Got an HMRC Letter About Making Tax Digital? Here's Exactly What to Do Next

What the HMRC Letter Actually Says

The letter from HMRC is typically 2-3 pages and carries the headline "Making Tax Digital for Income Tax." It's not a penalty notice, a demand for payment, or a compliance investigation. It's a notification.

In plain English, the letter tells you three things:

1. Your income puts you in scope. Based on your 2024/25 tax return, your combined self-employment and property income exceeds £50,000 (gross turnover, not profit).
2. From 6 April 2026, you must use MTD-compatible software to keep digital records and submit quarterly updates to HMRC.
3. You need to sign up. The letter provides a link to HMRC's step-by-step MTD sign-up guide.

That's it. No immediate action is demanded. No payment is due. You're being told what's coming and given time to prepare.

But here's the important nuance: whether or not you receive this letter, if your income exceeds the threshold, you must comply. The letter is a courtesy, not a prerequisite.

Who's Getting These Letters (and When)

HMRC is sending letters in three waves, based on when you filed your 2024/25 tax return:

If you filed your return late (after 31 January 2026), you may not receive a letter at all. But again — no letter doesn't mean no obligation.

The Chartered Institute of Taxation confirmed that HMRC is actively sending these letters as of February 2026, and the final batch goes out in mid-March.

Quick Check: Are You Actually Affected?

Before you do anything else, confirm whether MTD actually applies to you. It's simpler than most guides make it sound.

You MUST comply from April 2026 if:

• You're registered for Self Assessment, AND
• Your gross self-employment income (turnover, not profit) exceeds £50,000, OR
• Your gross property income exceeds £50,000, OR
• Your combined self-employment + property income exceeds £50,000

This is based on your 2024/25 tax return (the one due 31 January 2026).

You are NOT affected (yet) if:

• Your combined self-employment and property income is below £50,000
• You only have PAYE employment income (even if you also do Self Assessment for other reasons)
• You're a limited company director — MTD only applies to individuals
• Your income is only from dividends and/or interest
• You started your business mid-year, unless your income would exceed £50,000 when annualised

Future thresholds (you'll get a letter later):

• April 2027: Threshold drops to £30,000 (affects ~900,000 more people)
• April 2028: Threshold drops to £20,000 (affects millions more)

If you're between £30,000 and £50,000, you have until April 2027. But starting to keep digital records now is sensible preparation.

The Good News: No Penalties for Your First Year

This is the bit most articles don't mention clearly enough.

In the Autumn Budget 2025, HMRC confirmed that taxpayers joining MTD in April 2026 will not receive penalty points for late quarterly submissions during their first 12 months.

Let that sink in. You have an entire year of grace.

Here's what that means in practice:

Important distinction: The grace period applies to quarterly submission penalties only. If you have tax to pay and pay it late, interest and late payment penalties can still apply. The grace period protects you from the new quarterly reporting requirements while you get used to the system.

The Shepherd Partnership summarised it well: "For the first four quarterly returns in 2026/27, taxpayers will not face any penalty points or monetary fines." The STEP journal confirms this extends to the full first year.

This doesn't mean you should ignore the deadline. It means you should start now, knowing that early mistakes won't cost you money. That's actually a generous position from HMRC — they recognise this is a significant change and are giving people room to learn.

What Actually Changes from 6 April 2026

Here's the practical difference between the old system and the new one:

Old System (Self Assessment)

• Keep records however you like (paper, spreadsheet, shoebox)
• Submit one annual tax return by 31 January
• Pay any tax due by 31 January

New System (MTD for Income Tax)

• Keep digital records using MTD-compatible software
• Submit quarterly updates showing income and expenses (4 times per year)
• Submit a Final Declaration at the end of the tax year (replaces the traditional tax return)
• Pay tax as before (31 January, plus payments on account in January and July)

What the quarterly updates actually contain

This is where most people's anxiety spikes, so let's be specific. Each quarterly update includes:

• Total income for the quarter (from your self-employment and/or property)
• Total expenses for the quarter, broken down by HMRC's allowable expense categories
• That's it. It's a summary, not a line-by-line transaction report.

Your software handles the formatting and submission. You don't need to manually enter data into an HMRC portal — the software talks to HMRC directly via their API.

The key change is that you need to categorise your expenses as you go, rather than dumping everything into a box at year-end. If you're already using accounting software or a decent spreadsheet, this is less of a leap than it sounds.

Your Quarterly Deadline Calendar (2026/27)

Pin this somewhere visible. These are the submission deadlines for the first year:

Remember: during 2026/27, you get the penalty grace period. These deadlines still apply — you should aim to meet them — but a late submission won't trigger a penalty point.

