Making Tax Digital (MTD) is a significant change to how HMRC collects tax information from sole traders and landlords. This FAQ explains what it means, who it applies to, and what you need to do — in clear, plain English.
Contents
Turnover vs profit – the most common confusion
3. Is Making Tax Digital based on profit or turnover?
4. What counts as turnover for Making Tax Digital?
5. What if one income source is below the threshold but combined they are over?
What actually changes under MTD
6. Will I have to pay tax quarterly?
7. What are quarterly updates (and what are they not)?
Software and records
8. Do I need special software for Making Tax Digital?
9. Do I need to keep digital receipts?
10. What software can be used for Making Tax Digital?
Support and next steps
11. What happens if I make a mistake under Making Tax Digital?
12. What should I do if I’m unsure whether Making Tax Digital applies to me?
1.What is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax is a system that requires self-employed individuals and landlords to keep digital accounting records and submit updates to HMRC using compatible software.
Instead of reporting everything once a year through a Self Assessment tax return, information is reported quarterly, with a final declaration submitted after the end of the tax year.
2.Who does Making Tax Digital apply to?
Making Tax Digital currently applies to sole traders and landlords whose income meets HMRC’s qualifying income rules.
It does not currently apply to:
- Limited companies
- Partnerships
- Individuals with PAYE income only
If you operate solely through a limited company, Making Tax Digital for Income Tax does not apply to you at this stage.
3.Is Making Tax Digital based on profit or turnover?
Making Tax Digital is based on turnover, not profit.
This means HMRC looks at your income before expenses are deducted, not the profit you make after costs. This is one of the most common reasons people are unsure whether MTD applies to them.
4.What counts as turnover for Making Tax Digital?
Turnover for Making Tax Digital includes your combined income from:
- Self-employment (sole trader income)
- Property rental income
These income sources are added together when HMRC decides whether Making Tax Digital applies.
5.What if one income source is below the threshold but combined they are over?
If one income source is below the threshold but your combined turnover reaches or exceeds the threshold, Making Tax Digital applies.
For example, even if:
- Your self-employment income is below the threshold, and
- Your rental income is below the threshold
Once the two are added together and the combined figure reaches the threshold, you are required to comply with Making Tax Digital.
6.Will I have to pay tax quarterly?
No.
Making Tax Digital changes how often information is reported, not when tax is paid. Tax payment dates remain the same as under the current Self Assessment system.
Quarterly updates are not tax bills.
7.What are quarterly updates (and what are they not)?
Quarterly updates are summary reports of income and expenses submitted to HMRC using compatible software.
They:
- Are not full tax returns
- Do not finalise your tax bill
- Can be corrected in later submissions
Their purpose is to keep records up to date throughout the year.
8.Do I need special software for Making Tax Digital?
No — not special software, but it does need to be compatible.
Making Tax Digital is about how information is communicated to HMRC, not about using complex or expensive systems. Most accountants already have MTD-compatible software in place.
9.Do I need to keep digital receipts?
No.
Making Tax Digital is not about keeping digital receipts. It is about keeping digital accounting records and submitting information to HMRC through compatible software. You or your accountant manages how this information is processed and reported.
10.What software can be used for Making Tax Digital?
There are several MTD-compatible software options available.
For many sole traders and landlords, the Mettle and FreeAgent combination is completely free and suitable for most straightforward setups. Other software such as Xero or Sage may be more appropriate depending on how your business operates.
The important thing is choosing software that suits your business and how you work.
11.What happens if I make a mistake under Making Tax Digital?
Making Tax Digital uses a points-based penalty system rather than immediate fines for minor issues.
Quarterly updates can be corrected in later submissions, and penalties are designed to apply only where deadlines are repeatedly missed.
12.What should I do if I’m unsure whether Making Tax Digital applies to me?
If you’re unsure whether Making Tax Digital applies to your situation, it’s worth checking sooner rather than later. Understanding where you stand gives you time to prepare calmly and avoid last-minute pressure.
Talk it through with an MTD specialist
📞 0115 932 9888
👉 www.accountantsilkeston.co.uk/mtd
All information correct at time of publishing Feb 2026
