The UK government’s Making Tax Digital (MTD) initiative is set to expand to Income Tax (IT) from 6 April 2026. This change will significantly impact self-employed individuals, including sole traders and landlords, who earn above specific income thresholds. This blog aims to comprehensively address the key questions surrounding MTD for income tax, its implications, and how self-employed individuals can prepare for the upcoming changes.
What exactly is Making Tax Digital for self-employed individuals?
The Making Tax Digital for Income Tax initiative necessitates that self-employed individuals and landlords keep digital records of their income and expense and send quarterly submissions to HMRC via compliant software.
Starting April 6th, 2026, sole traders and landlords who earn over £50,000 annually will be required to participate in the initial stage of Making Tax Digital for Income Tax. Those earning above £30,000 will be mandated to comply from April 2027, and the threshold will eventually extend to individuals earning above £20,000.
Who is obligated to comply with MTD for Income Tax?
It’s important to note that MTD for Income Tax applies to sole traders and individual landlords. Partnerships and other business structures may have different requirements depending on their income and HMRC’s specific rules.
Self-employed individuals and landlords with a total income before tax (from business or property) exceeding £50,000 annually must adhere to MTD for Income Tax from April 2026. This threshold applies to the combined income from all self-employed activities and property rentals. If your income is below this threshold, you are not required to follow MTD rules, but you can choose to do so voluntarily.
What are the deadlines for MTD for Income Tax?
The implementation of MTD for Income Tax has been delayed to April 2026 to allow more time for businesses and software providers to prepare. The deadlines are as follows:
April 2026: Sole traders and landlords earning above £50,000 annually must comply.
April 2027: The threshold lowers to £30,000, requiring more individuals to join the system.
Future date: The threshold will eventually extend to those earning above £20,000.
What are the benefits of MTD for Income Tax for self-employed individuals?
While the transition to digital tax management may seem challenging, MTD offers several advantages for self-employed individuals:
1. Improved accuracy: Digital tools minimise the risk of human error by automating calculations and data entry. This keeps your records reliable and up-to-date.
2. Real-time tax insights: With quarterly updates, you can track your tax liabilities in real-time, enabling more effective tax planning and smoother cash flow management.
3. Simplified bookkeeping: MTD breaks down the annual tax filing process into smaller, more manageable tasks. Instead of a yearly rush, you can handle your bookkeeping on a monthly or quarterly basis.
4. Enhanced financial control: Many MTD software solutions integrate added capabilities such as expense monitoring and financial reporting, offering a more detailed view of your business’s financial operations.
What are the criteria for MTD for IT compliance?
To comply with MTD for Income Tax, self-employed individuals must meet the following requirements:
1. Digital record-keeping: Maintain digital records of all income and expenses using MTD-compatible software.
2. Quarterly updates: Submit quarterly updates to HMRC, summarising your income and expenses for each period.
3. End-of-Period Statement (EOPS): Finalise your accounts at the end of the tax year by submitting an End-of-Period Statement.
4. Final declaration: Replace the traditional Self Assessment tax return with a Final Declaration, which includes all taxable income and confirms your tax liability for the year.
How do you calculate income for MTD for Income Tax?
All income from business activities and property rentals contributes to the £50,000 threshold. For example:
- Freelance income – £35,000 per year
- Rental income – £20,000 per year
- Total income – £55,000 (exceeds the threshold, requiring MTD compliance).
If you have multiple businesses or property income sources, combine all income to determine if you meet or exceed the threshold.
This calculation method will also apply when the threshold is lowered to £30,000 in 2027 and eventually to £20,000 in the future.
How can self-employed individuals prepare for MTD?
Preparing for MTD involves several steps:
1. Assess your current systems: Evaluate your existing record-keeping and tax management processes to identify areas that need updating.
2. Choose MTD-compatible software: Select software that meets your needs and is recognised by HMRC.
3. Transition to digital record-keeping: Start using your chosen software to record income and expenses, ensuring a smooth transition when MTD takes effect.
4. Stay informed: Follow HMRC’s official communications closely and be prepared to alter your approach to align with any changes in MTD requirements.
5. Seek professional advice: If you’re unsure about MTD guidelines or software selection, consider reaching out to an accountant or tax advisor for support.
What happens if you don’t comply with MTD?
HMRC may issue fines for breaches of MTD rules, which might include tardy filings, errors in submissions, or not keeping proper digital records. To avoid penalties, it’s essential to understand the requirements and take steps to comply.
Are self-employed individuals required to register for MTD for VAT and IT separately?
Yes, MTD for VAT and MTD for Income Tax are separate systems. If you are VAT-registered, you may already be familiar with MTD for VAT. However, you will need to sign up for MTD for Income Tax separately if your income exceeds the relevant thresholds.
How can I register for MTD for Income Tax?
To sign up for MTD for Income Tax, you must first have HMRC-recognised software in place. You will need your business name, start date, email address, National Insurance number, accounting period, and accounting type to complete the registration process. Your software provider can guide you through the sign-up process.
Conclusion
Making Tax Digital for Income Tax represents a significant shift in how self-employed individuals manage their tax affairs. While the transition to digital record-keeping and quarterly submissions may require adjustment, the benefits of improved accuracy, real-time insights, and simplified tax management make it a worthwhile change.
By understanding the requirements, choosing the right software, and preparing in advance, self-employed individuals can ensure a smooth transition to MTD and avoid potential penalties. An accountant can significantly alleviate the burden of this transition, ensuring accurate submissions and providing tailored advice to optimise your financial strategy.