Use our MTD Penalty Calculator to see what penalties would look like after the grace period ends.

Step-by-Step: What to Do This Week

You've got the letter. Here's the action plan, in order:

Step 1: Confirm You're Affected (10 minutes)

Check your 2024/25 tax return. Look at your total self-employment turnover and property income. If the combined figure exceeds £50,000, you're in. Use our free MTD Readiness Checker if you want a quick answer.

Step 2: Choose Your Software (30 minutes)

You need MTD-compatible software that can submit quarterly updates to HMRC. See the software comparison below for options. The key decision: do you want an all-in-one accounting package (like Xero or FreeAgent) or a simple bridging tool that connects your existing spreadsheet to HMRC?

Step 3: Sign Up on the HMRC Website (20 minutes)

Go to HMRC's MTD sign-up page. You'll need your Government Gateway login. See detailed walkthrough below.

Step 4: Connect Your Software to HMRC (15 minutes)

Once signed up, authorise your chosen software to communicate with HMRC. Each software provider has their own walkthrough for this — it's usually a few clicks.

Step 5: Start Keeping Digital Records (ongoing)

From 6 April 2026, every business transaction needs to be recorded digitally. Income received, expenses paid — each one logged with a date, amount, and category. If you're already using a spreadsheet, you might just need to add expense categories.

Step 6: Submit Your First Quarterly Update (by 7 August 2026)

After 5 July, review your Q1 data in your software and submit. Most software does this in one or two clicks. Remember, this first submission is covered by the grace period — if you're a few days late, it's fine.

Software Options: Free vs Paid

This is the question everyone asks first: "Do I have to pay for software?" The short answer: no, but free options have limitations.

Free Options

Paid Options (£5-15/month)

The cost is tax-deductible. Whatever you spend on MTD software is an allowable business expense, which reduces your tax bill. At £8/month, that's £96/year — and at the basic tax rate (20%), you'll save £19.20 in tax, making the real cost about £77.

For a detailed breakdown of free vs paid options with our recommendations, read our MTD Software: Free vs Paid — Which Is Right for You? guide.

How to Sign Up for MTD on the HMRC Website

The sign-up process is straightforward but has a few steps that trip people up. Here's the walkthrough:

1. Go to gov.uk/guidance/sign-up-your-business-for-making-tax-digital-for-income-tax
2. Sign in with your Government Gateway ID and password (the same one you use for Self Assessment)
3. Choose your software. HMRC will ask which compatible software you plan to use. You need to have chosen before you sign up.
4. Authorise the software. HMRC will redirect you to authorise your software provider to access your tax information.
5. Confirm your details. Check your business name, UTR number, and income sources are correct.
6. Done. You'll get confirmation that you're signed up for MTD.

Common sign-up problems:

• "I don't have a Government Gateway account" — You need one. Create it at access.service.gov.uk. You'll need your National Insurance number.
• "My UTR number doesn't match" — Your Unique Taxpayer Reference is on any letter from HMRC about Self Assessment. It's a 10-digit number.
• "It says I can't sign up yet" — If you haven't filed your 2024/25 return yet, the system may not recognise your income. File first, then sign up.
• "My accountant handles everything" — Your accountant can sign up on your behalf using their agent services account. Ask them to do it — see the accountant section below.

What If You Think You Should Be Exempt?

Some people genuinely qualify for an MTD exemption. But the bar is higher than most expect.

Automatic exemptions (no application needed):

• You don't have a National Insurance number
• You receive the blind person's allowance (until at least April 2029)
• You're a limited company — MTD only applies to individuals
• You receive qualifying care relief (foster carers, kinship carers) as your only self-employment income

Discretionary exemptions (must apply to HMRC):

• It's not "reasonably practical" for you to use digital software due to age, disability, or location
• You're a member of a religious order that forbids computer use

Important: "I don't like computers" or "I've always done it on paper" is not grounds for exemption. You need to demonstrate a specific practical barrier. HMRC assesses each case individually.

If you're applying for an exemption, continue preparing for MTD while waiting for the decision. Don't assume it'll be granted.

What If You Didn't Get a Letter?

Don't assume you're in the clear. There are several reasons you might not have received a letter:

• Timing: The final batch of letters goes out mid-March 2026. Yours might not have arrived yet.
• Address issues: If you've moved and not updated your address with HMRC, the letter went to your old address.
• Late filing: If you filed your 2024/25 return after 31 January 2026, you may not be in any of the mailing batches.
• Processing delays: HMRC's systems aren't perfect. Some people slip through.

The Guardian recently reported that even if your letter "gets lost in the post, you must still sign up, unless you're exempt."

