Making Tax Digital: half of first cohort missed August deadline

Just over half of the first cohort required to comply with Making Tax Digital (MTD) for Income Tax submitted their initial quarterly update by the 7 August 2026 deadline, according to figures released by HMRC. Of the 864,000 sole traders and landlords expected to fall within the first phase, only 436,000 met the deadline. With around 1.08 million additional taxpayers set to enter the system from 6 April 2027, the compliance shortfall in the opening wave raises questions about readiness for the next, larger group.

HMRC confirmed on 5 October that the qualifying-income threshold for MTD will fall from £50,000 to £30,000 next April. A further reduction to £20,000 is planned for April 2028, which will bring yet another tranche of sole traders and landlords into the regime. Those who missed the August deadline can still submit late updates during the current tax year without penalty, but that grace does not extend to the incoming cohort.

Who is caught and why it matters

A key source of confusion, according to Oxfordshire-based chartered accountancy firm Ridgefield Consulting, is that the £30,000 threshold applies to gross qualifying income rather than taxable profit. A sole trader with £32,000 in turnover but only £14,000 in profit after expenses is still in scope. Similarly, taxpayers with multiple qualifying income streams, such as a small business alongside a rental property, must aggregate those figures. Employment income, dividends and pension receipts do not count toward the threshold, but the combination of self-employment and property receipts can tip people over it unexpectedly.

Simon Thomas, Managing Director at Ridgefield Consulting, said: "The £30,000 figure sounds like a lot, but it's measured on what comes in, not what's left after expenses. Plenty of small business owners and landlords who think of themselves as modest earners could find they're in scope once they add up their qualifying income."

The firm also notes that compatible software is not necessarily expensive. Spreadsheets remain acceptable for record-keeping provided they are paired with HMRC-approved bridging software, and free MTD-compatible applications are available from third-party providers.

Penalty regime tightens for the next cohort

The regulatory stakes increase for those entering MTD from April 2027. During the 2026/27 tax year, HMRC has not applied penalty points for late quarterly submissions, giving the first cohort a degree of leeway as they adjust. That changes with the April 2027 intake: each missed quarterly deadline will attract a penalty point, and a £200 financial penalty triggers once four points accumulate. The shift from a soft-launch approach to a live penalty regime is a material change that practitioners say underscores the urgency for prospective entrants to prepare early.

Market context for tax-software providers

The rolling MTD expansion represents a sustained commercial opportunity for accounting-software vendors. Platforms such as Xero, Sage, QuickBooks and FreeAgent have built MTD-compatible filing modules and have been marketing aggressively to the self-employed and landlord segment. The next threshold drop, projected to bring in more than a million additional users by April 2027, is likely to accelerate software-adoption decisions and intensify competition at the lower end of the market, where free or low-cost bridging tools compete directly with subscription-based packages. HMRC's own MTD vendor list provides a baseline quality assurance, but choosing and onboarding a tool before the deadline remains the responsibility of the taxpayer or their agent.

With six months to the next threshold change and a proven pattern of late compliance among the first group, accountancy practices and software vendors alike face a short window to reach prospective entrants before the penalty clock starts.