Making Tax Digital For Income Tax in the UK

Making Tax Digital For Income Tax

Contents

In this article we discuss:

What is Making Tax Digital for Income Tax?

Making tax digital for income tax self assessment, also known as MTD for ITSA is a long term government initiative. It is intended to help bring taxes into the digital age.

Making Tax Digital means submitting quarterly updates of your business income and relevant expenses. This is to be done by keeping electronic records, by the use of software packages.

The current self-assessment tax return system is being replaced by a digital process.

Aspects of Making Tax Digital

There are two aspects of making tax digital for income tax:

  1. The need for digital record keeping requirements using functional compatible software

  2. The need for information to be submitted to HMRC quarterly and digitally rather than via a tax return.

  3. The need for a final declaration to be submitted at the end of the year year.

Who Will Making Tax Digital Affect?

From April 2026, sole traders and landlords with a total income of more than £50,000 will be required to keep digital records and submit quarterly updates to HMRC on their income and allowable expenses. This is to be done through a Making Tax Digital compatible accounting software provider, such as Quickbooks online.

Those self employed individuals and landlords with a total gross income over £30,000 will be required to submit quarterly updates this from April 2027.

Most customers will be able to join voluntarily beforehand. Meaning they can eliminate common errors and save time managing their tax affairs.

The government has also announced a review into the needs of smaller businesses, particularly those sole traders with business income or property income under the £30,000 income threshold. The review will consider how Making Tax Digital for income tax self assessment can be shaped to meet the needs of smaller businesses, and the best way for them to fulfil their income tax obligations using income tax compatible software.

MTD for income tax self assessment will not be extended to general partnerships in 2025 as originally planned. We await further updates on partnerships.

We also await further updates on Making Tax Digital for Limited Companies, which will be introduced mucu further down the line.

What is a Quarter?

The quarter is aligned with the relevant tax year. Meaning the first quarterly update for an affected individual would be 6th April 2026 to 5th July 2026.

The MTD for income tax rules for quarter end dates would be: 5th July, 5th October, 5th January and 5th April.

I am a VAT Registered Business and Already Submit VAT Quarterly…

An election can be made to report to the nearest calendar month. This will be particularly useful for those trades who are VAT registered businesses. Therefore already quarterly updates via their VAT returns, or trades who have an accounting period end of 31st March.

Making the election would mean the quarter end dates would be: 31st March, 30th June, 30th September and 31st December.

How are the Income Limits Applied Under MTD for ITSA?

The £30,000/£50,000 business income and property income limit is a combined limit across both self employed and rental income.

You may have more than one business, the limit applies as a whole to the total income for all.

The limit does not apply to income other than self employed or rental property business.

Example:

Liam works as a self employed decorator and his annual gross turnover is £28,000 for the year.

He also rents out a property and receives a total gross rental income per year of £7000.

He also receives £2,000 in dividends from his wife’s Limited Company.

Liams total combined gross income for Making Tax Digital purposes would be £35,000.

The dividends are irrelavent, just trading and rental income is taken into account.

As Liam’s total combined gross income is £35,000 he will fall under Making Tax Digital rules from April 2027. This is because his income exceeds £30,000.

If Liam’s income exceeded £50,000 he would fall under making tax digital for income tax from April 2026.

If Liam’s income was below £30,000 he doesnt fall under Making Tax Digital requirements just yet.

We await further updates from HMRC as to when MTD will be introduced for smaller businesses.

What if I Cannot Handle the MTD for Income Tax Digital Processes?

HMRC may agree that you are digitally excluded, and unable to keep digital records. Then you are exempt from the MTD for ITSA reporting requirements. You would therefore just be required to file a self assessment tax return as normal.

If HMRC agrees that it is not practical for you to use digital tools, by reason of age, disability or location, then you do not need to follow the digital reporting requirements for MTD for income tax rules.

For example, remoteness of your location could mean you don’t have internet access at home. And it would be unreasonable to have to travel to an area that has internet coverage.

What if I Don’t Want to Take Part?

Unfortunately, unless you are digitally excluded, or exempt for some other reason, if you are self employed and/or received rental income, you will be expected to keep digital records submit quarterly returns for MTD for income tax as required.

What is Digital Recordkeeping?

Part of MTD for income tax requires taxpayers to store digital records of their business income and expenses, using digital software tools such as MTD compatible software.

These tools will either be capable of interacting directly with HMRC to make submissions, or will be linked to other tools that can make the MTD for income tax submission quarterly, and at the end of the tax year in an end of period statement.

How Long Do I Have to Make the MTD for ITSA Quarterly Submission?

One calendar month from the end of the quarter.

How Long Do I Have to Make the MTD for Income tax Annual Submission?

Annual information related to the tax year needs to be provided in a final declaration end of period statement by 31st January following the tax year end, the normal self assessment deadline.

What Income is Submitted Quarterly Under MTD for Income Tax?

Only income and expense category relating to trading income and rental income is required quarterly, using MTD compatible software.

The quarterly update submissions are for income and expenses updates purposes only, so that HMRC know you are keeping good business records for your property business and or self employment.

No accounting and tax adjustments are needed at this point, this comes at the tax year end.

There is no income tax affect at this point. You do not need to pay tax quarterly when under MTD for ITSA.

Futher information can also be provided optionally, but it is not a requirement.

Does the Quarterly Data Need to be the Equivalent of the Year End Accounts?

No. The quarterly data is an overview of the business income and expenses, recorded in the recordkeeping, before any accounting adjustments.

HMRC do not expect accounting or tax adjustments, or formal reviews of accuracy to be undertaken for the assessment process of quarterly MTD for income tax updates.

The quarterly update submission of your accounting records using accounting software is a period statement that simply demonstrates that digital records are being kept, not related to your tax position, tax returns or business finances.

What Income is Submitted Annually When Under MTD for ITSA?

In simple terms – anything that would go into self assessment tax returns today, to determine your tax position, needs to be submitted annually via Making Tax Digital (for those taxpayers under the MTD for income tax process). It is in this final declaration that your tax bill will be calculated.

For example, a sole trader who falls withing Making Tax Digital requirements, who also receives bank interest, dividends, and makes pension contributions, would need to provide this data as part of their annual self assessment tax return submission.

It is at this point annually, in the final declaration, that you will calculate how much tax you are liable to pay. You will then receive a final tax bill after the submission of your annual return.

What About Joint Income, ie, Joint Rental Income?

This is still not fully confirmed, but joint rental income will have a designated recordkeeper. The designated recordkeeper will be responsible for making the quarterly submission on behalf of all recipients.

Who is Responsible for Making a Partnership MTD for Income Tax Submission?

Today, one person is responsible for signing the partnership tax return on behalf of the partnership under self assessment. This will continue to be the case for the partnership’s digital records and quarterly submissions, and end of period statement under Making Tax Digital.

Further Information

For further information on Making Tax Digital, please read the HMRC guidance here.

If you need help with Making Tax Digital get in touch with us today at www.simpletaxes.co.uk .

Disclaimer

The information contained in this blog is for general information purposes only, and not for accounting and tax advice. You should speak to a qualified professional about your specific circumstances before acting upon any of the information in this blog.

Date Published: February 2023