites such as Xero, FreeAgent, and QuickBooks offer end-to-end MTD ITSA support. They handle record keeping, categorization, and quarterly submissions within a single platform. For businesses with complex finances or those already using cloud accounting, this is the most integrated option.

API-enabled spreadsheets are purpose-built spreadsheet templates that connect directly to HMRC's API. These are less common but exist as a middle ground for users who want spreadsheet-style interaction without separate submission software.

Bridging software is the third path, and it is the one most relevant to self-employed professionals who already track income and expenses in Excel or Google Sheets. Bridging software sits between your spreadsheet and HMRC's API. You continue maintaining your records exactly as you do now, and the bridging software reads your spreadsheet data and transmits your quarterly updates to HMRC on your behalf. Your workflow stays familiar; the bridging tool handles the technical submission.

How the Spreadsheet-Plus-Bridging Workflow Operates

For freelancers, tradespeople, and small landlords who find full accounting suites excessive for their scale of operations, the workflow looks like this:

Extract data from invoices and receipts into a structured Excel or CSV format, recording each transaction individually with dates, amounts, categories, and descriptions.
Maintain your records in that spreadsheet throughout the quarter, keeping income and expense entries up to date as transactions occur.
Use bridging software to submit your quarterly update to HMRC, pulling directly from the spreadsheet without manual re-entry.

This approach works well because it preserves the flexibility of spreadsheets while meeting HMRC's digital submission requirement. If you are already automating your bookkeeping workflow, structured data extracted from invoices and receipts feeds directly into these spreadsheet records with minimal additional effort.

Whichever of the three paths you choose, the software determines how your structured data reaches HMRC, not what data you need to capture. Whether you use a full accounting suite or submit via bridging software from a spreadsheet, the underlying MTD ITSA digital record keeping standard is identical: individual transaction records with date, amount, category, and supplier broken out into discrete fields.

MTD ITSA Penalties and the First-Year Soft Landing

HMRC is replacing the old penalty regime with a new points-based system for Making Tax Digital for Income Tax. Understanding how MTD ITSA penalties work, and where the first-year concessions apply, lets you plan around the real consequences of missed deadlines.

Points-Based Penalties for Late Quarterly Updates

Each time you submit a quarterly update after its deadline, you receive one penalty point. These points accumulate across your quarterly submissions. Once you hit the penalty point threshold, you receive a £200 fine. Every further late submission after that threshold also triggers an additional £200 fine.

The threshold for quarterly obligations is four points, meaning you would need to miss four quarterly deadlines before the first financial penalty kicks in. Points do not expire automatically. To reset your total back to zero, you must meet all submission deadlines for a set compliance period and ensure all outstanding returns are up to date.

Late Payment Penalties

Separate from submission penalties, HMRC charges penalties when tax payments are overdue. Interest begins accruing from the payment due date itself, regardless of whether you have submitted your return.

The escalation works as follows:

15 days overdue: A first late payment penalty is charged at 2% of the tax outstanding at day 15
30 days overdue: An additional 2% penalty is charged on the tax still outstanding at day 30
Beyond 30 days: A further penalty accrues at 4% per year on the remaining balance, calculated daily until payment is made

These percentages apply to the amount unpaid at each milestone, so partial payments reduce the penalty base.

The 2026/27 First-Year Soft Landing

HMRC has confirmed a soft landing for the first year of MTD ITSA (the 2026/27 tax year) to give taxpayers time to adjust to quarterly digital reporting.

For late quarterly updates: No penalty points will be issued during the 2026/27 tax year. You are still required to submit quarterly updates, but missing a deadline in this first year will not add points to your record or trigger the £200 fines.

For late payments: You receive an extra 15 days of grace before the first late payment penalty applies. Instead of the penalty starting at 15 days overdue, it starts at 30 days overdue during the first year. This effectively doubles your window to settle any outstanding amount before financial consequences begin.

The Final Declaration Is Not Covered

One critical detail: the soft landing does not extend to your end-of-year final declaration. The final declaration for the 2026/27 tax year is due by 31 January 2028, and standard penalties apply from day one if you miss that date. There is no grace period, no suspended penalty points, and no extended payment window for this annual return. HMRC treats the final declaration under the existing rules even while quarterly updates benefit from the soft landing.

Why This Matters for Your Preparation

The soft landing exists specifically to give you room to build new habits around quarterly digital record-keeping without immediate financial risk. The 2026/27 tax year is your lowest-stakes window to establish a reliable workflow for capturing invoices, categorizing expenses, and submitting updates on time. Getting your digital processes right during this protected period means you enter the 2027/28 tax year, when full penalties apply, with a tested and functional system already in place.

Preparing for April 2026: Your Practical Next Steps

The April 2026 deadline for Making Tax Digital Income Tax is close, and preparation now determines whether your first year of compliance runs smoothly or becomes a quarterly scramble. The first-year soft landing gives you breathing room with reduced penalty risk, but HMRC still expects you to keep digital records from day one of the 2026/27 tax year. Waiting until after April to figure out your system is not a viable strategy.

Here is your preparation checklist:

Confirm you are in the April 2026 cohort. Check whether your qualifying income exceeds £50,000. This includes gross self-employment income, property income, or a combination of both. If you are above the threshold, MTD ITSA requirements apply to you from 6 April 2026.
Choose your MTD-compatible software path. Decide between a full cloud accounting suite that handles record keeping and submission in one platform, or your existing spreadsheets paired with bridging software that transmits data to HMRC. Your choice depends on your current workflow, budget, and how much of your bookkeeping you want to automate.
Establish your document processing workflow. This is the step most guidance overlooks. How will you extract data from supplier invoices, PDF bills, and expense receipts into your digital records? If you handle dozens of documents each month, manually retyping figures into software is both slow and error-prone. Consider batch processing tools that can pull structured data from paper and digital documents automatically, reducing the per-document effort to seconds rather than minutes.
Set up separate digital record sets if you are both self-employed and a landlord. HMRC requires distinct records for each income source. Your self-employment income and your property income each need their own categorized transaction history, and each generates its own quarterly update.
Mark your first quarterly deadline. Quarter 1 of the 2026/27 tax year covers 6 April to 5 July 2026, with the quarterly update due to HMRC by 7 August 2026. Add this date to your calendar now so it does not arrive as a surprise during summer.
Use the soft landing wisely, not as a crutch. The 2026/27 tax year carries no penalty points for late quarterly updates, giving you a genuine window to refine your process. But treat this as a testing phase for a system you intend to run permanently, not as permission to delay getting organized.

The transition to Making Tax Digital for Income Tax self-employed individuals and landlords is not purely a software decision. For anyone who handles paper invoices, scanned PDFs, and physical expense receipts, the critical gap is converting those documents into structured digital data that your chosen software can actually use. Getting this document-to-data workflow right from the start is what determines whether quarterly reporting takes you fifteen minutes or an entire afternoon.

If you are an accountant or bookkeeper managing MTD compliance for multiple clients, the document processing challenge multiplies. Establishing a consistent extraction workflow across your client base, using the same templates, folder structures, and processing tools for each, reduces the per-client overhead and makes quarterly submissions predictable rather than chaotic.

Looking ahead, the system you build now will serve you well beyond 2026. The qualifying income threshold drops to £30,000 in April 2027 and £20,000 in April 2028, bringing hundreds of thousands more sole traders and landlords into scope. The workflows and software choices you establish this year become the foundation for an expanding compliance obligation.