Making Tax Digital for Income Tax – The ABC Guide

If you are in business then you’ve probably heard of Making Tax Digital – more accurately Making Tax Digital for Income Tax Self Assessment (MTDITSA).

But you may not have heard accurately what it involves.

Here is a really quick ABC guide.

We’ll just refer to MTD rather than MTD ITSA in this guide.  Separately MTD has been in place for VAT for some years (MTD VAT).

 

A – Does it apply to you?

• It applies if you have income from Self Employment as a Sole Trader or Rental Income from Property.
• If all your Self Employment is via a Partnership or Company it doesn’t apply.

 

B – When does it apply from?

• The entry date to MTD depends on your aggregate income from Self Employment and Property.
• This is gross income before expenses are taken off – so not profit, its the turnover, sales, gross rents and similar figures.
• Expenses still come off later when calculating your tax.

So total up your Self Employed Income and Property Income.  Then:

• If the total was over £50,000 in 2024/25 then you’re into MTD from 6th April 2026.
• If the total was over £30,000 in 2025/26 then you’re into MTD from 6th April 2027.
• If the total was over £20,000 in 2026/27 then you’re into MTD from 6th April 2028.
• Under £20k?  Stay on Self Assessment

 

C – What do you have to do once in MTD?

• One off register with HMRC – they should prompt you to do this, but even if they don’t it’s still your responsibility.
• Keep your accounts digitally – either with an app which connects to HMRC or a spreadsheet connected to HMRC approved bridging software.
• Keep digital links in your accounts – basically minimal re-keying or cut n paste.  For most people this isn’t a big deal.
• Submit a summary of income and expenses digitally to HMRC each quarter.
• Submit your annual Self Assessment – now called an End of Period Update – using MTD approved software, yours, or your accountants.

 

Some More Details

Some more detail on thresholds:

• If you are over the threshold but your income reduces next year, you are still in.  EG over £50k in 2024/25 but only £15k in 2025/26 – you are still in MTD from 6th April 2026.
• If you are over the threshold but making a loss, you are still in.  Eg Business Turnover in 2024/25 £50k, make a £5k loss – you are in MTD from 6th April 2026.
• Once you are in, unless you cease Self Employment / receiving rents all together then you will need to stay in until you have three years below £20,000.
• You could get out of MTD by transferring your business to a partnership or company, but its unlikely to be worthwhile.
• If your business income or rents are for less than 12 months then you need to annualise them when applying the test.
• Starting a new business?  MTD applies from the second tax year after you go over the threshold.  Eg, new business in 2030-31 and over £20k (annualised), you are in MTD from 6th April 2032.

Choosing an app or bridging software:

• We recommend FreeAgent to clients, but we are open platform and will work, where possible with your choice of app.   You can subscribe to FreeAgent through us, or get a free version if you bank with NatWest, RBS or Mettle.
• If you are using a spreadsheet, we recommend Vital Tax as Bridging Software.  Or we can bridge for you for if you are on one of our Continuous Service plans.

How does the relationship with us as your accountant change?

• If you decide to do the day to day accounting and submit the quarterly returns yourself, then nothing really changes.  We’ll do your year end as normal, using an import from your app or spreadsheet, and our software will take case of the End of Period Update (aka Self Assessment) with an MTD compliant submission.
• If you would like some help, then we offer something called “Continuous Service” – you keep your day to day accounts digitally – app or spreadsheet – at the quarter end we will check them over and make the submissions for you.
• Continuous service normally costs £200 + vat/year over and above your existing year end accountancy fee, plus you will need to subscribe to suitable software, eg FreeAgent. Occasionally our charge will be a more than this, we will of course let you know if thats going to be the case.
• If you are using a spreadsheet and would like us to bridge for you, then we charge £100+vat/year for access to our bridging software and making the connections.  This is on top of the £200/year upgrade to the Continuous Service, meaning an all in compliance cost for MTD of £300+vat a year, equating to £75+ vat each quarter.
• We can also work up a bespoke quote to do the day to day bookkeeping for you if it all sounds a bit too much.

If you have Self Employed Income and Rents then:

• You’ll need software or a separate spreadsheet for each.
• You’ll need to submit two separate returns each quarter.

What doesn’t change:

• How your tax is calculated – you still get to deduct the same expenses
• When you pay your tax
• The deadlines for submitting the Self Assessment

We’ve got a more detailed guide to Making Tax Digital for Income Tax here 

Need help?  Let us know, and don’t get stressed about complying – we can sort it.