Making Tax Digital for Income Tax: Segment your client base

Segment your clients for Making Tax Digital for Income Tax, save time, stay compliant, and hit deadlines.

Quick Guide To Segmenting Your Client Base For MTD For ITSA

Table of contents

Key takeaways

• Segment your client base now based on income thresholds (£50k for 2026, £30k for 2027, £20k for 2028) and digital readiness levels to prioritise your practice's resources and ensure timely MTD compliance across your portfolio.

• Audit your current client data by verifying income levels, assessing digital capabilities, and identifying existing software usage to create targeted preparation strategies for each client segment.

• Prepare your clients early for the transition from annual Self Assessment to quarterly digital updates by recommending MTD-compatible software and delivering training on digital record-keeping requirements.

• Leverage the phased implementation timeline to reduce last-minute pressure on your team and strengthen client retention by offering proactive, value-added advisory support tailored to each client's compliance deadline and support needs.

Making Tax Digital for Income Tax: Essential background

What is Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax is the next step in the government's plan to modernise the UK tax system. It fundamentally changes how your sole trader and landlord clients record and report their income to HMRC. Instead of filing a single Self Assessment tax return each year, your clients will need to use compatible software to keep digital records and send quarterly updates on their income and expenses.

Who will be affected by MTD for IT?

From April 2026, your sole trader and landlord clients with qualifying income over £50,000 will be legally required to use MTD for Income Tax. This mandate extends to clients with qualifying income over £30,000 from April 2027, and those with income over £20,000 from April 2028.

This means your clients will need to use MTD-compatible software to keep and maintain digital records and send updates to HMRC. The annual Self Assessment will be replaced by quarterly updates and a Final Declaration.

Income thresholds and who must follow MTD for Income Tax

Your clients' eligibility for MTD for IT depends on their total qualifying income from business or property. The rules apply to sole traders and landlordsoperating as individuals, not companies or partnerships.

How income is calculated for MTD thresholds:

  • Gross income basis: The thresholds are based on gross income or turnover before expenses, not net profit
  • Combined income sources: Add together all qualifying income from self-employment and property rental
  • Annual assessment: HMRC looks at total income for the tax year to determine if your clients meet the threshold

For example, if your client earns £35,000 from self-employment and £20,000 from rental property, their total qualifying income is £55,000. This means they'll need to follow MTD for IT rules from April 2026, even though neither income source alone exceeds the £50,000 threshold.

Review each client's income across all qualifying sources so you know exactly when they need to join MTD for Income Tax. This assessment should become a standard part of your annual client review process.

Who is exempt from Making Tax Digital for Income Tax

Not all of your sole trader and landlord clients will need to follow MTD for IT rules. Understanding exemptions helps you advise clients accurately and avoid unnecessary compliance work. Common exemptions include clients who are digitally excluded—those unable to use digital tools due to age, disability, remote location, or religious beliefs. As their trusted adviser, you'll need to review HMRC's guidance to determine whether an exemption applies to each client's specific circumstances.

Key dates and deadlines for MTD

Managing your practice's MTD transition effectively means staying ahead of key deadlines. Here are the critical dates you need to plan around:

  • From April 2026: Your sole trader and landlord clients with annual business or property income above £50,000 must comply with MTD for IT rules
  • From April 2027: The mandate extends to clients with annual business or property income above £30,000
  • From April 2028: Clients with annual business or property income above £20,000 must join

HMRC will provide further details on the timeline for general partnerships in the future. For taxpayers below the mandated thresholds, the government has stated it will explore how it can bring digitalisation benefits to the approximately 4 million taxpayers with income below £20,000.

What Making Tax Digital for IT means for your practice

Making Tax Digital represents the government's digital transformation of the UK tax system. The next phase, MTD for Income Tax, will directly impact your sole trader and landlord clients from April 2026.

If you supported clients through MTD for VAT—which launched in 2019 and became mandatory for all VAT-registered businesses in April 2022—you'll recognise the scale of change ahead.

This represents a significant shift in how you'll deliver tax compliance services. By preparing your practice early, you can turn this regulatory change into an opportunity to strengthen client relationships and position your firm as a trusted digital adviser. One of the most strategic steps you can take now is segmenting your client base for MTD for IT.

What is client segmentation?

Client segmentation is a strategic approach to dividing your client portfolio into targeted groups based on their MTD compliance requirements. This methodology helps you identify which clients need MTD compliance, when they must start, and what level of support your practice needs to provide to each group.

Ways to group your clients for MTD for Income Tax:

  • Income thresholds: Whether clients meet £50k, £30k, or £20k limits
  • Compliance readiness: Current record-keeping methods and digital capabilities
  • Support needs: Level of guidance your practice must deliver for successful transition

What are the benefits of segmenting clients for MTD for IT?

