What Is Making Tax Digital?
Making Tax Digital (MTD) is HMRC's programme to modernise the UK tax system by requiring taxpayers to keep digital records and submit updates electronically. MTD for VAT has been in place since 2019, but MTD for Income Tax Self Assessment (MTD for ITSA) is now rolling out to self-employed individuals and landlords — and that includes many side hustlers.
The aim is to reduce errors, make tax reporting more real-time, and ultimately replace the annual Self Assessment tax return with quarterly digital submissions. Whether you see this as progress or paperwork depends on your perspective, but either way, you need to know if it applies to you.
Who Needs to Comply — and When?
MTD for ITSA is being introduced in phases based on your qualifying income (gross income from self-employment and/or property, before expenses):
- From April 2026: Self-employed individuals and landlords with qualifying income over £50,000 must comply.
- From April 2027: The threshold drops to £30,000.
- Future phases: HMRC has indicated it intends to extend MTD to those with income below £30,000, but no firm dates have been announced yet.
Important: the threshold is based on gross income, not profit. If your side hustle generates £55,000 in revenue but only £20,000 in profit after expenses, you are still caught by the £50,000 threshold. Check the latest guidance on GOV.UK's MTD for Income Tax page.
What If I Have Multiple Income Sources?
If you have both self-employment income and rental income, HMRC looks at the total qualifying income across all sources. For example, £30,000 from a side hustle plus £25,000 in rental income gives you £55,000 of qualifying income — above the April 2026 threshold.
Employment income (your day job salary) does not count towards the qualifying income threshold. MTD for ITSA only applies to self-employment and property income.
What Does MTD Require You to Do?
If you are within scope, MTD for ITSA imposes three main obligations:
1. Keep Digital Records
You must use MTD-compatible software to maintain digital records of your income and expenses. Spreadsheets are acceptable, but only if they can connect to HMRC's systems via an Application Programming Interface (API) — a basic Excel file on its own will not suffice. Most people find it simpler to use dedicated accounting software.
2. Submit Quarterly Updates
Instead of filing a single annual tax return, you will need to submit four quarterly updates to HMRC through your software. The quarters and their deadlines are:
- Quarter 1 (6 April – 5 July): submit by 7 August
- Quarter 2 (6 July – 5 October): submit by 7 November
- Quarter 3 (6 October – 5 January): submit by 7 February
- Quarter 4 (6 January – 5 April): submit by 7 May
Each quarterly update is a summary of your income and expenses for that period. It is not a tax calculation — just a data submission.
3. Submit a Final Declaration
After the end of the tax year, you submit a final declaration (replacing the traditional Self Assessment return) by 31 January following the tax year. This is where you confirm your figures, claim any reliefs or allowances, and receive your final tax calculation. Any tax owed must be paid by the same deadline.
Choosing MTD-Compatible Software
HMRC maintains a list of software providers that are compatible with MTD for ITSA. Popular options for side hustlers and small businesses include:
- FreeAgent: Popular with freelancers, offers a clean interface and automatic bank feed imports.
- Xero: Widely used by small businesses, with strong invoicing and reporting features.
- QuickBooks: Well-known internationally, with a range of plans including a self-employed tier.
- HMRC's free software: HMRC is working with providers to ensure basic free options are available, particularly for simpler affairs.
When choosing software, look for features that matter to your situation: bank feed integration, receipt scanning, mileage tracking, and the ability to handle multiple income sources if you have them.
Penalties for Non-Compliance
HMRC is introducing a new points-based penalty system for MTD. Each late quarterly submission earns you a penalty point. Once you reach a threshold (currently four points for quarterly obligations), you receive a £200 penalty. Further late submissions incur additional £200 penalties.
Late payment penalties are separate and work on a percentage basis: 2% of the tax owed if payment is 15 days late, rising to 4% at 30 days, with additional daily interest thereafter. HMRC has indicated a light-touch approach in the first year of MTD for ITSA, but it is wise not to rely on leniency.
Practical Steps to Prepare
If you think MTD applies to you from April 2026, here is what to do now:
- Check your qualifying income: Add up your gross self-employment and property income for the current year. If it exceeds £50,000, you are in scope.
- Choose compatible software: Sign up and start using it before April 2026 so you are comfortable with it from day one.
- Set up digital record-keeping: Connect your bank accounts, set up categories for income and expenses, and start recording transactions digitally.
- Speak to an accountant: If your affairs are complex, a qualified accountant can help ensure you are compliant and making the most of available reliefs.
Calculate Your Side Hustle Tax
MTD changes how you report your tax, but the underlying calculations remain the same. Use our free side hustle tax calculator to estimate your 2026/27 tax bill, see your take-home pay, and understand how much you need to set aside for HMRC each quarter.