Making Tax Digital for Income Tax: What UK Contractors Must Do Before April 2026

HMRC's Making Tax Digital for Income Tax Self Assessment — commonly called MTD for ITSA — is the most significant change to self-assessment since its introduction in 1997. From April 2026, any sole trader or landlord with gross income above £50,000 must keep digital records and submit quarterly updates to HMRC using compatible software, replacing the traditional annual Self Assessment return for that stream of income.

What MTD for ITSA Actually Requires

Under MTD for ITSA, affected sole traders are required to maintain digital business records throughout the tax year rather than assembling figures at year-end. Every quarter — aligned to the tax year starting 6 April — they must send a summary of income and expenses to HMRC using software that connects directly to HMRC's APIs. There are four quarterly updates per year (periods ending 5 July, 5 October, 5 January, and 5 April) plus a final declaration that reconciles all sources of income and claims any reliefs. The final declaration replaces what was previously the Self Assessment return. HMRC has made clear that estimates are permitted at the quarterly stage, but the final declaration must be accurate. Failing to meet the quarterly deadlines will attract a points-based penalty regime that accumulates over time, with financial penalties kicking in once the threshold is reached. For a busy plumber or electrician juggling multiple jobs simultaneously, this shift from one annual submission to five separate filings per year is a material change in administrative burden.

Who Is Affected and the Rollout Schedule

The April 2026 threshold applies to sole traders and landlords with gross self-employment or property income above £50,000. HMRC then intends to extend the obligation to those with income above £30,000 from April 2027, and further consultation is underway regarding a potential £20,000 threshold. Partnerships will be brought into scope at a later date that has not yet been confirmed. Contractors who operate through a limited company are outside the scope of MTD for ITSA because corporation tax and PAYE are governed by separate regimes. However, sole traders who also hold directorships must still comply if their self-employment income exceeds the threshold. It is worth noting that the £50,000 figure refers to gross income — turnover before expenses — not profit. A tiler with £60,000 revenue and £40,000 costs still falls within scope even though taxable profit is only £20,000.

Digital Record-Keeping Requirements

HMRC's rules specify that digital records must be maintained in a compatible software product and cannot simply be a spreadsheet maintained outside of any HMRC-linked tool, unless that spreadsheet is connected to a bridging solution that sends data to HMRC directly. Acceptable digital records include the date and amount of each business transaction, the category of income or expenditure, and the name of the counterparty where applicable. For trade contractors, this means every invoice issued and every purchase receipt should be captured in software at or near the time of the transaction. HMRC does not prescribe a specific product, but it does maintain a list of software vendors that have been tested against its APIs and confirmed compatible. The requirement to keep digital records is distinct from the requirement to submit digitally — both apply simultaneously. Paper records alone will not satisfy HMRC's requirements even if a quarterly update is eventually submitted through software.

Compatible Software and What to Look For

Not all accounting tools have invested in MTD for ITSA compatibility, and contractors should verify that any product they use or are considering has been included on HMRC's published list of compatible software. Key features to look for include direct API connection to HMRC for submission of quarterly updates and the final declaration, automatic categorisation of income and expenditure, the ability to store and retrieve source documents such as invoices and receipts, and a clear audit trail showing when records were created and last modified. For trade contractors whose primary need is quoting and invoicing rather than full bookkeeping, the most practical path is often to use a dedicated quoting and invoicing platform that integrates with a compatible tax tool, ensuring that all invoice data flows through to the tax submission without manual re-entry. Duplication of data entry is both a time cost and a source of error, neither of which HMRC will view sympathetically.

Penalties for Non-Compliance

HMRC is introducing a points-based late-submission penalty system for MTD for ITSA. Each missed quarterly submission results in one penalty point. Once a taxpayer accumulates a threshold number of points — four points for quarterly filers — a £200 financial penalty is triggered. Further missed submissions beyond that threshold result in additional £200 penalties. Points can be reset if the taxpayer maintains a clean submission record for a continuous period. Separately, late payment of income tax continues to attract existing interest charges, and the overall penalty regime for inaccurate returns remains in place. For contractors who are already managing cash flow carefully, accumulating penalty points through missed deadlines represents a preventable financial risk. HMRC's customer support has made clear it will offer some transitional support in the early months, but will not waive penalties indefinitely.

The Interaction with Construction Industry Scheme

Many self-employed contractors in the building trades operate under the Construction Industry Scheme, under which contractors deduct CIS tax at source before paying subcontractors. This creates a situation where income arrives net of CIS deductions, but the gross figure — not the net — counts towards both the MTD threshold and the income reported in quarterly updates. A subcontractor receiving £45,000 net after £12,000 of CIS deductions has gross income of £57,000 and therefore falls within scope of MTD for ITSA. Monthly CIS deduction statements issued by the main contractor serve as evidence of gross income, and subcontractors must retain these as part of their digital records. The CIS tax deducted is then offset against the taxpayer's income tax liability in the final declaration, so accurate record-keeping of deduction certificates is particularly important to avoid overpaying or underpaying tax.

How QuotCraft Supports MTD Compliance

QuotCraft is built to help trade contractors maintain the kind of accurate, timestamped digital records that MTD for ITSA demands. Every invoice you raise is stored with a full audit trail, and QuotCraft's export tools allow you to push income data to compatible tax software without re-keying figures. The platform records transaction dates, amounts, client details, and payment status in a format that mirrors HMRC's categorisation requirements, making quarterly update preparation significantly faster. For contractors moving from spreadsheets or paper records, QuotCraft provides a practical starting point that is purpose-built for the trade industry rather than adapted from generic small-business accounting. As HMRC extends MTD to lower income thresholds in 2027, having a reliable digital record-keeping habit in place now will make compliance straightforward rather than disruptive.