Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) is no longer on the horizon – it’s here! This article aims to highlight the essentials of MTD, breaking down what it means for your business and outlining the crucial steps you need to take to ensure full compliance.
What is Making Tax Digital?
Making Tax Digital is a key part of the government’s Tax Administration Strategy that aims to introduce a tax system that is assessed closer to real-time. The new rules introduce requirements on businesses and individuals that will see them needing to keep digital records, use software that integrates with the Making Tax Digital system and significantly submit updates every quarter.
Why is the government introducing MTD?
The transition to Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) represents a significant change to taxpayers and HMRC for how self-employment and property income is reported.
Under MTD, businesses, self-employed individuals and landlords will keep digital records and send a quarterly summary of their business income and expenses to HMRC using MTD-compatible software.
In response they will receive an estimated tax calculation based on the information provided to help them budget for their tax. At the end of the year, they can add any non-business information and finalise their tax affairs using MTD-compatible software. This will replace the need for a Self-Assessment tax return.
Who does Making Tax Digital (MTD) for Income Tax apply to?
The Spring 2025 Budget confirmed the government’s intentions to expand the Making Tax Digital (MTD) for Income Tax regime to include a wider range of small businesses.
When the MTD obligations will apply is dependent upon your income threshold:
- From April 2026, MTD for Income Tax will apply to sole traders and landlords with qualifying income over £50,000.
- From April 2027, the rules will be extended to those with incomes over £30,000.
- From April 2028, MTD for Income Tax will now also be extended to sole traders and landlords with income over £20,000.
- The decision to reduce the threshold to £20,000 will ensure that 900,000 sole traders and landlords, who will now join MTD from April 2028, have the time they need to prepare for the changes.
How does MTD work?
The major changes for sole traders, and for people needing to declare self-employed income, under MTD will be requirement to use commercial software that works with the Making Tax Digital for Income Tax system.
Whereas someone would previously have completed a self-assessment, inputting income figures on their return at the end of the year, they will now be required to use a third-party, commercial software (like Quickbooks or Xero) to keep digital records and submit quarterly updates.
Before you can register for MTD, you must be using, or be ready to use, an MTD-compatible digital software package. This software will help you to:
- Create, store and correct digital records of your business income and expenses,
- Send quarterly updates,
- Submit your tax return by 31 January after the end of the tax year (this will also include any other sources of income or gains that you need to declare),
- Receive information, such as your tax estimates, from HMRC.
Additional benefits of MTD and digital accounting
By adopting digital accounting software, you are not only ensuring that you are prepared for MTD, but it also provides a range of benefits for running your business more effectively.
Improved accuracy and calculations
Accounting software reduces human error. Bookkeeping on paper or with spreadsheets means making mathematical calculations “manually”. Mistakes are easily made and putting them right can be time-consuming and expensive.
Providing the data is correct to begin with, accounting software can carry out complex calculations with speed and accuracy.
Efficient Invoicing
Digital accounting significantly streamlines invoicing for businesses by automating key processes and reducing manual intervention. Cloud-based software allows for the quick creation and sending of professional, customized invoices from any device.
Features like automated recurring invoices, payment reminders, and integration with payment gateways ensure faster payments and improved cash flow.
Real-time tracking of invoice statuses eliminates the need for manual follow-ups, while automated data entry minimizes errors and saves valuable time.
Effective business management
Online accounting platforms automatically generate a wide array of insightful reports, including profit and loss statements, balance sheets, cash flow forecasts, and aged receivables. While real-time dashboards provide an immediate overview of key performance indicators, enabling more effective business management.
What you’ll need to comply with MTD?
Reporting income sources
You will need to use accounting software to record and report your different business income sources. This means income from:
- self-employment
- UK property
- foreign property
Some software will be able to report all business income sources, whilst others may focus on a specific source. You may also need to report personal income sources, such as income from savings or dividends.
Keep digital records
If you are not already using an accounting software, you will need to start using one soon. This will help ensure that you are keeping the required records for MTD as well as making it much easier to submit the necessary data to HMRC.
Prepare now for MTD
If you are self-employed and used to filing an annual self-assessment, having to submit account updates to HMRC every quarter will be a significant change, and something that you should begin to prepare for now.
At Driver Accountancy we can help provide you with the necessary advice and expertise to ensure that you ready to comply with the new tax regulations.
