HMRC in 2026: What Small Businesses Really Need to Sort Out Now

If you run a small business, work as a freelancer or own rental property in the UK, the next twelve months bring one of the most significant shifts in tax compliance in a generation. Making Tax Digital for Income Tax Self Assessment, known as MTD ITSA, went live on 6 April 2026 for taxpayers with qualifying income above £50,000. A tougher points based penalty regime has landed alongside it under Schedule 24 Finance Act 2021. HMRC's free Company Tax Return online service closed on 31 March 2026. And the basis period reform that changes how unincorporated trading profits are taxed is now fully in effect for the 2024 to 2025 tax year and onwards.

The pace of change is real and the consequences of falling behind are financial. This guide sets out exactly what is happening, who is affected, what HMRC expects, and what practical steps sole traders, landlords and limited companies should take before the first quarterly MTD deadline on 7 August 2026.

Making Tax Digital for Income Tax: the basics

Making Tax Digital for Income Tax Self Assessment requires sole traders and landlords with qualifying income above the relevant threshold to keep digital records and send quarterly updates to HMRC using MTD compatible software, rather than filing a single annual self assessment return.

The rollout works in three phases tied to gross income thresholds, as confirmed by HMRC's guidance on Making Tax Digital for Income Tax as a sole trader or landlord:

• From 6 April 2026, those with qualifying income above £50,000 must comply.
• From April 2027, the threshold falls to £30,000.
• From April 2028, it is expected to fall further to £20,000.

These thresholds apply to your gross income before expenses, not your profit. That distinction matters enormously. A landlord with £35,000 in rental income who also earns £18,000 from freelance work has combined qualifying income of £53,000 and is already in scope from April 2026, even if their net profit is well below that figure.

Who is in scope and how HMRC decides

HMRC uses your previous tax year figures to determine whether you are caught. If your 2024 to 2025 self assessment return shows combined qualifying income above £50,000, you are required to comply with MTD ITSA from 6 April 2026. HMRC is actively writing to taxpayers it believes are in scope, so many people will receive a mandation letter, but the legal obligation applies whether or not a letter reaches you. The responsibility to check your own figures and sign up in time sits with you.

Qualifying income includes:

• Self employment income as a sole trader (turnover, not profit)
• Property letting income, including your proportionate share if the property is jointly owned
• Furnished holiday lets and overseas property income

PAYE employment income from a salaried job does not count towards the threshold, but having a day job alongside self employment or rental income does not exempt you either. Partnership income is also outside the current 2026 phase, with HMRC's plans for partnerships to be confirmed in due course.

The practical implication is that many people with more modest earnings are already approaching the threshold without realising it, particularly those with a side business or a single rental property on top of freelance work. If you are anywhere near £50,000 in combined gross income, checking your 2024 to 2025 figures now should be a priority.

Is there a hard sign up deadline?

HMRC has not set a specific financial penalty for signing up to MTD ITSA late. In practice though, you must be signed up and using compatible software in time to capture the income and expenses for your first quarter and submit a quarterly update by 7 August 2026. If you choose calendar quarter reporting rather than the standard tax year quarters, HMRC's guidance requires that election to be in place by 1 April in the first year of mandation, which is earlier than many readers expect. So while there is no bespoke sign up fine, leaving it too late effectively means you miss your first update and start the clock on the points based regime.

What quarterly updates actually mean day to day

Rather than filing one annual return, you will send four quarterly updates to HMRC throughout the tax year summarising your income and expenses to date, followed by a final end of year declaration.

The standard quarter periods and submission deadlines under MTD ITSA are:

• 6 April to 5 July, due 7 August
• 6 July to 5 October, due 7 November
• 6 October to 5 January, due 7 February
• 6 January to 5 April, due 7 May

Taxpayers can opt for calendar quarter reporting (to the end of June, September, December and March) where this better fits their accounting, as set out in HMRC's MTD ITSA guidance. Your final declaration, which replaces the traditional self assessment return, remains due by 31 January following the end of the tax year.

Importantly, quarterly updates do not have to be perfect. HMRC's guidance confirms that estimates and provisional figures are acceptable, provided the numbers are tidied up and corrected in the final declaration at year end. That means a missing supplier invoice or a late expense claim should not stop you from hitting your quarterly deadline. You file what you have, and adjust at year end.

Software is not optional under MTD. You will need either a full cloud accounting package that integrates directly with HMRC, or bridging software that pulls data from a spreadsheet and transmits it digitally. Manual copy and paste from a spreadsheet into HMRC's systems does not meet the digital link requirement set out in the MTD ITSA regulations (SI 2021/1076) and HMRC's supporting MTD ITSA guidance.

The new points based penalty system explained

Alongside MTD, HMRC has rolled out a points based penalty regime under Schedule 24 Finance Act 2021 that replaces the old fixed fine structure for late submission. Every time you miss a submission deadline you accumulate a penalty point. Once you reach the relevant threshold, a financial penalty kicks in.

