Making Tax Digital for Income Tax: What You and Your Clients Need to Know
For sole traders and landlords in the UK, the way you manage and report your tax affairs is changing. The UK government’s ‘Making Tax Digital for Income Tax Self-Assessment’ (MTD for ITSA) initiative is set to fundamentally alter the annual tax return process, introducing a more frequent, digital approach.
As your accountants, we want to ensure you’re fully prepared for these important changes, so we have prepared the following information to help you understand and get ready for MTD.
What is Making Tax Digital (MTD)?
MTD is HMRC’s plan to modernise the tax system, making it easier for businesses and individuals to keep their tax records up to date and reduce errors. The core of MTD for ITSA is the move from a single annual self-assessment tax return to a system of digital record-keeping and mandatory quarterly submissions to HMRC.
Instead of waiting until the end of the tax year to reconcile all your income and expenses, MTD requires you to use MTD-compatible software to:
- Keep digital records of your business income and expenses.
- Send quarterly updates of a summary of this data to HMRC.
- Submit a Final Declaration at the end of the tax year to finalise your tax position.
Who is Affected and When?
The UK government’s ‘Making Tax Digital’ (MTD) initiative is being rolled out in phases to various taxpayers. While MTD initially started with VAT-registered businesses, the current focus is on sole traders and landlords. The introduction of MTD for Income Tax Self-Assessment (ITSA) is being phased in based on a business’s qualifying income from self-employment and property. The key dates are:
- From 6 April 2026: MTD becomes mandatory for sole traders and landlords with a total annual qualifying income over £50,000.
- From 6 April 2027: The rules will apply to those with a total annual qualifying income over £30,000.
- From April 2028: The threshold is expected to be lowered further to include those with qualifying income over £20,000.
Qualifying income is defined as your total gross income (before deducting expenses) from all your self-employment and property businesses.
The Impact of Quarterly Returns
The biggest change for many of your clients will be the shift to quarterly reporting. Instead of a single yearly deadline, they will have four quarterly deadlines, as well as an annual one. The standard deadlines for a tax year ending on 5 April are:
- First Quarter (6 April – 5 July): Deadline 7 August
- Second Quarter (6 July – 5 October): Deadline 7 November
- Third Quarter (6 October – 5 January): Deadline 7 February
- Fourth Quarter (6 January – 5 April): Deadline 7 May
This may seem like a lot more work, but it offers a number of key benefits. By keeping records digitally and submitting them regularly, businesses will have a much clearer, real-time view of their financial position.
This will enable more effective tax planning, better cash flow management, and a significant reduction in the year-end rush. It also allows for more accurate tax forecasting, so you can set aside the right amount of money throughout the year to cover your tax bill.
Key Questions and Considerations
To help you feel more confident about this transition, here are some answers to common questions about MTD:
Are there any exemptions?
HMRC has a very strict policy on who is exempt from MTD for ITSA. While the rules are very clear, some people may be excluded, for example:
- Those with religious beliefs that prevent them from using digital tools.
- Those who are digitally excluded for reasons such as age, disability, or a remote location without an internet connection.
In these rare cases, it is important to contact HMRC directly to get an official exemption.
What are the penalties for non-compliance?
HMRC is introducing a new points-based penalty system to encourage compliance. Rather than being fined immediately, you will receive a point each time you miss a submission deadline.
- Once you reach a certain number of points, you will be issued a fine.
- If you miss a payment deadline, you will also be charged a penalty based on the amount of tax you owe and how late the payment is.
This new system is designed to be fairer and to give you a chance to correct errors before a penalty is issued.
What to Do Next
At TIG Accountants, we are here to help you navigate this transition smoothly. The first step is to assess when MTD will become mandatory for you. We can help you determine your qualifying income and identify the key dates that apply to your business. We can also assist you in finding and implementing the right MTD-compatible software and help you get into a routine of digital record-keeping and quarterly submissions.
The move to MTD is a significant change, but with the right preparation and support, it is an opportunity to improve the efficiency of your financial management. We are ready to work with you to ensure a seamless transition and keep you on the right side of HMRC’s new requirements.
Useful Resources from HMRC
For more detailed information on Making Tax Digital, you can refer to the official HMRC guidance, found on the following links:
- Main MTD for Income Tax guidance: A comprehensive guide on the new rules: https://www.gov.uk/government/collections/making-tax-digital-for-itsa
- Check when you’re affected by MTD for ITSA: Use this tool to see when you’ll need to follow the rules based on your income: https://www.gov.uk/guidance/check-when-youre-affected-by-making-tax-digital-for-itsa
- Find MTD-compatible software: A list of software providers that are MTD-compliant: https://www.gov.uk/guidance/find-software-for-making-tax-digital-for-income-tax
- Making Tax Digital for VAT: Information on the rules for VAT-registered businesses: https://www.gov.uk/guidance/making-tax-digital-for-vat
If you have any questions or you would just like to speak to someone regarding MTD, please contact us on 0191 406 5050.
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