Introduction to Making Tax Digital Record Keeping in 2026

If you are a sole trader or landlord, the way you handle your taxes is changing right now. With the 6 April 2026 deadline fast approaching, Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) is no longer a distant plan—it is an immediate reality.

For many business owners in Sutton Coldfield and across the UK, this shift means moving away from the annual "shoe box of receipts" panic and adopting a continuous digital workflow. The goal is to make tax administration more accurate and efficient, reducing the gap between earning income and reporting it.

MTD for ITSA becomes mandatory from 6 April 2026 for sole traders and landlords with income over £50,000.

What Is Making Tax Digital and Why Digital Records Matter

At its core, Making Tax Digital is about accuracy and modernization. The government wants to remove the errors that inevitably happen when people manually type figures from paper receipts into tax returns months after the fact.

Digital records allow for near real-time record keeping. This doesn't just help HMRC; it gives you a clearer view of your business finances throughout the year rather than waiting for an accountant's report.

"Making Tax Digital (MTD) is a U.K. government initiative designed to modernise the U.K. tax system. It replaces traditional, paper-based processes with digital recordkeeping and reporting, and requires businesses to use MTD-compatible software." - Avalara Blog (avalara.com)

Who Must Comply with MTD Digital Records from April 2026

The rules for who needs to start keeping digital records depend entirely on your qualifying income. This is calculated based on your combined trading and property income from the 2024/25 tax year.

Here is the current rollout schedule:

• £50,000+ income: Mandatory from 6 April 2026.

• £30,000+ income: Mandatory from 6 April 2027.

• £20,000+ income: Planned legislation for 6 April 2028.

If your income for the 2024/25 tax year met the £50,000 threshold, you must comply immediately this April. If you fall below this but exceed £30,000, you have one more year to prepare, but starting early is highly recommended.

Key Requirements for Keeping Digital Records Under MTD for ITSA

Under the new regulations, a "digital record" is specific. It is a record of income and expenses created and stored in MTD-compatible software. You cannot simply keep a spreadsheet and type the totals into HMRC's website manually.

The core requirements include:

• Digital Storage: Records must be stored in functional compatible software.

• Digital Links: If you use more than one piece of software (like a spreadsheet linked to bridging software), data must transfer digitally. Copying and pasting is not permitted.

• Granularity: You must record the date, amount, and category for every transaction.

If you have multiple businesses, you must keep separate digital records for each one.

How Digital Record Keeping Works in Practice

Transitioning to digital records changes your daily or weekly admin routine. Instead of an annual pile-up, you will manage data continuously. Here is how the process breaks down into manageable steps.

Creating and Maintaining Your Digital Records

For every transaction, you need to record the amount, the date, and the category (e.g., travel, office costs). The categories match the Self-Assessment tax return.

However, there are simplifications:

• Retailers: You can record gross daily takings instead of every single sale.

• Turnover under £90,000: You only need to record whether a transaction is "income" or "expense" without further categorization.

• Joint Property: Landlords only need to record their specific share of income and expenses
  

Integrating Records with Quarterly Updates

Once your records are digital, you must send summary data to HMRC every three months. These are not full tax returns; they are high-level updates showing your income and expenses for that period.

This process ensures you and HMRC have a clearer picture of your estimated tax liability throughout the year, preventing nasty surprises. Taxpayers will make five submissions each tax year: four quarterly updates plus the end-of-year tax return.

Final Declarations and End-of-Year Summaries

After submitting your four quarterly updates, you must complete a final declaration. This is the "fifth submission" where you finalize your tax position.

During this step, you make accounting adjustments (like capital allowances or accruals) and confirm that the data provided throughout the year is complete and accurate. This replaces the traditional Self-Assessment tax return for qualifying income sources.

Choosing the Right MTD-Compatible Software

You have two main options for software: MTD-compatible accounting software (like Xero) or bridging software.