For quarterly MTD filers the threshold is four points, at which point a £200 fixed penalty applies. Each subsequent missed deadline adds a further £200 until your compliance record improves and points begin to reset. Points expire after 24 months provided the threshold has not been reached and all outstanding submissions are up to date.

Late payment of tax is penalised separately under a different regime, and the figures have changed for 2026 to 2027. The rules that currently apply are:

• Days 1 to 15 after the due date: no late payment penalty, only interest at HMRC's official rate.
• Days 16 to 30: a first penalty of 3% of the tax still outstanding at day 15.
• Day 31 onwards: a further 3% of the tax still outstanding at day 30, on top of the first 3%, plus a daily charge equivalent to 10% per annum for as long as the tax remains unpaid.
• Interest continues to accrue on the unpaid balance at HMRC's official rate throughout.

For the first year of MTD ITSA, 2026 to 2027 only, HMRC has also announced a specific payment concession that effectively extends the initial no penalty window from 15 days to 30 days, so taxpayers have longer to settle before the first 3% charge bites. This concession is year one only.

From April 2027 the headline rates on the late payment side increase: the day 15 and day 30 charges each rise from 3% to 4%, so leaving tax unpaid into the second month becomes noticeably more expensive from the 2027 to 2028 tax year onwards. The daily 10% per annum charge from day 31 remains unchanged at 10%.

HMRC has also confirmed a soft landing on the submission side for 2026 to 2027: penalty points will not be charged for missed quarterly updates during that first year as taxpayers adjust to the new quarterly rhythm. However, your quarterly updates must still be submitted before you can file your end of year declaration, and late payment penalties and interest (subject to the 30 day year one concession above) apply regardless of the soft landing on points.

The key shift here is that the late submission system is cumulative. One missed deadline used to mean a single fixed penalty. Under the new regime, a pattern of late submissions builds up over time and can create a larger bill than the old approach for those who are repeatedly disorganised.

Basis period reform: the change that already happened

While Making Tax Digital is front of mind for many, an equally important change has already taken effect for unincorporated businesses. From the 2024 to 2025 tax year onwards, trading profits are assessed on a tax year basis aligned to 6 April through to 5 April the following year, regardless of your accounting year end.

Previously, a business with a 31 December year end would be taxed on its profits to 31 December, which often meant profits earned in one calendar year were taxed in a different tax year. That mismatch has now been removed by Schedule 1 Finance Act 2022.

The transition year was 2023 to 2024, when businesses with non standard year ends had to bring in their overlap profits and account for any additional taxable income created by the change. For some businesses this caused a temporary spike in taxable profit even though underlying performance had not changed. Spreading elections can reduce the impact over up to five years.

If you have not had a detailed conversation with your accountant or adviser about how this transition affected your figures, it is worth doing so before your next self assessment filing. Getting basis period reform wrong and then layering MTD on top is a recipe for mistakes that are expensive to unwind.

Corporation tax filing: no more free HMRC portal

For limited companies the change that took effect from 1 April 2026 is equally significant. HMRC permanently closed its joint online filing service for Company Tax Returns and accounts on 31 March 2026.

From 1 April 2026 all companies must use commercial software to file both their CT600 corporation tax return with HMRC and their statutory accounts with Companies House.

The service that closed was the free to use platform that many small and unrepresented companies relied on for years. HMRC has cited the fact that the existing tool did not meet modern digital standards or reflect recent changes to company law, including new small company filing requirements under the Economic Crime and Corporate Transparency Act 2023, as the reason for the closure.

For very small companies with straightforward accounts this does mean an additional software cost, typically £100 to £300 a year depending on features. However it also creates an opportunity to improve bookkeeping habits, maintain better visibility on cash flow throughout the year, and avoid last minute scrambles when filing season arrives.

Common worries and what HMRC actually says

Sole traders and small business owners often share the same practical anxieties around compliance. Can I still use a spreadsheet? What about estimates? What do I do about missing receipts? Will HMRC actually chase me if I am a bit late?

On spreadsheets, the position is nuanced. A spreadsheet alone will not satisfy MTD requirements, but a spreadsheet connected to bridging software via a proper digital link remains a valid approach. What is not permitted is manually copying figures from a spreadsheet into HMRC's systems, as this breaks the digital link under the MTD ITSA rules.

On estimates and provisional figures, HMRC's guidance is reassuring: quarterly updates can include estimated or provisional amounts where a precise figure is not yet available, as long as the position is finalised in your end of year declaration. You do not need a perfect set of books every quarter to stay compliant, you just need to file on time and correct the figures at year end.

On record keeping, HMRC's core requirement has not fundamentally changed. You need complete and accurate records that support the figures on your return, and you must keep them for at least five years after the 31 January submission deadline of the relevant tax year. Scanning receipts, using bank feeds into software or photographing expenses at the time of purchase all meet that standard. The key is consistency and not leaving everything until the end of the quarter or the year.

