MTD is live now and CIS subcontractors are caught by a threshold most guides miss
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is not a future obligation for the higher-earning subcontractor. It started on 6 April 2026. If your gross income exceeds £50,000, you are in scope right now. And the figure that determines whether you are in scope is your gross income, the total value of the work you invoice before any expenses, and before any CIS deductions your contractors make. It is not the money that actually lands in your bank account.
That distinction is where most guides stop, and where most CIS subcontractors get caught out. This page explains exactly who is in scope from April 2026 and from April 2027, what MTD requires in practice, and how your CIS records feed into the new system.
Who is in scope: the two thresholds
MTD ITSA is being phased in by income level:
| Start date | Gross income threshold | Who is affected |
|---|---|---|
| 6 April 2026 | Over £50,000 | Sole traders and partnerships with annual gross income above £50,000 |
| 6 April 2027 | Over £30,000 | Sole traders and partnerships with annual gross income above £30,000 |
Limited companies are not currently in scope for MTD ITSA (they have their own Corporation Tax obligations). MTD ITSA applies to individuals and partnerships filing Self Assessment. For sole-trader CIS subcontractors, that means checking whether your gross income crosses these thresholds now or in the next tax year.
The threshold trap: gross income, not net receipts
This is the central point this page is written around, because it catches a large number of CIS subcontractors by surprise.
HMRC tests the MTD threshold against your gross income (total turnover before expenses), not against your net-after-deduction receipts. For a CIS-registered sole trader working at the standard 20% rate, the difference is material.
Worked example
| Amount | |
|---|---|
| Gross income invoiced to contractors during 2026/27 | £60,000 |
| CIS deductions made by contractors (20% on labour) | £12,000 |
| Amount actually received into your bank account | £48,000 |
| Figure HMRC tests against the MTD threshold | £60,000 |
| In scope from April 2026? | Yes (£60,000 exceeds £50,000) |
The subcontractor in this example banks £48,000. They might reasonably assume they are under the £50,000 threshold and that MTD does not apply yet. They are wrong. The £60,000 gross is the figure that matters, and they should have been compliant from 6 April 2026.
The same logic applies at the £30,000 threshold from April 2027. A subcontractor with £36,000 gross, deducted down to £28,800 in the bank at 20%, is in scope from April 2027 even though their receipts look modest.
The deductions themselves (the amounts your contractors hold back and pass to HMRC on your behalf) are not lost. They are an advance payment against your eventual Self Assessment bill, a credit you claim back through your end-of-year return. But for the purpose of deciding whether MTD applies, those deductions are irrelevant. The gross figure is all that counts. For a fuller explanation of how CIS deductions work and the labour-only rule, see our guide to CIS deduction rates explained.
What MTD for Income Tax actually requires
MTD ITSA replaces the old annual Self Assessment return with a four-quarterly-updates model plus an end-of-year finalisation. There are three core obligations:
1. Digital record-keeping
Every item of income and every allowable expense must be recorded digitally, in MTD-compatible software. Paper records, spreadsheets sitting on a desktop, or notes in a notebook are not sufficient on their own. The digital record must be capable of generating the quarterly update submissions directly, or of feeding into a bridging tool that does so.
For CIS subcontractors, this means the CIS payment and deduction statements your contractors issue each month must be entered into your software as they arrive. The gross figure on each statement is your income entry. The deduction figure is recorded separately: it is tax paid in advance, not an expense.
2. Quarterly updates
Four times a year you submit a summary of your income and expenses for that quarter via your software directly to HMRC's systems. The quarters align with the tax year:
| Quarter | Period | Submission deadline |
|---|---|---|
| Q1 | 6 April to 5 July | 7 August |
| Q2 | 6 July to 5 October | 7 November |
| Q3 | 6 October to 5 January | 7 February |
| Q4 | 6 January to 5 April | 7 May |
These are not four mini tax returns with payments attached. They are cumulative data submissions. HMRC uses them to build a running picture of your income position, but no tax is calculated or paid at the quarterly stage. Tax is still settled through the annual process.
3. End-of-period statement and final declaration
After the tax year ends (after 5 April), you submit an end-of-period statement through your software confirming your final income and expense figures. You then make a final declaration, replacing what was previously the SA100 Self Assessment return. The deadline for the final declaration is 31 January following the end of the tax year, the same date as the old SA return and the payment-on-account deadline.
The year-1 penalty grace and what it does NOT cover
HMRC has confirmed a penalty grace for 2026/27 (the first year of the £50,000 threshold): HMRC will not issue penalty points for late quarterly updates. Under the new points-based penalty system, missing quarterly submissions accumulates points and eventually triggers a financial penalty. The grace period means those points will not be issued if a quarterly update is late during 2026/27.
However, the grace is narrower than it sounds. It covers only the quarterly-update penalty points. It does not cover:
- Late annual returns. The end-of-period statement and final declaration must still be filed by 31 January 2027. Missing that deadline attracts the existing SA late-filing penalty structure.
- Late payment. Payments on account (31 January and 31 July) and balancing payments (31 January) still incur late-payment interest and surcharges if missed.
- Incorrect returns. Careless or deliberate errors in quarterly data are still subject to inaccuracy penalties.
The practical lesson: the grace period is not permission to ignore MTD for a year and catch up later. It is a buffer against penalty points for imperfect quarterly compliance in year one. Getting your software set up and your records digital from the start is still the right approach.
