Skip to main content Qualifying income, quarterly updates, penalty points: 14 Making Tax Digital for Income Tax terms you need to know
It’s bad enough having to learn new tax processes - let alone all the jargon that comes with it! Making Tax Digital for Income Tax comes with its own collection of terms to learn. From qualifying income to penalty points and bridging software to quarterly updates - you might be feeling lost.
You know we’re not here to complicate things, so we’ve taken all the MTD for Income Tax terms you need to know and created the ultimate MTD for Income Tax dictionary. Every term and phrase is explained in plain English so you’ll be able to master the jargon and feel like a total MTD pro.
Quick links
Bridging software · Digital records · Exemption · Government Gateway ID · HMRC-recognised · Income stream · Making Tax Digital · MTD-compatible software · Penalty points · Qualifying income · Quarterly updates · Reconnect to HMRC · Tax return · Update periods
Making Tax Digital (MTD)
Making Tax Digital is the government’s initiative to introduce a fully digital tax system in the UK. It began when MTD for VAT was introduced in April 2022 and is currently rolling out for Income Tax from 2026-28. Under MTD, taxpayers must keep digital records and use MTD-compatible software to make tax submissions online.
MTD-compatible software
According to HMRC, MTD-compatible software must be able to do three things:
- create, store and correct digital records
- send your quarterly updates to HMRC
- submit your tax return
HMRC has a tool that helps you find MTD-compatible software, so you can make sure you’re ready for MTD for Income Tax.
HMRC-recognised
To be HMRC-recognised, software must be listed on gov.uk as being MTD-compatible. Before you choose software, it’s a good idea to make sure it is HMRC-recognised for MTD for Income Tax or it may not have all the features you need to stay compliant with the new rules.
Government Gateway ID - soon to be GOV.UK One login
If you’ve ever filed a tax return, you’ll have seen your Government Gateway ID. It’s the series of up to 12 characters you use (alongside a password) to log in to HMRC’s online services. That’s where you manage your Self Assessment and view your final tax bill from HMRC.
You’ll need to use your Government Gateway ID to sign up for MTD for Income Tax. You’ll also need these account details when connecting your accounting software to HMRC.
It is worth noting that the government is in the process of fully replacing the Government Gateway ID with the GOV.UK One login. The GOV.UK One Login will eventually replace all other ways to sign in to services on the government’s website, GOV.UK - but for now, keep using your Government Gateway ID.
Digital records
In the context of MTD for Income Tax, digital records are information about your business finances that you store digitally. This means that you’ll need to use accounting software or bridging software to keep your financial records. We’re sorry to say, receipts in a shoebox are definitely out.
Qualifying income
Qualifying income is the income HMRC uses to calculate if you’ll need to use MTD for Income Tax. Check your last Self Assessment return for your self-employed and property income, as this is what HMRC will use to calculate your qualifying income and, therefore, when you’ll need to comply with MTD for Income Tax.
Your qualifying income is the total income from your sole trades plus your total rental income from property that you own personally, or jointly with other individuals. This is your turnover, not your profit or taxable income. You must calculate this before any costs are deducted.
Your qualifying income only includes sole trader and unincorporated property income. You won’t need to include income you earn from any other source, such as:
- wages or salary from an employer
- dividends from a limited company
- rent from properties owned by a company, not by you personally
- or pension income
For even more information, read our guide to qualifying income.
Income stream
An income stream means a source of money coming in to you as an individual or a business. Examples of income streams include income from a sole trade, income from employment, income from property, dividend income and interest income.
For MTD for Income Tax, knowing how many qualifying income streams you have is really important, as you have to sign up for MTD for Income Tax for each one. You’ll also have to submit separate quarterly updates for each of your qualifying income streams. Each sole trade you have counts as a separate income stream - so if you have a consulting business but also sell handmade products on the side, you’ll need to submit two quarterly updates every three months (one for each trade).
To complete MTD for Income Tax in FreeAgent, you will need one FreeAgent account for each of your income streams. This allows you to keep your finances organised.
If you have property income, you’ll be relieved to know this all counts as one income stream, no matter how many properties you have or if you own any jointly (i.e. with a spouse or other family member). However if you have income from property and income from a sole trade, these will count as two income streams.
Update periods
An update period covers three months of income and costs, which you’ll report in your quarterly update.. HMRC’s standard update periods start at the new tax year (6th April) and you might also see them referred to as “tax quarters”. The standard update periods are:
- 6th April - 5th July
- 6th July - 5th October
- 6th October - 5th January
- 6th January - 5th April
If you would prefer to use calendar quarters (starting on 1st April, 1st July, 1st October and 1st January) for your records, you can switch to calendar update periods in FreeAgent.