Bottom line: Check your own numbers. If your 2024/25 self-employment and property income combined exceeds £50,000, you must comply — letter or no letter.

Special Considerations for Landlords

If your letter came because of property income (not self-employment), there are a few extra things to know:

How property income is counted

• Gross rental income — total rent received before expenses. Not profit.
• Joint ownership: Only your share of the rental income counts towards the threshold. If you and your partner split a £60,000 rental income equally, you're each at £30,000 — below the 2026 threshold.
• Multiple properties: All your property income is combined. Three properties each earning £20,000 = £60,000 total = you're in scope.
• Rent-a-room relief: Income up to £7,500/year under the rent-a-room scheme doesn't count towards the threshold.
• Property trading allowance: Income up to £1,000/year from casual property rental doesn't count.

What landlords submit quarterly

Your quarterly updates include rental income received and allowable expenses (mortgage interest — at the restricted rate — repairs, insurance, letting agent fees, etc.). The software handles the categorisation.

Software for landlords

Most MTD software handles property income. Landlord Studio and Hammock are specifically designed for landlords. FreeAgent and Xero also handle property well if you also have self-employment income.

If you're a landlord AND self-employed, you submit one set of quarterly updates covering both income sources.

What to Tell Your Accountant

If you use an accountant, they should already know about MTD. But not all accountants have been proactive about this. Here's what to discuss:

1. "Are we set up for MTD?" — Your accountant needs an HMRC agent services account to sign you up and submit on your behalf.
2. "Which software are we using?" — If your accountant uses a specific platform, it makes sense to use the same one for seamless data sharing.
3. "Will my fees change?" — MTD means more frequent submissions, which may mean higher accountancy fees. Better to know now than be surprised.
4. "What do I need to do differently day-to-day?" — Some accountants want you to log transactions yourself; others will do it for you. Clarify the division of labour.
5. "Can you handle the transition for me?" — Many accountants offer an MTD setup service. This is worth paying for if you're not confident with technology.

If your accountant seems uncertain about MTD, that's a red flag. This has been announced for years and the deadline is weeks away. A good accountant should have a clear plan.

9 Mistakes People Make After Getting the Letter

1. Ignoring it. The letter is a notification, not a suggestion. MTD compliance is a legal requirement.
2. Assuming it'll be delayed again. MTD has been postponed before, but there is no indication of another delay. The government and HMRC have been clear: April 2026 is happening.
3. Buying the most expensive software. A £30/month package is overkill for most sole traders. Start with a basic plan and upgrade if needed.
4. Trying to sign up before choosing software. The HMRC sign-up process asks which software you'll use. Have this decided first.
5. Not telling their accountant. If you use an accountant, they need to know. MTD changes how your tax information is submitted.
6. Panicking about penalties. The first-year grace period means no penalty points for late quarterly submissions in 2026/27. You have time to learn.
7. Thinking they need to submit detailed transaction records. Quarterly updates are summaries — total income and total expenses by category. Your software generates these from your records.
8. Waiting until April to start. You can set up software and start keeping digital records now, even before MTD officially begins. In fact, having a few months of data already entered makes your first quarterly submission much easier.
9. Confusing turnover with profit. The £50,000 threshold is based on gross income (turnover), not profit after expenses. If you turn over £55,000 but only profit £25,000, you're still in scope.

Frequently Asked Questions

Can I still use a spreadsheet?

Yes, but you'll need bridging software to submit the data to HMRC. Your spreadsheet needs to meet HMRC's digital record-keeping standards (date, amount, and category for each transaction). Options like 123Sheets connect your spreadsheet directly to HMRC's API.

What if my income drops below £50,000 next year?

If your income fell below the threshold in a later year, you may be able to opt out of MTD. But for now, the obligation is based on your 2024/25 return.

Do I still need to file a Self Assessment tax return?

The quarterly updates and Final Declaration replace the traditional Self Assessment return. You won't need to file separately. However, during the transition year, make sure your accountant (if you use one) understands this change.

How long do I have to keep digital records?

Same as now: 5 years from the 31 January filing deadline for the relevant tax year. For the 2026/27 tax year, that's until 31 January 2033.

What about CIS (Construction Industry Scheme) income?

If you're a CIS subcontractor, MTD adds complexity because you need to reconcile CIS deductions with your quarterly updates. Read our CIS and MTD Software Guide for specific guidance.

I earn over £50,000 but it's all from one client. Do I still need MTD?

Yes. The number of clients is irrelevant. If your total self-employment turnover exceeds £50,000, you're in scope — even if it all comes from one source. (Though if all your income is from one source, you might want to check whether you should actually be classified as employed rather than self-employed.)

Your Action Plan

Here's the simplified version. Do this in order: