MTD for Income Tax: 7 strange yet true facts you need to know

1. You can’t sign-up for MTD if you’re new to operating a business

If you’re just starting out as a sole trader or landlord, you can’t sign-up to MTD immediately. This is true even if you’re sure your gross income will be above the threshold. In other words, you won’t face any penalties, so don’t worry.

Instead, you must sign-up to and use Self Assessment in the standard way – applying for a unique tax payer (UTR) reference, then submitting a Self Assessment tax return by 31 January following the end of the tax year the previous April (or a paper-based return by the end of October).

However, if it’s clear following your first Self Assessment tax return that your income exceeds the MTD qualifying income threshold, then HMRC will write to you telling you to start using MTD from the next tax year onwards.

This effectively means that those new to being a sole trader or landlord will always complete at least two years of Self Assessment before moving to MTD for Income Tax.

(There is a caveat: It is possible to sign-up to MTD for Income Tax voluntarily after you sign-up to Self Assessment. In that case, you’ll be scheduled to start using MTD for Income Tax as of the following tax year, meaning you’ll still have to complete one year of Self Assessment.)

Even though you must use Self Assessment before switching to MTD, there remains an excellent opportunity to embrace modern accounting technology and digitalise your accounting. MTD-ready accounting software like Sage Accounting is also fully compatible with Self Assessment.

If you develop the right processes for income and expenses using accounting software, then switching to MTD when required will be almost seamless.

2. Your accountant can do nearly all of MTD for you

Although the goal of Making Tax Digital is to introduce digitalisation to your accounting, you can still ask your bookkeeper or accountant to do most of the work.

You just need to ensure they have all the accounting data they need ahead of the quarterly deadlines, so they can digitalise it in time. In other words, while you may currently contact them only once a year around January, with MTD you’ll now need to make this same contact every three months, and also in January for that digital tax return.

The contact every three months could be simply supplying the bank statements of your business accounts, although you should speak to your bookkeeper or accountant to see how they want to handle it.

The bookkeeper or accountant can create and submit your quarterly updates for you. They can create your digital tax return, too, although you’ll still need to review and digitally sign it. The accountant or bookkeeper can do this via email, just as they do already with Self Assessment.

They can even register you for MTD for Income Tax.

None of this is to say the above is a good way of working. You’ll be blind to your business finances, and cash flow, for most of the time. And leaving digitalisation of the data to the last-minute risks penalties from HMRC. It’s a perfect way to create situations where you accidentally lose that vital data, too.

Why not take the opportunity to modernise your accounting and processes, so you get the benefit of cloud accounting software, like automated reminders, AI assistants, and more? You can still work with your accountant or bookkeeper by connecting your accounting system to theirs.

But it is entirely possible for them to nearly entirely take care of MTD on your behalf. Speak to your bookkeeper or accountant to learn how.

3. It’s potentially illegal to copy and paste accounting data

This really might seem a strange one but it’s true: You’re not allowed to manually cut/copy the key income and expenditure accounting data for MTD. No Ctrl+C. No Ctrl+V.

For example, if you keep track of this data in a spreadsheet then it’s illegal to copy and paste it into your accounting software. If HMRC catches you doing so, you could be penalised.

Similarly, you can’t write it down and then key it in manually.

This is because of the digital record and digital linking rules, that try to ensure the accounting data is not only digital but that it’s transferred in an automated way that’s fundamental to digital accounting.

For example, you could configure your spreadsheet to somehow transfer the data automatically into your accounting software. However, this is technically difficult to achieve.

You can copy and paste other accounting data. Just not the records directly relating to your income and expenditure for your business(es) that are required for the quarterly updates or the digital tax return.

This is why it simply makes sense to keep everything within your accounting software. Ensure you get data into it as soon as possible, such that contained in receipts or bills, or generate the data there by doing things like issuing invoices using it.

