Making Tax Digital (MTD) for Income Tax* is a huge change to how self-assessment will work for unincorporated businesses such as landlords and the self-employed. These rules will change how you will keep your records, when you submit your tax returns to HMRC and will affect an estimated 1.6 million sole tradersand landlords. *formerly referred to as Making Tax Digital for Income Tax Self Assessment (MTD ITSA)

Why is the process changing?

Errors and avoidable mistakes cost HMRC an estimated £9 billion per year in uncollected taxes. Keeping information as real-time as possible reduces errors. Making Tax Digital is part of a reform of taxes across all business which started with VAT and will extend to include Corporation Tax in the next phase.

So what are the new rules?

Let’s take a look at the current process.

The current Self Assessment process

Your earnings from between 6th April one year and 5th April the next are reported by Self Assessment tax return before 31st January the following year. If you complete your self-assessment right on the deadline, that’s around 10 months after your year end and a whopping 22 months before the start of that tax year. You can start to see how it would be easy to make mistakes when looking that far back.

Now let’s take a look at what will change.

The proposed changes for Making Tax Digital

The proposed changes split the year into 4 quarters starting on 6th April. At the end of each quarter you will have a further month to submit a return to HMRC so at the start of August 2026, you must send your return covering 6th April – 5th July. Remember, the accounts must be kept and sent digitally. As well as these 4 quarterly returns, there will also be a final return similar to the current self assessment which ties all the information together and includes your income details from other sources e.g. pensions, employment etc. Any tax owed is also due on the 31st January of the following year after the tax year end. This doesn’t change under MTD.

Does it affect me?

The rules mean businesses and landlords with annual turnover* above £50,000 will need submit income tax information following the MTD rules starting on or after 6th April 2026. Those with income over £30,000 will be mandated from 6th April 2027. If either of these apply to you, your accounting records will need to be kept digitally and sent to HMRC digitally after the end of each quarter.

* Worth noting, turnover means the total amount of income. It’s the top line figure before you begin to deduct anything and calculate profit. For example if you have £50,000 of income and £40,000 of expenses, your profit will be £10,000 but you will need to follow the MTD rules from 6th April 2026.

Turnover in the tax year we are currently in (6th April 2024 – 5th April 2025) will be used to determine if and when you are mandated to follow the rules.

If you’re an unincorporated business (a sole trader or landlord) with a total turnover above £30,000 , here’s what will change for you:

  • Your business records will need to be kept and sent to HMRC digitally from 6th April 2026 or 6th April 2027. Realistically this means you will need accounting software for each business. i.e. if you’re a sole trader with a rental property you will need two accounting software accounts (these can be on the same software).

  • Your accounting software may need a digital bank feed, meaning you need to connect your business bank account to the accounting software. This also means you could need a separate business bank account (for each business).

HMRC will be sending out letters in Spring 2025 to those who are likely to be mandated. This is based on your turnover for tax year 2023-2024 and assumes that this year’s income will be the same. A further letter in January 2026 will confirm this and when your start date will be.

If you don’t want to wait for the letter, HMRC have created a tool where you can check if you are likely to need to follow the MTD rules: Find out if and when you need to use Making Tax Digital for Income Tax

The Government have stated that those with turnover of £20,000 or above will be brought into MTD by the end of the current parliament.

So what steps do you need to take to get ready?

You will need accounting software:

Moving to digital isn’t easy, especially if you’re part way through the business year, however if you have a very simple business, or a good grasp of the accounts, you may be able to manage this yourself. Moving as soon as is practically possible has a lot of advantages including:

  • You will gain peace of mind from knowing everything is correct; the addition, rounding and completeness of information (especially with a business bank account connected).
  • There are many benefits of software such as invoicing with ease, tracking if payments have been made, chasing those that haven't and reporting easily on the business finances. Usually adopting software will reduce your admin time if you’re moving from paper or even spreadsheets/documents.
  • Accountants and bookkeepers are more likely have time to help you the sooner you decide to make the move.

To help small businesses comply with the making tax digital rules, HMRC have committed to provide free software for businesses who meet all of these conditions:

  • it is unincorporated (for example self-employed persons or landlords)
  • it has turnover within the scope of Income Tax below £85,000
  • it has no employees
  • it uses cash basis accounting*

However, there is no expectation that a free product will include VAT so if you’re VAT registered, free software is unlikely to be an option.

Some bank accounts provide you with free software (see below) . If you don’t qualify for free software, you can expect to pay between £10 and £40 per month, depending on what functionality you need. If you need help to decide on software please get in touch and we can chat through the options.

* You can see if you use Cash Basis accounting by looking on your previous tax return. Look at Box 8 on the Self-employment pages, and/or Boxes 5.2 and 20.2 on the UK property pages.

You will probably need a separate business bank account

Bank accounts can usually be linked to your accounting software, meaning the lines on your bank statement are automatically fed into the accounts.

If you use a personal account, you will spend extra time and/or money explaining away the transactions that don’t belong to the business.

Some business bank accounts offer free access to accounting software. FreeAgent software is free of charge to Natwest, RBS & Mettle Business Banking Customers

You may want to change your Year End Date

If your business year ends on a date that isn’t 31st March up to 5th April, "Basis Period Reform" is happening in advance of the introduction of the MTD ITSA rules. In brief this will mean you report an extra long tax year starting and pay the associated tax.

There may be ways to reduce this potentially large tax bill – by deducting overlap profits if you have them, or by spreading the cost over 5 years.

Tax year 2023-2024 is the transition year for Basis Period Reform so if this affects you, read more on the link below:
* 25/02/22 Basis Period Reform

Consider engaging a bookkeeper or accountant now

If digital isn’t your thing, or you will need help to get going, now is the time to find yourself someone who can help. HMRC estimates that 31% of those who will be mandated don’t have an Agent (someone who deals with HMRC on your behalf). Accountants and bookkeepers are expecting a large increase in demand for services as we draw closer to the deadline, so if you need help, you would be wise getting it soon. You can plug your postcode in here to find a local bookkeeper.

If that happens to be me, get in touch.

Anything else?

Yes the penalty system for late submissions is changing to a point-based system, similar to that in place for VAT. 18/11/22 VAT Penalty Reform

 

For Reference:
An Overview of Making Tax Digital. Updated 19 December 2022



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