What Is Changing as a Result of MTD for Income Tax?

Key Changes Introduced by MTD for Income Tax in 2025

What is changing as a result of MTD for income tax? HMRC is introducing four major changes: compulsory digital record keeping, quarterly updates, a final end-of-year tax return, and the mandatory use of MTD-compatible software. Together, these changes aim to modernise the tax system, reduce errors, and give taxpayers a clearer picture of their finances throughout the year.

Introduction

Getting Started with MTD for Income Tax

Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) is one of the most significant shifts the UK tax system has seen in decades. HMRC’s goal is simple: to make tax administration more accurate, more efficient, and easier for both businesses and individuals. But what is changing as a result of MTD for income tax in practice? For most taxpayers—sole traders and landlords in particular—the impact will be noticeable and requires early preparation.

Below, we break down the four key changes you need to understand before MTD for Income Tax becomes mandatory

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1. Digital Record Keeping

Digital Record Keeping for MTD for Income Tax

Under MTD for income tax, taxpayers must keep digital records of all business income and expenses. This means no more paper ledgers, handwritten notes, or spreadsheets that are manually adjusted throughout the year. HMRC requires all relevant financial information to be stored and maintained in a digital format using MTD-compatible software.

The purpose behind digital record keeping is to reduce common errors such as transposition mistakes, incorrect categorisation, or missing entries. By recording transactions in real time, business owners and landlords benefit from up-to-date financial data, improved accuracy, and a more streamlined accounting process. Digital record keeping also supports better decision-making, as taxpayers have clearer visibility over profitability and tax liabilities throughout the year.

2. Quarterly Updates

MTD Reporting: How to Submit Quarterly Updates

Key MTD Change: Submitting Quarterly Updates to HMRC

One of the biggest changes introduced by MTD for income tax is the requirement to submit quarterly updates to HMRC. These updates provide HMRC with a snapshot of your business income and expenses every three months, replacing the old system of waiting until year-end to declare all taxable income.

Each quarterly update must be submitted via MTD-approved software. The update itself is not a full tax return—it simply summarises the period’s income and expenditure. HMRC will use this information to provide an estimated tax calculation, helping taxpayers plan their cashflow more effectively and avoid unexpected tax bills.

While quarterly reporting may feel like an increased administrative burden, the process is designed to be simple and largely automated through modern bookkeeping software. For many businesses, it actually leads to better financial discipline and fewer end-of-year surprises.

3. End-of-Year Tax Return (Final Declaration)

End-of-Year Tax Return: Final Declaration Under MTD

Although quarterly updates are a major change, they do not replace the need for a final annual submission. Under MTD for income tax, the traditional Self Assessment tax return is replaced by a Final Declaration.

This end-of-year submission brings all financial information together and confirms that the quarterly figures are correct. It also accounts for adjustments such as:

Capital allowances
Reliefs and allowances
Actual vs estimated figures
Private use adjustments
Any additional income not included in quarterly updates

The Final Declaration ensures everything is accurate and complete before HMRC calculates the final tax due. This step is essential because quarterly updates are based on real-time figures, which may need refinement once year-end adjustments are made.

4. Use of MTD-Compatible Software

Using MTD-Compatible Software for Income Tax Compliance

The final major change is the mandatory use of HMRC-approved, MTD-compatible software. Taxpayers can no longer file income tax returns manually through HMRC’s website or use basic spreadsheets alone. Instead, submissions must be made through software that links directly to HMRC’s systems.

MTD-compatible software allows users to:

Record digital transactions
Categorise income and expenses
Submit quarterly updates
Prepare the Final Declaration
Maintain year-round visibility over tax liabilities

Popular options include Xero, QuickBooks, Sage, and other HMRC-recognised solutions. Using compliant software ensures your records stay accurate, your submissions meet MTD requirements, and your financial information remains securely stored.

For many taxpayers, this will be the most noticeable change—but ultimately the most beneficial, as modern software reduces admin, increases accuracy, and helps prevent costly tax mistakes.

Final Thoughts: Preparing Now Is Essential

MTD for Income Tax: Key Takeaways and Next Steps

Understanding what is changing as a result of MTD for income tax is crucial for all sole traders and landlords, particularly those nearing the MTD thresholds. The shift to digital record keeping, quarterly submissions, a final annual declaration, and mandatory accounting software represents a major transformation in how taxpayers manage and report their finances.

Starting early is the best way to ensure a smooth transition—especially if your current bookkeeping is manual, inconsistent, or reliant on spreadsheets.

Get in touch with Naail & Co to book your free initial consultation. Our experienced tax advisors can help you understand your obligations, choose the right software, and prepare your business for full MTD compliance with confidence.

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FAQs on What Is Changing as a Result of MTD for Income Tax?

Sole traders will need to keep digital records, submit quarterly updates through MTD-compatible software, and complete a final declaration instead of the traditional Self Assessment return.

Landlords with gross rental income above the MTD threshold must maintain digital records of rental transactions, file quarterly updates, and use approved software for all submissions to HMRC.

When looking at what is changing as a result of MTD for income tax, HMRC’s aim is to reduce errors, improve accuracy, and provide taxpayers with more up-to-date information on their tax liabilities.

Paper bookkeeping and spreadsheets will no longer be sufficient. Digital record keeping becomes mandatory, and all transactions must be stored in MTD-compliant software.

Yes. One of the biggest elements of what is changing as a result of MTD for income tax is the requirement for taxpayers to send HMRC a summary of income and expenses every quarter.

No. Part of what is changing as a result of MTD for income tax is replacing the annual Self Assessment with a new Final Declaration that confirms the year’s figures after all adjustments.

You must use HMRC-recognised MTD-compatible software such as Xero, QuickBooks, Sage, or similar tools that can digitally record transactions and submit updates directly to HMRC.

Taxpayers will receive in-year estimated tax calculations from HMRC after each quarterly update, helping them plan and manage cashflow more accurately.

No, payment deadlines remain the same. What is changing as a result of MTD for income tax is how frequently you report your information—not when you pay HMRC.

Anyone with qualifying self-employment or property income above the MTD thresholds must follow the new rules once MTD becomes mandatory.

Spreadsheets alone will no longer meet HMRC requirements. You can only continue using them if they are bridged with MTD-enabled software that digitally links to HMRC.

Start transitioning to digital bookkeeping now, choose MTD-approved software, and seek professional guidance to ensure your systems are compliant before the rules take effect.