Tax

Making Tax Digital for Income Tax – change is here!

Making Tax Digital (MTD) was first mentioned by the UK Government back in 2015, nearly ten years ago!

The main goal of MTD is to create a more efficient and accurate way of calculating and paying tax. This is to be done by introducing a compulsory requirement for taxpayers to maintain and keep digital records and to submit quarterly updates to HM Revenue & Customs (HMRC) using MTD compatible software.

A long running project; the first phase of MTD saw the introduction of MTD for VAT back in April 2019.

The second phase, MTD for Income Tax (MTD for IT), is due to go live in April 2026, with further rollouts in April 2027 and April 2028. This will be the biggest change to the way Income Tax returns are filed since the introduction of Self Assessment in 1996.

Please see below for details of how the scheme will work, who will be affected, what we are doing to prepare for the changes and what we can do to help you comply with MTD for IT.

Who will be affected from April 2026?

• Sole traders with a business turnover above £50,000
• Landlords with rental income above £50,000
• A sole trader who also receives rental income, the turnover from which, when added together, exceeds £50,000

In all of the above tests it is the gross income that is considered, i.e. before the deduction of any expenses.

Also, if you have rental property that is owned jointly, it is only your share of the rental income that is taken into consideration when deciding whether you need to comply with MTD for IT.

How will this affect you?

If you meet the above criteria you, or  we as your Accountant, will need to:

• Use software that is compatible with MTD for IT
• Keep digital records of your business and/or rental income and expenses
• Send to HMRC quarterly updates of your business and/or rental income and expenses
• Submit an end of tax year annual submission

Who will be affected from April 2027?

Still only sole traders and landlords, but from April 2027 the income threshold decreases from £50,000 down to £30,000.

Who will be affected from April 2028?

A further reduction in the income threshold from £30,000 to £20,000, but this still only applies to sole traders and/or landlords.

HMRC have also confirmed that Limited Companies and partnerships will also fall under MTD in due course.

What does digital record keeping look like?

If you have to comply with MTD for IT, you will be legally required to keep digital records.

There will be two options available:

• Use software specifically designed for MTD for IT.
• Use spreadsheets to track your income and expenses, although these spreadsheets will then need to be linked through bridging software to MTD compatible software to allow the submission of the quarterly updates.

If you have more than one sole trade business, you must keep separate digital records for each business.  If you have more than one UK rental property these can be treated as a single UK property business for record keeping purposes.  If you have rental income from outside of the UK, a separate record will need to be kept showing the income and expenses for each country.

What is the process for the quarterly updates?

At the end of each quarter, you will be required to make a digital submission of your income and expenses for the past three months for each qualifying income stream.

The standard quarterly update periods will fall in line with the tax year; so they will end on 5 July, 5 October, 5 January and 5 April.

It is however possible to make an election to opt for calendar quarters if your sole trade business prepares accounts to 31 March.  Making an election means that your quarters would end on 30 June, 30 September, 31 December and 31 March.

Regardless of when your quarter ends, your quarterly submission must be filed by the 7^th of the following month as follows:

• Quarter 1 must be filed by 7 August
• Quarter 2 must be filed by 7 November
• Quarter 3 must be filed by 7 February
• Quarter 4 must be filed by 7 May

If you are already complying with MTD for VAT, and you also meet the MTD for IT criteria, then you will need to submit separate quarterly reports under MTD for IT as well as the usual MTD for VAT filings.

What happens after the end of the tax year?

Once all of the quarterly submissions have been made for the tax year, it is the necessary to make any year end accounting adjustments, such as for capital allowances or private use.

In addition to this, you will also need to report your non-MTD income such as bank interest, dividends, salaries and pensions. You will also need to make a claim for any tax relief due to you, such as on Gift Aid or pension payments.

The submission of the end of year information finalises you tax position for the tax year.

The deadline for completing the year end submission remains at 31 January following the relevant tax year.

So, if you are required to prepare and submit quarterly submissions for the tax year ended 5 April 2026, your year end submission must be done by 31 January 2027.

HMRC have confirmed that if you need to comply with MTD for IT, you will not be able to file the year end adjustments, and finalise your tax position, through their free online filing service.