Bridging software allows you to keep using spreadsheets, provided they are digitally linked to the software that submits to HMRC. However, dedicated accounting software is generally more efficient as it automates bank feeds and categorization.

Look for software that:

• Connects to your bank: Automatically pulls in transactions.

• Handles multiple income streams: Essential if you are both a trader and a landlord.

• Supports digital links: Ensures you don't break the "no copy-paste" rule.

Best Practices for Seamless Digital Record Keeping

To make this transition smooth, consistency is your best friend. Waiting until the deadline to update your software will only cause stress.

Follow these rules for success:

• Separate Bank Accounts: Keep business and personal finances distinct. It makes digital matching much faster.

• Update Weekly: Spend 15 minutes a week reconciling transactions rather than days at month-end.

• Check Thresholds Early: Review your 2024/25 income now to confirm if you hit the £50,000 mark.

• Retain Records: You must keep digital records for at least five years from the 31 January submission date.
  
  

 Common Mistakes to Avoid with MTD Digital Records

The biggest pitfall business owners face is breaking the "digital link." It is tempting to calculate figures in a spreadsheet and then type them into your software, but this is non-compliant. Data must flow automatically or via import/export functions.

Other common errors include:

• Mixing Property Records: Landlords must keep UK and foreign property business records separate.

• Ignoring Joint Property Rules: You only need to record your share, not the total property income.

• Over-complicating: If your turnover is under £90,000, use the simplified recording rules (income vs. expense) to save time.
  

Understanding Penalties for Non-Compliance

HMRC takes MTD compliance seriously. Since the system relies on timely digital submissions, failing to keep digital records or missing submission deadlines can lead to financial penalties.

A points-based penalty system applies to late submissions. If you accumulate enough points by missing quarterly updates, you will receive a fine. Additionally, there are separate penalties for late payment of tax. The best way to avoid this is to treat your digital records as a core part of your business operations, not an afterthought.

How Inform Accounting Can Help You Stay MTD Compliant

Navigating MTD for ITSA can feel overwhelming, but you don't have to do it alone. At Inform Accounting, we are specialists in cloud accounting and Xero, helping businesses in Sutton Coldfield and across the UK transition seamlessly to digital systems.

We can help you:

• Select and set up the right MTD-compatible software.

• Review your income to determine exactly when you need to comply.

• Manage your quarterly updates so you never miss a deadline.

• Ensure your digital records meet all HMRC requirements.

Conclusion

The shift to Making Tax Digital for ITSA is one of the biggest changes to the UK tax system in years. While the April 2026 deadline might seem daunting, it is also an opportunity to get better visibility over your finances.

By adopting digital record keeping now, you aren't just ticking a compliance box—you are building a more organized, efficient business. Whether you are a landlord or a sole trader, the key is to start today. Check your software, review your 2024/25 income, and get your digital house in order.

Frequently Asked Questions

What software is MTD- compatible for digital records in the UK?

Popular MTD-compatible options include Xero, QuickBooks and FreeAgent.  Check HMRC's list at gov.uk for the latest approved software.

Can I use Excel spreadsheet for MTD digital records from 2026?

Yes, but only with bridging software ensuring digital links - no manual copy-paste. Transactions must flow automatically into MTD submission tools. Pure standalone Excel without links is non-compliant.

How do quarterly updates work under MTD for ITSA?

Submit four high-level summaries of income and expenses every three months via compatible software, plus a final end-of-year declaration. Deadlines align with tax year periods, starting 6 April 2026 for £50,000+ earners.

What if my income drops below £50,000 after 2024/25?

You remain in scope if 2024/25 income exceeded £50,000 - compliance is based on that year's threshold. Monitor annually; dropping below later may exempt future years per HMRC rules.

Are there expectations for digital records in Sutton Coldfield?

No local exceptions in Sutton Coldfield - national MTD rules apply via HMRC. Simplified rules exist for turnover under £90,000 (income/expense only) or retailers (daily gross takings). Contact HMRC helpline for personal circumstances.

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