Quarterly updates
Under MTD for Income Tax, you have to submit four quarterly updates each year to HMRC. These will tell HMRC about your cumulative income and costs for each qualifying income stream.
If you’ve been consistently keeping digital records, your quarterly updates should be simple to complete. FreeAgent will automatically fill in your quarterly update based on the transactions, invoices and expenses you’ve added. You’ll just need to check that the numbers look right, correct any mistakes, and click ‘Send update’. Easy peasy!
You’ll also have to submit an end-of-year update. If you have more than one qualifying income stream, you’ll need to submit an end-of-year update for each one. This finalises the total income and costs and lets you make any year-end changes like adding adjustments and allowances and declaring Class 4 National Insurance exemptions.
The deadlines to submit each quarterly update are:
- first quarter (6th April - 5th July, or 1st April - 30th June): 7th August
- second quarter (6th July - 5th October, or 1st July - 30th September): 7th November
- third quarter (6th October - 5th January, or 1st October - 31st December): 7th February
- fourth quarter (6th January - 5th April, or 1st January - 31st March): 7th May
Tax return
At the end of the year, you have to submit a tax return to HMRC under MTD for Income Tax. Unlike under the old-style Self Assessment, you don’t have to calculate how much tax and National Insurance you’ll owe, HMRC will do this for you.
Your tax return is made up of two elements. The first includes the final figures for all your qualifying income streams, along with any adjustments or allowances you’re eligible for on this income. The second includes details of all your other income sources. Combined together, these elements will let HMRC calculate your final tax bill.
You must submit your tax return to HMRC by 31st January in the following tax year.
What’s the difference between the end-of-year update and the final declaration?
In FreeAgent, we split the final tax return into two parts: an end-of-year update and a final declaration. You’ll submit one end-of-year update for each of your qualifying income streams, and one final declaration which brings together all your income streams and gives you your final tax breakdown from HMRC.
Each software deals with MTD for Income Tax year-end slightly differently. The process in FreeAgent makes it simpler to manage different streams of income - and lets you check your Tax Breakdown before you submit your final declaration, which gives you one final opportunity to check for mistakes.
If you have only one income stream (i.e. one sole trade and no property income, employment or other income sources) then your end-of-year update might look fairly similar to your final declaration. However, if you have two qualifying income streams (i.e. one sole trade and property income), you’ll send two end-of-year updates (one for each income stream) and one final declaration.
HMRC calls this process of sending end-of-year updates and final declaration: your MTD tax return. This can be very confusing if you are used to calling your old-style Self Assessment filing a tax return - they’re not the same!
Exemption
An exemption for MTD for Income Tax is a valid reason why you do not need to use MTD for Income Tax. HMRC sets out two types of exemptions: automatic exemptions that are given by HMRC based on the information you provided in your 2024/25 Self Assessment (for example, having qualifying income under £20,000 per year), and exemptions you must apply for (for example, being digitally excluded and therefore unable to keep digital records).
You can find a full list of exemptions from MTD for Income Tax here.
Penalty points
HMRC has introduced a new points-based penalty system for MTD for Income Tax. One penalty point will be applied to your record each time you miss a filing deadline, and you’ll only be fined once you reach four points (or two points for volunteers who are using MTD for Income Tax earlier than mandated).
Take a look at our guide to MTD penalties to find out how to avoid them.
Reconnect to HMRC
Every 18 months, you’ll need to reconnect your MTD-compatible accounting software to HMRC.
In FreeAgent, you’ll be warned before your connection to HMRC expires. It’s easy to reconnect, you’ll just need to click the ‘Update connection’ button to reconnect for another 18 months.
Bridging software
Bridging software is an alternative to full-service accounting software. Bridging software allows you to send quarterly updates and submit your tax return from your existing, non-MTD-compatible records (like spreadsheets).
However, it’s important to note that bridging software must be able to connect to your spreadsheet without the need for any manual data entry or copying and pasting.
Get MTD done with FreeAgent
We know all these new terms and rules can feel overwhelming, but we’re here to help! We have lots of resources on MTD for Income Tax from webinars to detailed guides on filing.
And if you need MTD-compatible, HMRC-recognised software, we have that too. Find out how we’re simplifying MTD for Income Tax and your daily admin.
Sign up to try FreeAgent free for 30 days.
Disclaimer: The content included in this guide is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this guide. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.
