Further updates to making tax digital for income tax self-assessment announced

The UK government’s L-Day (Legislation Day) event on 21 July 2025 saw updates to the Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) regime. These set out an updated phased mandatory rollout schedule, introduce new exemptions and deferrals for certain taxpayers, and refine how the digital tax system will operate.

The Draft Finance Act 2025-26 clauses and associated draft regulations will refine and simplify MTD ITSA and associated penalty reform regimes.

Phased MTD ITSA roll-out: Key dates and thresholds

Under the proposed updates, MTD ITSA will be introduced in stages based on business/property income levels. This phased mandation is designed to ease smaller businesses and landlords into the digital regime gradually. 

As a reminder, we already knew that: 

• From April 2026 – Sole traders and landlords with gross business/property income over £50,000 will be required to keep digital records and report via MTD software for the tax year 2026/27. These taxpayers will file their first fully digital annual returns by January 2028 (for 2026/27). HMRC will use 2024/25 self-assessment returns to identify who is in this first wave.
• From April 2027 – The MTD ITSA requirement extends to sole traders and landlords with income above £30,000. This second wave will cover tax year 2027/28. 

It’s now been announced that from April 2028 the threshold will drop to £20,000 of annual income, bringing many more sole traders and landlords into MTD ITSA. Those earning above £20k (and not already mandated) will join for the 2028/29 tax year. This fulfils the government’s plan to lower the threshold “by the end of this Parliament,” accelerating digital adoption. Around 900,000 additional taxpayers will enter MTD in April 2028 under this expansion.

Sole traders and landlords with incomes under £20k will remain outside MTD ITSA for now. The government has however indicated it’ll “continue to consider” how to bring the benefits of digital tax to the approximately 4 million very small businesses below the threshold in the future. So, while those in the sub-£20k bracket won’t be mandated at this stage, further expansion after 2028 cannot be ruled out.

Exemptions and deferrals for specific taxpayers

It’s important to note that general partnerships aren’t included in these dates; the focus is on unincorporated sole traders and landlords. MTD ITSA for partnerships is expected to follow later, although no date has been set. All other self-assessment filers (company directors, pensioners, etc.) also remain outside MTD ITSA scope.

There are however also exceptions for certain types of taxpayers who face particular challenges or complexities under MTD ITSA, either deferring their start date or exempting them entirely from the digital requirements. 

A summary of the latest position is as follows:

Taxpayer Category	MTD ITSA Status
Ministers of religion	Deferred – Not mandated until April 2029 at earliest.
Lloyd’s underwriters	Deferred – Not mandated until April 2029 at earliest.
Recipients of Married Couple’s Allowance	Deferred – Not mandated until April 2029 at earliest.
Recipients of Blind Person’s Allowance	Deferred – Not mandated until April 2029 at earliest.
Individuals who have a power of attorney in place	Exempt permanently.
Non-UK resident entertainers or sportspeople (with no other UK income)	Exempt permanently.
Taxpayers requiring SA109 (non-residence/remittance pages)	Deferred – Not mandated until April 2027.
“Digital service unavailability” cases	Exempt.

The deferral for SA109 taxpayers could cause confusion around mandation dates, particularly where a non-resident has over £50,000 of income and would otherwise be expected to come into MTD ITSA from April 2026. Further details will also be required on how those whose residence status changes between now and April 2026 will be impacted.

It’s not clear at this stage the full extent of those who will qualify for the “Digital service unavailability” category but affected individuals will also have to “notify and satisfy” HMRC that they’re exempt.

Fully digital filing: End-of-year returns via software only

One critical change confirmed in the latest update is a move to a fully digital filing process for MTD ITSA. Taxpayers within MTD ITSA will be required to submit their annual self-assessment final declaration using MTD-compatible software, just like their quarterly updates. 

Previously, it was envisioned that while quarterly income and expense updates would use third-party software, the year-end tax return might still be filed through HMRC’s own online portal if desired. This is no longer the case – HMRC has explicitly ruled out providing an online self-assessment filing service for those in MTD. Instead, all submissions must be done through software (a so-called “full software journey”). The existing HMRC online tax return system will remain available only for taxpayers outside the MTD regime.

For those within MTD ITSA, MTD compliant software will be needed to handle the complete tax reporting cycle, including the final tax return, which for MTD ITSA taxpayers replaces the traditional SA100 return. While many software providers have already built solutions for quarterly reporting, they won’t have to ensure their tools can also generate and file the final tax return. 

Advisors and taxpayers should review their software choices to confirm that a product can support all required MTD ITSA functions from start to finish or check with their software providers that they will have this functionality available in time.

HMRC are currently working on redesigning its public list of MTD ITSA software to clearly indicate which products support the full filing process. This is expected to include a tool to match taxpayer requirements with software functionality.

For tax practitioners, the fully digital mandate means they should prepare to file clients’ year-end submissions through agent-capable software. There will be no free HMRC web option for submitting a client’s return in MTD ITSA. This may impact the smallest of tax practitioners and those who have only a handful of clients in particular and may entail additional software licensing costs and training on the final declaration process within software, on top of quarterly updating.

Penalty reform adjustments

Alongside MTD ITSA, HMRC is introducing a new points-based late submission penalty system (already in use for VAT) to income tax. This is intended to incentivise compliance without immediately punishing the occasional slip-up. 

Under this regime, taxpayers incur a penalty point each time they miss a reporting deadline, and only after accumulating a certain number of points does a financial penalty (a £200 fine) apply.  Points can expire after a period of compliant filing.

Draft legislation published includes technical tweaks to ensure the penalty system works smoothly with MTD ITSA. Specifically, HMRC will have explicit authority to cancel or reset late submission penalty points and any associated fines. 

While it’s expected that there may be a soft-landing period, ultimately clients who consistently miss quarterly update deadlines or the final report deadline will face cumulative penalties. 

Looking ahead: Further developments and next steps

With draft legislation now published, the coming months will involve consultation and refinement. Stakeholders have until 16 September 2025 to submit feedback on the proposed clauses. Any amendments from this technical consultation will be incorporated into Finance Bill 2025–26, which is expected to be introduced after the Autumn 2025 Budget. 

We will keep an eye on further developments and the final legislation to confirm there are no late changes to dates or thresholds – currently none are expected, but consultation could fine-tune details like exact criteria for exemptions.

Additional guidance from HMRC is anticipated, particularly on ambiguous areas. For instance, more detail should come on the process for claiming exemption under the “cannot provide a digital service” category, and on how deferred groups will be handled as 2029 approaches. 

The government has also ruled out extending MTD to Corporation Tax for now, acknowledging that one size does not fit all for digital tax and that they will explore a suitable approach for companies separately. This means practitioners can focus on MTD ITSA for the foreseeable future without fearing an imminent MTD for corporation tax mandate.

Further down the line, how successful the 2026–2028 rollout is will determine what happens post-2028. If implementation goes relatively well, a future government might decide to push MTD to the sub-£20k population (potentially with simpler requirements or continued exemptions for the smallest businesses). There’s also the matter of general partnerships – originally slated to join MTD after individuals, but now on hold. We may see moves to bring partnerships into MTD ITSA after the current phases, once the individual rollout stabilises.

For now, the priority for advisers and taxpayers is clear: focus on the known timeline up to 2028 and get ready. MTD ITSA is moving from concept to reality and L-Day 2025 has given some of the final blueprint details of how it’ll happen. By understanding the rules, taking advantage of the phased schedule, and preparing clients early, tax advisers can best manage what might seem a significant compliance burden.