Understanding Making Tax Digital for Income Tax
What is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax, or MTD for short, is a government plan to change the way people like sole traders and landlords tell HMRC about their earnings and expenses. If you make over a certain amount, you’ll need to use this new system. Unless you have a special reason, it’s a legal requirement to join in.
This guide covers the basics of MTD, what’s changing, and how you can get ready.
Why is Making Tax Digital Happening?
The government started Making Tax Digital for VAT back in 2019, and now they’re doing the same for income tax. The main idea is to make tax reporting simpler, help you keep on top of your taxes during the year, and cut down on mistakes.
Because you’ll update HMRC more often, you’ll always know how much tax and National Insurance you owe. This makes it easier to manage your money and plan ahead for tax bills. For HMRC, it helps make sure the right amount of tax is paid.
Who Will Need to Use MTD?
About 2.65 million sole traders and landlords in the UK will need to use MTD for Income Tax, but those who earn the most will start first. The rules are based on your total income from self-employment and property before expenses and taxes are taken away.
- If you make over £50,000 a year, you’ll start using MTD from 6 April 2026.
- If you make over £30,000, you’ll start in April 2027.
- If you make over £20,000, you’ll start in April 2028.
Each year, by the 31 January tax return deadline, you and HMRC will know if you need to use MTD from the next April.
What Counts as “Qualifying Income”?
This means all the money you get from self-employment and renting out property, before you take away any expenses or pay tax. If you have more than one business or property, add up all the income. Earnings from a regular job (where tax is taken from your pay) don’t count here.
If you start working part-way through the year, work out what you’d earn in a full year. For example, if you earn money for only six months, double it to see if you meet the threshold.
What’s Changing?
Instead of filling out one tax return every year, you’ll now need to:
- Keep digital records of what you earn and spend
- Use government-approved software to send updates to HMRC every three months
- Send a final report each year that confirms your total income, including anything else you made money from
This takes the place of the yearly Self Assessment tax return.
How Will the New Process Work?
Here’s a simple breakdown of what you’ll do with MTD:
- Quarterly updates: Every three months, send HMRC details of your income and expenses using the chosen software. Deadlines are 7 August, November, February, and May.
- End of year statement: After the tax year (which ends 5 April), you have until the following 31 January to send a final report with your total income and expenses for the year—including any other taxable income, like pay from a regular job or selling assets.
- Payments: The way you pay your tax stays the same as before.
Getting Ready for MTD
To make things easier, start getting into good habits now. Try to keep your personal and business finances separate. This makes it much simpler to track your business income and costs, and to be ready for the new system.
Questions & Answers
What’s the point of Making Tax Digital?
The aim is to move the tax system online, making it easier and less stressful for you to manage your taxes throughout the year.
Can my accountant help me with Making Tax Digital?
Yes! Your accountant or adviser can support you. Some software lets them send your quarterly updates and final declaration to HMRC for you.
Do I need an accountant or professional adviser?
No, it’s totally up to you. You can handle MTD yourself or get help from an accountant or adviser if you’d prefer.
What’s the threshold for Making Tax Digital?
The first group who must use MTD are those who earn £50,000 or more from 2024 to 2025. Sole traders and landlords who meet this must start using MTD from 6 April 2026.
What can I do now to prepare for the deadline?
Start by keeping your business money separate from your personal money. This will help you stay organized and make it easier to get ready for Making Tax Digital.
It’s also a good idea to keep your financial records in digital form. Consider getting accounting software that’s compatible with Making Tax Digital requirements. This will help you record transactions, track your finances, and submit information to HMRC smoothly and efficiently.
👉 Find out more and get help with MTD here:
https://www.relevantaccounts.co.uk