How CIS records feed into your MTD digital records
One advantage CIS subcontractors have over some other self-employed people is that their income documentation is already structured. Every contractor you work for is required to give you a CIS payment and deduction statement for each payment period, showing the gross amount paid, the amount of materials (excluded from the deduction base), and the deduction made.
These statements become your primary income source documents under MTD. The workflow is straightforward:
- Receive each monthly CIS statement from your contractor.
- Record the gross figure as income in your MTD software for that period.
- Record the deduction separately as CIS tax deducted at source (a prepayment of your tax bill, not an expense).
- Record any materials you supplied separately if relevant (materials are excluded from the CIS deduction base under the scheme rules, so they may appear on your statement with £0 deduction applied).
- Your software totals these up each quarter and generates the quarterly update submission.
The key point to make clear to your software: the CIS deduction does not reduce your income. Your income for the period is the gross amount. The deduction is a separate line. At the end-of-year stage, your software will present the total CIS tax deducted over the year as a credit against your final tax bill, which is how you claim any overpayment back.
Most registered CIS subcontractors end the year with more CIS deducted than their total tax liability, because the 20% is taken on labour before expenses and before the personal allowance. MTD does not change that dynamic. It just changes how the figures are reported and when HMRC can see them. For more on how CIS refunds work and why most subcontractors are owed money, see our guide to how to claim your CIS tax refund.
MTD software: what to look for
The software market has moved quickly now that the April 2026 start date has arrived. Most of the major construction-accounting packages have MTD ITSA modules available. When choosing or upgrading, check for:
- HMRC recognition. The software must appear on HMRC's list of recognised MTD ITSA software. Do not assume a package is compliant because it handles CIS or Self Assessment: the MTD ITSA submission capability is a separate qualification.
- CIS workflow. Good construction accounting software will have a dedicated CIS module that handles contractor payments, generates deduction statements (if you are a contractor as well as a subcontractor), and populates the income records correctly for MTD purposes.
- Quarterly submissions built in. The software should generate the quarterly update submission directly from your records without requiring you to export data or use a separate bridging tool. Bridging tools work but add a step and an additional cost.
- Bank feeds. Automatic bank feeds reduce the risk of missed entries. For a CIS subcontractor, the bank receipts (net of deductions) will not match the gross income figure in your records. Good software handles this reconciliation automatically once the CIS statements are entered correctly.
Steps to take now if you are in scope from April 2026
If your gross income is above £50,000 and you have not yet set up MTD-compatible software, the quarterly submissions for Q1 (6 April to 5 July 2026) will be overdue. The year-1 grace means you will not receive penalty points for the late Q1 submission, but you should get set up before the Q2 update falls due on 7 November 2026.
A practical checklist:
- Confirm your gross income figure for 2025/26 (the prior year) or your projected 2026/27 figure. Remember: gross means total before CIS deductions, not net receipts.
- If gross income exceeds £50,000, register for MTD ITSA through your HMRC online account (or ask your accountant to do so on your behalf).
- Choose and set up MTD-compatible software. Link it to your HMRC account.
- Gather your CIS payment and deduction statements from April 2026 onwards and enter them as digital records.
- Submit your Q1 update as soon as your software is set up. The grace covers penalty points, not the underlying obligation.
- Confirm your end-of-period statement deadline is 31 January 2027 and note the payment-on-account dates.
If you are approaching the £30,000 threshold and will be in scope from April 2027, now is a good time to start using MTD-compatible software voluntarily so the process is familiar before it becomes mandatory.
MTD alongside your wider CIS obligations
MTD for Income Tax changes how you report your income to HMRC. It does not change the underlying CIS rules: you are still paid net of 20% (or 0% if you hold Gross Payment Status), your contractors still deduct from labour only (not materials), and you still reclaim overpaid deductions via your annual return. MTD changes the reporting mechanism, not the scheme mechanics.
For subcontractors who want to stop having 20% deducted at source altogether, Gross Payment Status is the route. GPS removes the deduction entirely, settling your tax through Self Assessment (or Corporation Tax for a limited company) instead. The turnover threshold for a sole trader is £30,000 in net annual CIS income, so if you are in scope for MTD from April 2027 you are also likely close to the GPS turnover threshold. Holding GPS also simplifies MTD record-keeping, because your gross income and your receipts are the same figure.
The two systems are connected in another way too: GPS requires a clean compliance record. Missing MTD quarterly submissions, or failing to file your annual return on time, can affect the compliance test that GPS holders must pass each year. Keeping on top of MTD is therefore not just a reporting obligation; for GPS holders or applicants it is also part of keeping the scheme's most valuable benefit.
For a full picture of how CIS fits into your tax position as a sole trader or limited company director, see our overview of how CIS works.
Where to get help
MTD is a significant change in how sole traders report their income to HMRC, and the interaction with CIS records adds a layer of complexity that generic guides do not always address well. Setting up the software correctly so that gross CIS income and deduction credits reconcile properly from the start will save considerable trouble at year-end.
To see where your Self Assessment position lands under the current rules, use our CIS Self Assessment calculator. It nets your CIS deductions off against the final bill so you can see whether a refund is coming.
Our team works with CIS subcontractors and limited company directors in construction every day. We can set up your MTD software, ensure your CIS records are structured correctly as digital records, file your quarterly updates, and handle the end-of-year finalisation. See our full range of services on the services page, or get in touch to discuss your position.