Making Tax Digital (MTD) for Income Tax is one of the most significant changes to the UK tax system in decades.
But as the April 2026 start date approaches for many, misconceptions about what MTD actually involves are still widespread.
If you’re a sole trader or landlord, understanding the truth is essential. Misunderstanding the rules could lead to non-compliance, unnecessary stress, wasted costs, and even penalties.
In this article, we’ll tackle five common misconceptions about MTD for Income Tax—and explain what you really need to know.
Misconception 1: Each quarterly update is a mini tax return
One of the most persistent myths is that quarterly updates under MTD are equivalent to submitting a full tax return every three months.
This is just not the case.
Quarterly updates are details of business income and expenses to that point, sent to HMRC via MTD-compatible software. If your income is less than £90,000, you can send just a total income and expenses summary.
That’s all that’s required. The purpose of quarterly updates provide you and HMRC with an in-year snapshot of your tax position, but they don’t replace the annual tax return.
Nor do you have to pay tax quarterly. The way you make tax payments doesn’t change with MTD for Income Tax. Most people will pay on account by 31 July and 31 January, with any additional balance payable by 31 January, too.
Quarterly updates aren’t legally binding and you won’t get penalised if they’re not 100% correct. All you need to provide are the running totals of your income and expenditure. If you’re using accounting software, the data for this will already be there, so it’s going to be little more than pressing a button to submit.
You’ll still need to provide a digital tax return on 31 January, and only there will you need to include things like the following that are usually found on tax returns:
- Adjustments for reliefs and allowances
- Other sources of income (e.g., employment, dividends)
- Any corrections to earlier estimates
Think of quarterly updates as progress reports rather than the full story. They help HMRC—and you—stay on top of your tax position throughout the year, but the tax return remains the definitive calculation.
Misconception 2: MTD only applies to me if I’m VAT registered
Because the MTD rollout from the government started with VAT, many assume MTD for Income Tax only applies to VAT-registered businesses.
That’s not true.
In fact, MTD for Income Tax is a separate mandate. Whether or not you’re already using MTD for VAT is irrelevant. Many businesses will use one, or both.
If you’re a sole trader or landlord with qualifying income, you’ll need to comply—even if you’re not VAT registered.
The rollout of MTD for Income Tax is phased as follows:
- April 2026: Businesses and landlords with qualifying income over £50,000
- April 2027: Qualifying income over £30,000
- April 2028: Qualifying income over £20,000 (subject to legislation)
If you fall into these brackets, start preparing now. Waiting until the last minute could leave you scrambling for software and support.
It’s worth adding that the penalties for both MTD for VAT, and MTD for Income Tax, are entirely separate—although they work in the same way. In other words, a penalty for getting something wrong to do with MTD for VAT will have no impact on any penalty count you might have for MTD for Income Tax.
Misconception 3: Penalties don’t apply in the first year
This one’s got some truth to it, but care needs to be taken.
HMRC announced a soft landing for penalties in the first year of MTD for Income Tax. This means late quarterly submissions won’t attract penalty points initially.
However, this doesn’t mean you can ignore the rules. It doesn’t mean you can be late with other deadlines, such as that of the digital tax return on 31 January.
The soft landing is designed to ease the transition—not to delay compliance. You’ll still need to:
- Keep digital records
- Submit updates on time
- Use MTD-compatible software
Penalties will apply from the following tax year, so use the first year to build good habits and avoid future issues. Don’t use it to avoid your responsibilities.
Misconception 4: MTD Is just more red tape from HMRC
It’s understandable to view any changing mandatory requirements as yet more red tape. But the truth is that not only is there no extra red tape once MTD is up and running for you, but the existing red tape around doing your taxes will be hugely reduced. That’s the whole point.
HMRC is introducing MTD for Income Tax to help businesses do their taxes better, and to have superior insight into their taxes.
For example, upon submitting each quarterly update, HMRC provides an estimate of your tax bill. There’s no need to set aside a nebulous amount of cash to pay your bill. This helps cash flow enormously.
By enforcing the use of MTD-ready software, HMRC is ensuring that all benefits benefit from modern digital advances such as:
- Reduced errors: Digital records minimise mistakes.
- Time savings: Automated processes cut down paperwork.
- Better visibility: Quarterly updates give you a clearer picture of your tax position throughout the year.
Furthermore, modern cloud accounting software like Sage Accounting brings AI to small businesses in the form of Sage Copilot. This is like having your own dedicated AI-powered productivity assistant, monitoring your accounting 24/7 and telling you about things you need to know and do.
Rather than seeing MTD as a chore, think of it as an opportunity to modernise your financial processes. It’s finally time to get away from paperwork and go digital. The vast majority of businesses find that adopting digital tools improves efficiency and decision-making.
Misconception 5: Spreadsheets are banned under MTD for Income Tax
This is incorrect. You can use spreadsheets for MTD as much as it helps you, provided you understand the digital linking rules, and add-in a way to submit data to HMRC.
While spreadsheets can play a role in your business tax accounting, they must use bridging software that connects to HMRC’s systems.
In other words, using a spreadsheet to input manual tax records without this connection won’t cut it.
MTD is about digital record-keeping and direct submission. This means using software that can:
- Maintain digital records of income and expenses
- Submit quarterly updates automatically
- Handle end-of-year adjustments
Investing in compliant software now will save headaches later. It’s also an opportunity to streamline your processes and reduce errors.
Making Tax Digital for Income Tax: What you need to do now
Preparing for MTD for Income Tax doesn’t have to be overwhelming, but it does require planning. Here are the key steps to take:
1. Choose MTD-ready software
Identify MTD-compatible software that suits your business size and complexity.
Consider whether you need bridging software for spreadsheets or a full accounting solution.
Look for features like automated quarterly submissions, expense tracking, and integration with your bank feeds.
2. Start digital record-keeping
Move away from manual records now. Begin capturing income and expenses digitally.
Ensure your records include dates, amounts, and VAT details (if applicable). Use data entry automation tools to extract data from receipts and bills without hassle.
The earlier you start, the easier the transition will be when MTD becomes mandatory.
3. Educate your team
If you employ people, ensure they understand what MTD for Income Tax requires. While it’s solely your responsibility to get MTD right, and not theirs, they obviously feed into the way you work.
This isn’t just about educating those who work with numbers. It can mean educating team members who make purchases, for example, because they’ll need to ensure digital records are created for expenditure. You might need to change the way team members issue invoices, too, in order to be MTD compliant. For example, if you provide services, then team members can issue invoices electronically, on-site, once the job is complete. They can even collect payment there and then, which can be a huge boost to cash flow. Sage Accounting empowers both these two breakthroughs.
Share resources, run meetings, or create emails to dispel common myths about MTD for Income Tax.
Final thoughts
MTD for Income Tax is a fundamental shift in how tax is reported. By understanding what’s required—and avoiding these misconceptions—you can stay compliant and even improve your business processes.
The key takeaway is that quarterly updates aren’t full tax returns, spreadsheets need bridging software, and preparation starts now. Don’t let myths derail your compliance journey.
E-Book: From Self Assessment to Making Tax Digital
Worried about following MTD’s rules in April 2026? This brief yet comprehensive guide explains what you need to know: How you do accounting now, and how you should do it in future.
