Making Tax Digital (MTD) has made a big change in the way people and businesses handle their taxes. The goal? By moving everything online, the hope was to make tax simpler, quicker, and more accurate. It’s all part of HMRC’s plan to modernise the tax system.
The rollout started with VAT, and now it’s expanding to cover Income Tax too. If you’re self-employed or a landlord, this blog will be of interest to you. We’ll briefly cover how MTD works for VAT, then dive into what it means for income tax and how you can get ready.
What is Making Tax Digital VAT?
Back in April 2019, the government made it mandatory for VAT-registered businesses earning over the VAT threshold (currently £90,000) to start using digital tools to keep records and submit VAT returns.
As part of MTD for VAT you need to:
- Keep your VAT records digitally
- Use HMRC-approved software to submit your VAT returns
- Do everything through your software instead of manually typing your return into the HMRC website
In April 2022, the rules were extended to all VAT-registered businesses, even if they were under the threshold. So now, whether you’re running a big company or a small side hustle with VAT registration, MTD rules apply.
Now that VAT is sorted, HMRC is turning its attention to Income Tax, and that’s where things are about to change for a lot more people.
Making Tax Digital for Income Tax: What’s Happening?
MTD for Income Tax Self-Assessment, or MTD for ITSA for short, is the next big step. It’s aimed at sole traders, self-employed individuals, and landlords who earn over a certain amount.
From April 2026, if you earn over £50,000 a year from self-employment or property, you’ll need to follow the new MTD rules. From April 2027, the threshold drops to £30,000.
So if you:
- Run your own business,
- Make money from renting out property, or
- Do both…
…and your income is over the threshold listed above, this applies to you.
How will Making Tax Digital for Income Tax work?
Here’s a breakdown of what MTD for Income Tax involves:
Keep Digital Records
Instead of keeping paper receipts or updating a spreadsheet once a year, you’ll need to record your income and expenses digitally, as you go. That means using software to track your sales or rental income, any business-related expenses, and other financial details like mileage or office costs.
Send Quarterly Updates
Instead of filing one big self-assessment return at the end of the tax year, you’ll send four smaller updates to HMRC each quarter, which is every three months.
These updates are summaries of your income and expenses and give HMRC a more up-to-date picture of how much tax you’re likely to owe.
Don’t worry, you don’t actually pay tax four times a year. These are just info updates.
Submit an End of Period Statement (EOPS)
At the end of the tax year, you’ll send in an EOPS to finalise your numbers. This is where you can make adjustments (like adding capital allowances), fix any mistakes, and claim reliefs or deductions.
Basically, it’s the chance to make sure everything is accurate before HMRC figures out your final tax bill.
Make a Final Declaration
After your EOPS, you’ll submit a Final Declaration – this is like the final version of what we now call the self-assessment tax return. It confirms all your income (including any that didn’t come from self-employment or property) and tells HMRC you’ve covered everything.
How to find MTD-compliant software
You’ll need to use MTD-compatible software that’s approved by HMRC. There are lots of options, and HMRC doesn’t endorse one over the other so the choice is yours as long as it can carry out all the tasks you need to do. You can find the approved list here.
In some cases, you’ll be able to keep using spreadsheets if you’re more comfortable with those. However, you’ll need to make sure they’re connected to bridging software that can submit your info to HMRC.
Why introduce MTD for ITSA?
Good question! The idea is to make tax simpler and more accurate by reducing errors, especially from manual entry or leaving things to the last minute.
Some potential benefits:
- Less hassle at year-end since you’re keeping records as you go
- Fewer surprises when it comes to your tax bill
- Better financial planning, thanks to more frequent updates
- Less risk of penalties for late or incorrect submissions
A few downsides:
- You’ll need to get used to the software (and maybe pay for it)
- Submitting quarterly updates might feel like extra admin
- If you’re not confident with tech, it could be a bit daunting at first
- Internet access is a must
That said, HMRC is offering digital exemption options if you genuinely can’t follow the rules due to age, disability, or lack of internet access.
How can I prepare for MTD for ITSA now?
If you think MTD for Income Tax might apply to you soon, it’s a good idea to start preparing. First and foremost, do some calculations to see if your income is and will likely continue to be over £50,000. If so, it might be time to start preparing for April 2026.
- Look into software options and see what fits your needs and budget
- Start keeping digital records now to get into the habit
- Speak to an accountant if you’re not sure where to start or just need some help getting to grips with everything
Getting ahead of the game now will make things less stressful when the new rules kick in.
Final thoughts
Making Tax Digital is a big shift, but it’s not as scary as it sounds. Once you’ve got the software in place and you’re used to keeping records regularly, the system can actually make life easier. No more last-minute panic in January, and no more trying to decode a year’s worth of receipts.
If you’re self-employed or a landlord earning over the threshold, MTD for Income Tax is on its way! Start getting ready now and we guarantee Future You will be very thankful.
Need a helping hand? Our accountants are experienced tax professionals with endless experience in MTD. Just get in touch with us and we’ll help you make the transition.