Client segmentation is a foundational step in preparing your practice for MTD for IT. Taking a segmented approach to your client base helps you:

  • understand the varying needs across your client portfolio
  • identify which clients will require intensive guidance and support to achieve MTD readiness
  • tailor your service offerings and resource allocation to support clients effectively through the MTD transition
  • create targeted communication strategies for different client groups
  • price your services appropriately based on the support level each segment requires

When should you begin segmenting your clients?

Start segmenting your clients now to ensure smooth MTD compliance across your practice. With April 2026 approaching rapidly, early preparation delivers significant advantages for your firm:

  • Reduced last-minute pressure on your team during peak compliance periods
  • Strategic resource allocation across your practice based on client needs
  • Enhanced client retention through proactive, value-added advisory support
  • Improved capacity planning for training, onboarding, and implementation

How to segment clients for MTD for Income Tax

Effective client segmentation delivers targeted MTD preparation by categorising your portfolio based on compliance needs and readiness levels. Follow these practical steps to get started:

Step 1: Audit yourcurrent client information

  • Update client records: Verify income levels and business structures across your portfolio
  • Assess digital readiness: Survey clients on current record-keeping methods and digital confidence
  • Identify software usage: Check which clients already use accounting software versus spreadsheets or paper records

Step 2: Build your practice's segmentation database

  • Create a tracking system: Record income levels, business types, current software usage, and digital capability for each client
  • Use Xero's free segmentation tool: Download our free client segmentation calculator designed specifically for accounting and bookkeeping practices

Step 3: Categorise clients by MTD timeline

  • 2026 group: Clients with income over £50,000 (immediate priority for your practice)
  • 2027 group: Clients with income over £30,000 (medium-term priority)
  • 2028 group: Clients with income over £20,000 (longer-term planning)

Step 4: Assess digital readiness within each timeline group

Divide clients into readiness categories based on their current practices. Clients still using paper records will need education on the digital links rule, and you'll need to support their transition to digital record-keeping. Tools like Hubdoc can simplify digital record-keeping for your clients who are currently using paper records.

Step 5: Develop targeted action plans for each segment

Create a clear implementation plan for each client group. Decide how and when you'll communicate MTD changes, what training or resources they'll need, and what support services your practice will provide. Consider developing tiered service packages that align with different client segments.

Download Xero's complimentary client segmentation tool to streamline this process. This segment overview and workload calculator helps you plan resource allocation and prepare your practice systematically for MTD for IT.

Examples of client segments for MTD

Multiple segmentation approaches help you create targeted support strategies that address different client needs across your practice:

By compliance requirements:

  • Income level: £50k, £30k, or £20k thresholds determining compliance dates
  • Client type: Sole traders, landlords, or contractors with different business models

By readiness level:

  • Current record-keeping: Paper-based, spreadsheet users, or cloud software adopters
  • Digital capability: Tech-savvy clients versus those requiring hands-on support
  • Service relationship: Tax-only clients versus full-service advisory relationships

By practice resource needs:

  • High-touch clients: Require significant training, software setup, and ongoing support
  • Medium-touch clients: Need guidance and periodic check-ins during transition
  • Low-touch clients: Digitally capable, requiring minimal support beyond compliance setup

Getting your clients ready for Making Tax Digital

Supporting your clients through the MTD transition positions your practice as an essential strategic partner. You can demonstrate value by:

  • Communicating the changes clearly and early through targeted client communications
  • Assessing their current record-keeping methods and digital capabilities
  • Recommending MTD-compatible software that aligns with their business needs and technical confidence
  • Offering training sessions and ongoing support to build their confidence with digital tools
  • Developing service packages that address different client segments' needs

A proactive, consultative approach helps reduce client anxiety, ensures compliance from day one, and strengthens your position as their trusted adviser.

Learn more about MTD for IT

Start your practice's MTD preparation today to ensure client compliance and unlock practice growth opportunities. Early segmentation reduces pressure on your team and improves outcomes for your clients.

Next steps for your practice:

FAQs on Making Tax Digital for Income Tax client segmentation

Here are answers to common questions accountants and bookkeepers ask about MTD for IT and client segmentation.

Can accountants manage Making Tax Digital for their clients?

Yes, as an accountant or bookkeeper, you can manage your clients' MTD for IT obligations on their behalf. This includes registering them for the service, submitting their quarterly updates, and filing their Final Declaration. You'll need to be authorised as their agent with HMRC to act on their behalf.

What software do clients need for MTD for Income Tax?

Your clients will need HMRC-recognised MTD-compatible software that can maintain digital records of income and expenses, prepare quarterly updates, and submit them directly to HMRC. Xero is an approved MTD-compatible software provider that simplifies compliance for both you and your clients, with seamless integration for practice management.

What happens if a client's income drops below the threshold?

If your client's income falls below the MTD for IT threshold, they may be able to exit the service. However, they must continue following MTD rules until HMRC formally confirms they can leave. Advise clients to maintain digital records until their exit is confirmed to ensure continued compliance.

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