On late submissions, HMRC's soft landing for quarterly updates during 2026 to 2027 is a genuine concession. However, it would be a mistake to treat it as an invitation to delay getting organised. The final declaration deadline of 31 January 2028 for the 2026 to 2027 tax year carries no such concession, and late payment penalties apply once the year one 30 day payment grace period has expired.

Free MTD readiness checker

Try the MBridge MTD & Compliance Checker →

Our MTD compliance checker walks through your income sources, flags whether you are in scope from April 2026 or the later £30,000 and £20,000 thresholds, and highlights the gaps in your current setup, from digital link issues to missing software, so you can fix them before the first quarterly deadline on 7 August 2026 rather than after a penalty point has already landed.

Three mistakes small businesses make

1. Assuming you are out of scope because profits are below £50,000

The £50,000 threshold is a gross income test, not a profit test. HMRC's guidance is explicit that it combines turnover from self employment with gross rental income across all properties. A sole trader with £40,000 of turnover and a rental property earning £15,000 a year is already in scope, even if their net taxable profit after expenses and mortgage interest is closer to £20,000. Many taxpayers will be surprised in the first quarter of 2026 to 2027 by exactly this calculation.

2. Treating the soft landing as no deadlines this year

The 2026 to 2027 soft landing only suspends late submission penalty points. It does not suspend the obligation to submit quarterly updates, it does not suspend late payment penalties once the year one 30 day payment grace period has run out, it does not suspend interest on unpaid tax, and it does not push back the 31 January final declaration deadline. Treating the soft landing as a free pass is the single most common trap we expect to see, and the bill at year end will be considerably more painful than one missed quarter.

3. Filing corporation tax on the old HMRC portal out of habit

Some directors of small limited companies will try to log back into the HMRC and Companies House joint online filing service when their accounting period ends, only to find it has been decommissioned. Commercial software for CT600 and iXBRL tagged accounts must be in place before your corporation tax filing deadline, not in the week running up to it. Leaving this to the last minute risks late filing penalties of £100 rising to £1,000 plus a percentage of tax surcharge, and late filing of accounts at Companies House carries its own separate penalty regime.

Practical steps for the next twelve months

Given all of the above, here is what we recommend doing now rather than later:

• Check your 2024 to 2025 qualifying income by adding your gross self employment turnover and gross property income. If the combined total exceeds £50,000 you are in scope for MTD ITSA from April 2026.
• Review your record keeping setup. If you already use cloud accounting software, confirm it is listed on HMRC's Find software that works with Making Tax Digital for Income Tax tool and that you know how to submit quarterly updates through it.
• If you use spreadsheets, identify a bridging software solution that can connect your figures to HMRC digitally via a valid digital link, or consider moving to a full accounting package if the time saved justifies the cost.
• For limited companies, confirm that you have commercial CT600 and iXBRL compliant accounts software in place now that HMRC's free joint filing portal has closed. Do not wait until filing season.
• Speak to your accountant about basis period reform, particularly if your business has a non April accounting year end, used the transition year spreading election, or has unused overlap relief you still need to claim.
• Build a compliance calendar. Note your quarterly MTD update deadlines (7 August, 7 November, 7 February, 7 May), your 31 January final declaration deadline, your corporation tax CT600 deadline, your Companies House accounts deadline, VAT quarters and PAYE RTI cut offs so nothing catches you off guard.
• Review your authorisations. If an accountant files on your behalf, make sure their MTD authorisation is linked to your Government Gateway account well in advance of your first quarterly update. Authorisations cannot be rushed on deadline day.
• Decide on your quarter pattern early. If you prefer calendar quarters to the default tax year quarters, make your election by 1 April in the first year of mandation so HMRC has it on file before your first quarter starts.

How MBridge helps

The picture above is genuinely complex, and HMRC guidance, while thorough, is not always written in language that feels accessible after a long working day. Understanding whether you are in scope, which software meets HMRC's digital link requirement, how basis period reform affected your taxable profits and what the penalty regime means in practice for your specific situation all require a clear head and some reliable tools alongside you.

MBridge Factory's free UK compliance calculators, including the MTD compliance checker, the director's loan and Section 455 calculator, the IR35 status checker and the corporation tax calculator, are designed to turn HMRC's legislation into plain answers for small businesses, sole traders and landlords. They use the current 2026 to 2027 rates and thresholds and are updated whenever HMRC publishes new guidance.

HMRC and legislation sources

• HMRC: Making Tax Digital for Income Tax as a sole trader or landlord
• HMRC: Find software that works with Making Tax Digital for Income Tax
• The Income Tax (Digital Requirements) Regulations 2021 (SI 2021/1076)
• HMRC: Penalty points and penalties for late submission
• Schedule 24 Finance Act 2021: Late submission penalties
• Schedule 26 Finance Act 2021: Late payment penalties
• HMRC: Basis period reform guidance
• HMRC: Closure of the joint CT and accounts filing service
• Companies House: Filing your accounts

This article is general information for UK small businesses, sole traders and landlords and does not constitute tax or legal advice. Always check the current HMRC guidance or speak to a qualified adviser before acting.