Instead, these will have to be reported through the same software that the quarterly updates are filed on, or a second different software if the quarterly software does not provide a tax year end service.

How will you know if you have to comply with MTD for Income Tax from April 2026?

It is your income for the 2024/25 tax year, i.e. 6 April 2024 to 5 April 2025, that will dictate whether or not you have to comply with MTD for IT from April 2026 onwards.

Whilst some people may already know if they have breached the £50,000 income threshold in the current 2024/25 tax year, and so will have to comply with MTD for IT from April 2026 onwards, others may not know until their 2024/25 accounts and tax return are prepared.

There will therefore be a benefit in your 2024/25 accounts and tax return being prepared as soon as possible after the tax year end so that, if you have to comply with MTD for IT, you have as much time as possible to get things in place before April 2026.

Can you get an exemption from MTD for Income Tax?

Yes, you can apply for an exemption if you think that you are digitally excluded.

This would be the case if:

• It is not practical for you to use software to keep digital records or submit them.  This may be due to age, disability or location.
• You are a practising member of a religious society whose beliefs are incompatible with using electronic communications or keeping electronic records.

HMRC have also confirmed that as well as the digitally excluded, the following can apply to be exempt from MTD for IT on the basis that it may be practically difficult for them to comply:

• Taxpayers who have a Power of Attorney in place
• Non-UK resident foreign entertainers and sportspeople who have no other income sources that count as qualifying income for MTD

The following groups of taxpayers will also not be required to join MTD for IT over the course of this parliament:

• Ministers of Religion
• Lloyds Underwriters
• Recipients of the Married Couples Allowance
• Recipients of the Blind Persons’ Allowance
• Those required to complete ‘Residence and remittance basis’ pages as part of their annual tax return (SA109 schedules).  This applies up to April 2027 only.

What will happen if I file a quarterly submission or year end return late?

Once you move into MTD for IT you will be subject to a new points based system of penalties.

A single point will be issued each time a quarterly or year end submission is late.

Once you get to two points, a £200 penalty will automatically be issued.

Subsequent late submissions will result in further £200 penalties being issued.

A single penalty point will be removed from your record after 24 months.

If you have reached the two point threshold, these will only be removed from your record if you have 24 months of compliance.

If you are already registered for MTD for VAT, your penalty points under MTD for IT are separate to your penalty points under MTD for VAT.

What will happen if I pay my Self Assessment tax bill late under MTD for IT?

Late payment interest will be charged as normal on any tax that is paid late.

However, a new late payment penalty will also be introduced once within the MTD for IT system.

This is to encourage you to pay your tax bill on time or as soon as possible. The longer the tax is outstanding, the higher the late payment penalty will be.

This new penalty system kicks in once a tax payment is more than 15 days overdue. A 3% charge will be imposed based on the amount of tax you owe at day 15.

If any tax remains outstanding after 30 days, then a further 3% charge is imposed based on the outstanding amount on day 30.

Also, if tax remains outstanding from day 31 onwards, then a daily penalty will be charged equivalent to an annual rate of 10%. This will be charged daily until the outstanding balance is paid in full.

Please note that the new penalty regime under MTD for IT only applies to balancing tax payments due on 31 January following a tax year or any adjustments or amendments made to the assessment for a tax year. It does not apply to any payments on account.

What are we doing to prepare for MTD for Income Tax

MTD for IT represents a significant shift in how tax is managed.

We understand that this change may feel challenging, but we are here to support you throughout the process and ensure the transition is as straightforward as possible.

We have already contacted clients likely to be affected based on earlier tax years and are confirming positions as 2024/25 accounts are finalised. We have been involved in HMRC’s testing programme, giving us early experience of how the system operates in practice.

Our dedicated software team continues to review the best options available to ensure the right solutions are in place for your circumstances. Whether you want to manage your own records or prefer us to take care of everything, we can support you with setup, training and ongoing compliance.

MTD for Income Tax is now in place, and preparation remains key. If you have any questions or would like to discuss how this affects you, please get in touch with our team. We are here to help you navigate the changes with confidence.