What is Making Tax Digital (MTD) for Income Tax?
Making Tax Digital for Income Tax (MTD for ITSA) is a reform requiring certain self-employed individuals and landlords to maintain digital business records and send updates quarterly to HMRC, rather than doing a single annual Self Assessment return. The change aims to make filing more frequent and accurate, and to ease end-of-year burdens. (kpmg.com)
Who is in Scope as of April 2026?
- Sole traders and landlords whose gross trading or rental income (not profit) in the tax year 2024/25 exceeds £50,000 must comply from 6 April 2026. (tax.org.uk)
- Those with income below this threshold are exempt until later phases (April 2027 and 2028) when thresholds will be lowered. (tax.org.uk)
- Everyone in scope must use compatible digital software for record-keeping and quarterly submissions. (kpmg.com)
Key Changes and Actions to Take
| Area | What’s New | Action Items | Example |
|---|---|---|---|
| Record Keeping | Must maintain digital records of income & expenses. | Choose and set up approved software; keep backups. | A landlord using spreadsheets must migrate to software like Xero or FreeAgent. |
| Quarterly Reporting | Submit four updates per year instead of one. | Align accounting period; set reminders; budget for time. | A sole trader books income monthly and submits four “updates” during the year. |
| End-of-Year Finalisation | Complete final submission replacing traditional SA return. | Ensure all income streams included; reconcile expense claims. | If you rent one property and run a small shop, combine both in final submission. |
Benefits and Challenges
Benefits:
- Smoother cash flow tracking and fewer surprises at year-end.
- Improved digital infrastructure and more up-to-date financial data.
- Reduced chance of errors or omissions thanks to ongoing tracking.
Challenges:
- Learning new software could be time-consuming.
- Initial setup costs or subscription fees.
- Quarterly deadlines need discipline to avoid non-compliance penalties.
Compliance Tips & Practical Checklist
- Check gross income for 2024/25 – does it exceed £50,000?
- If yes, register for MTD for Income Tax in HMRC’s system before first deadline.
- Choose software that’s compatible: must support digital records and quarterly updates.
- Break profit & loss data into correct categories: trading vs rental, avoid mixing.
- Set internal deadlines ahead of HMRC’s to ensure timely submission.
- Retain all supporting documents (receipts, invoices) in digital form for at least 5 years.
What Happens If You Don’t Comply?
Late or incorrect submissions can lead to penalties under HMRC regime. Also, inaccurate income declarations may lead to interest charges, or over-/under-stated tax bills. Staying compliant ensures smoother audits, and reduces risk of being caught by fiscal drag as thresholds and allowances stay frozen. (gov.uk)