Making Tax Digital and what it means for employees

What Making Tax Digital is

Making Tax Digital (MTD) is HMRC's programme to move tax reporting from annual returns to digital, more frequent submissions. The goal is to reduce errors, close the tax gap, and give taxpayers a clearer real-time picture of what they owe.

MTD has already been rolled out for VAT-registered businesses. The next major phase applies to income tax, which is the part most relevant to individuals.

MTD for Income Tax Self Assessment

MTD for Income Tax applies to people who file self-assessment tax returns — typically the self-employed, landlords, and people with significant non-PAYE income.

Key dates

• April 2026: MTD for Income Tax becomes mandatory for self-employed individuals and landlords with qualifying income above GBP 50,000
• April 2027: The threshold drops to include those with qualifying income above GBP 30,000
• Future phases: HMRC has indicated further expansion to lower income thresholds, but specific dates have not been confirmed

What changes in practice

Instead of filing one annual self-assessment return, affected taxpayers will need to:

1. Keep digital records using MTD-compatible software 2. Submit quarterly updates to HMRC (every three months) 3. Submit a final declaration after the end of the tax year (replacing the annual return)

The quarterly updates give HMRC and the taxpayer a running estimate of tax owed, which should reduce the surprise of a large tax bill at the end of the year.

What this means for PAYE employees

If you are a standard PAYE employee with no other income sources, MTD for Income Tax does not directly affect you in the near term. Your employer already reports your pay and deductions to HMRC in real time through the PAYE system.

However, MTD matters for employees in these situations:

Employees who also file self-assessment

If you have a PAYE salary plus self-employment income, rental income, or other taxable income that requires self-assessment, you will need to comply with MTD when your qualifying income exceeds the threshold. This means keeping digital records and submitting quarterly updates for the non-PAYE income.

Employees with rental income

Landlords with rental income above the threshold will need to comply with MTD. If your total qualifying income (rental plus self-employment) exceeds GBP 50,000 from April 2026, you are in scope.

Employees considering side income

If you are thinking about freelance work, property investment, or other income streams alongside employment, understanding the MTD obligations before you start is worthwhile. The record-keeping and quarterly reporting requirements are more demanding than the current annual self-assessment process.

What MTD does not change

MTD changes how you report income and how often, but it does not change:

• the tax rates or bands
• the personal allowance
• National Insurance rates or thresholds
• student loan repayment thresholds
• the way PAYE works for employment income

Your take-home pay from employment is unaffected by MTD.

The practical benefits

Despite the additional reporting burden, MTD offers some genuine advantages:

• Fewer surprises: quarterly updates mean you see your estimated tax position throughout the year rather than discovering a large bill months after the tax year ends
• Fewer errors: digital record-keeping reduces manual calculation mistakes
• Better planning: a running tax estimate makes it easier to set aside money for tax payments or adjust pension contributions to manage your tax position

Software requirements

MTD requires the use of HMRC-compatible software for record-keeping and submissions. HMRC maintains a list of compatible software providers. Many are cloud-based services with monthly subscription costs, which is an additional expense to factor in.

Free software may be available for simpler cases, but most people with qualifying income above the threshold will need a paid solution.

How this connects to PayPath

PayPath models PAYE employee deductions — income tax, National Insurance, and student loans — based on an annual estimate. This does not change under MTD.

Where PayPath is useful in the MTD context:

• Planning total income: if you have PAYE income plus other sources, the take-home pay calculator shows your employee-side deductions so you can estimate the additional tax on other income
• Modelling pay changes: if a raise or bonus changes your total income position, the calculators help you understand the employee-side effect before considering self-assessment obligations

Practical steps

1. Check whether you need to file self-assessment — if not, MTD does not affect you yet 2. If you do file self-assessment, check whether your qualifying income exceeds the GBP 50,000 threshold for April 2026 3. Start researching MTD-compatible software if you are in scope 4. Use the take-home pay calculator to understand your PAYE position, then plan your total tax position including any non-PAYE income separately