This way the data is always where you need it. You haven’t got to cut/copy and paste anything, so you’re automatically in compliance with the law.

4. MTD for Income Tax is not linked to MTD for VAT

If you’re already signed up to MTD for VAT, then you’ve gained some useful experience in Making Tax Digital’s requirements. Many are similar in MTD for Income Tax.

However, MTD for VAT is unconnected to MTD for Income Tax. They’re two separate and distinct systems run independently by HMRC.

For example, you’ll still need to sign-up to MTD for Income Tax separately, and activate it in your MTD-ready software – even if you’ve already signed-up to MTD for VAT and switched on that functionality in your accounting app.

You don’t need to use the same software for both MTD for VAT and MTD for Income Tax – although for many sole traders and landlords, this will make sense.

What’s more, although the VAT and Income Tax penalty systems work in an identical way, they’re entirely separate.

If you find yourself with penalty points for missed VAT return submission, that doesn’t affect your tally of points for MTD for Income Tax. And vice versa.

There is one exception to all of the above, which is that those who were digitally excluded from MTD for VAT are also digitally excluded from MTD for Income Tax – provided your situation hasn’t changed. Speak to HMRC to confirm.

5. MTD doesn’t replace Self Assessment for everybody

MTD for Income Tax only potentially applies to sole traders and landlords who currently use Self Assessment.

Nobody else.

However, there are many other reasons outside of running a business that people sign-up to Self Assessment. None of these people need worry about MTD for Income Tax right now.

For example, some people with pension income above the personal allowance need to use Self Assessment to report their income. These people do not need to use MTD for Income Tax.

Similarly, the following types of people who have to use Self Assessment do not need to switch to MTD for Income Tax:

• Those who pay the High Income Child Benefit Charge (if you don’t pay it through payroll).
• You’re a partner in a business unincorporated partnership (although the government has said it’s likely partners will be included at a future date).
• You received over £10,000 from savings, investments, or share dividends.

6. Any sole trader or landlord can sign-up to MTD – even if your income is below the threshold

MTD for Income Tax starts in April 2026 for those whose qualifying income is over £50,000. This threshold then falls to £30,000 as of April 2027, and then £20,000 as of April 2028.

However, if you earn less than this, you can still voluntarily sign-up for MTD for Income Tax provided you’re already a sole trader or landlord using Self Assessment (and provided you meet the other various criteria).

Signing-up voluntarily makes a lot of sense because you’ll gain the benefits of MTD for Income Tax, such as HMRC estimating your tax and National Insurance bill with every quarterly update. This is great for understanding your cash flow and it avoids the guessing game where you set aside around a third of your income for the tax bill.

Note that, if you voluntarily sign-up to MTD, you are committing to stay within MTD for the full tax year. In other words, you can’t join for a few months to see if you like it, for example, before reverting to Self Assessment.

7. You haven’t got to use the same software for everything in MTD for Income Tax

Although it makes sense to use the same cloud accounting software for all aspects of your accounting, this isn’t strictly required under the MTD rules.

You could use a particular app to track your expenses, for example, and another app for your income.

A good example of this is using data entry automation software like AutoEntry to digitise paper receipts and bills, which will magically and compliantly transfer the extracted data to your accounting software.

Similarly, retailers will use electronic point of sale (EPOS) systems to take payments. Some people who travel for work can use car mileage tracking apps.

However, there must be a way to automatically move the relevant income and expenses accounting data records into your main accounting software through which you make the quarterly updates and submit the digital tax return. As mentioned, you can’t manually copy and paste data or write it down and key it in manually because of the digital linking requirements.

In most cases, this is taken care of by the software automatically – but it’s a good idea to check before buying or subscribing to software.

Final thoughts

MTD for Income Tax is transformational for businesses. It’s the chance of a lifetime to update processes and introduce digital accounting, including automation and artificial intelligence.

There’s little to be gained by sitting on the fence. MTD has the very best intentions, for both your business and your admin.