Making Tax Digital for Income Tax

Making Tax Digital (MTD) for Income Tax is an initiative by HMRC to digitise UK tax reporting for Self Assessment taxpayers. It requires self-employed individuals and landlords with qualifying income above a certain threshold to keep digital records and submit tax related updates to HMRC using MTD compatible software. In addition to their annual ‘tax return’, taxpayers must submit quarterly income and expense data to HMRC.

By implementing these changes to the tax system, HMRC aims to help taxpayers:

• Pay the right amount of tax
• Reduce the likelihood of making errors on their tax return
• Better manage their finances

Who is affected by MTD for Income Tax and when will it become mandatory?

MTD for Income Tax applies to individuals who are registered Self Assessment taxpayers with qualifying income from self-employment and/or property rental income. Qualifying income does not include income from PAYE employment but does include gross annual income from self-employment activities and/or income from property, no matter if that property is in the UK or overseas.

Depending on their income, taxpayers who meet the above criteria will be required to comply with MTD for Income Tax from the following dates:

• Phase 1 – from April 2026 – where the Self Assessment taxpayer has gross annual income from self-employment and/or property income of £50,000 or more.
• Phase 2 – from April 2027 – where the Self Assessment taxpayer has gross annual income from self-employment and/or property income of £30,000 or more.
• Phase 3 – from April 2028 - where the Self Assessment taxpayer has gross annual income from self-employment and/or property income of £20,000 or more.

Who is not affected by MTD for Income Tax?

MTD for income tax will not apply to:

• Individuals with incomes below £20,000, although the government is looking at how to bring these individuals under the scope of MTD
• Those solely earning through PAYE
• Limited companies
• Partnerships

Are there any exemptions to MTD for Income Tax?

Yes. Exemptions may be granted on grounds of digital exclusion (such as age, disability, or location without reliable internet access) or for those who object on religious grounds.

HMRC have extended the exclusion list to include the following groups:

• Taxpayers who have a Power of Attorney
• non-UK resident foreign entertainers and sportspeople who do not have any other qualifying income for MTD purposes

Exemption is not automatic. Taxpayers must apply for an exemption, which is granted at HMRC's discretion.

What is the new process for MTD for Income Tax?

Instead of filing an annual Self Assessment return, affected taxpayers must:

• Keep digital records of their income and expenses using HMRC approved MTD compatible software.

• Submit quarterly income and expense updates to HMRC, the timings of which follow the standard tax year quarters, i.e. 6 April – 5 July, 6 July to 5 October, 6 October to 5 January, and 6 January to 5 April.

• Submit an annual form which allows the taxpayer (or their accountant/bookkeeper) to make appropriate income and expense adjustments and claim relevant tax allowances and reliefs.
• File the details of any other income received during the tax year, such as dividend income, savings interest, pension income, etc.
• Submit an annual tax return/final declaration to HMRC by 31 January to confirm the total taxable income. HMRC will confirm what tax is due or if a tax refund will be paid.
• Pay any tax owed to HMRC by 31 January.

If the taxpayer has self-employed income from different sources, such as a hairdressing business and rental income from a residential property, they will be required to make separate MTD for Income Tax submissions for each income source.

What is MTD compatible software?

MTD compatible software allows users to keep digital records and submit updates and tax returns directly to HMRC’s MTD for Income Tax online portal. It uses an Application Programming Interface (API) to digitally link income related data directly to HMRC and enable users to receive information back from HMRC. MTD compatible software includes HMRC approved cloud-based accounting packages and bridging software, which links Excel spreadsheets to the MTD portal.

What are the deadlines for paying tax due to HMRC under MTD for Income Tax?

Tax payment deadlines remain the same as under the current Self Assessment system:

• 31 January (for balancing payments and the first payment on account if required)
• 31 July (for the second payment on account if required)

Do taxpayers already signed up to MTD for VAT also have to comply with MTD for Income Tax?

Yes, if they meet the income thresholds. MTD for VAT and MTD for Income Tax are separate schemes; compliance with one does not automatically mean compliance with the other.

The benefits of MTD for Income Tax

Whilst these changes may sound daunting, there are many benefits for self-employed individuals and landlords to move to a digital record-keeping process before MTD for Income Tax becomes mandatory. These include:

• Having a better understanding of how your business is performing on a day-to-day basis, not just seeing the historical results at the year-end.
• Knowing who owes you money and who you owe money to, so you can better manage your cash flow.
• Being able to make robust business plans with accurate budgets and forecasts, based on having up to date income and expenditure figures.
• Having the ability to make quicker, better informed business decisions.
• Being prepared in advance for the new MTD for ITSA regulations.

How can DWilkinson&Company help you with MTD for Income Tax?

We have helped many VAT registered businesses transition to MTD for VAT, with most finding it less onerous than they initially thought it would be. Indeed, many have found that having up-to-date business information has been a great help in making business decisions based on the real-time information they can now access about the business's performance.

For our clients who will be affected by the new MTD for Income Tax rules, we will be able to help you in the following ways:

• Explaining the changes and how they relate to your individual circumstances and what measures you need to take.
• Recommending the appropriate type of MTD compatible software that will enable you to comply with the new rules.
• Providing training on the set-up and implementation of your chosen MTD software, so that you can do your own bookkeeping to file your quarterly and annual returns.
• Or, if you prefer, we can take on some or all of your bookkeeping tasks so that you don’t need to worry about it (other than giving us all your invoices and receipts).
• Reviewing your quarterly submissions and final declaration, and calculating what adjustments need to be made for the allowances and reliefs you can claim.

We can do as much or as little as is required to help you transition to MTD for Income Tax. However, the key to making this change as seamless as possible is to start the process sooner rather than later.

Contact us about MTD for Income Tax

MTD for Income Tax is the biggest change to affect UK taxpayers since the introduction of Self Assessment in 1996. If you want to discuss how these changes could impact you, please contact DWilkinson&Company at 0113 320 0001 or email office@dwco.co.uk.