MTD for Income Tax - What you need to know

As a small business owner you may have seen the social media posts, or had emails telling you all about MTD for Income Tax, but do you know what it is?

In simple terms MTD = Making Tax Digital. HMRC decided that in order to simplify self assessment for sole traders and landlords, and reduce errors in your tax calculations, the process was to be moved on to digital platforms.

If you are VAT registered you will already be familiar with MTD, but what does it mean for those new to the process?

What does ‘digital’ mean

One question I’ve already been asked a handful of times is “surely we already submit our returns digitally, by logging on to our Government Gateway?”

Well, yes and no. It’s digital in the technical sense as you are submitting your figures electronically, but all you are doing is typing in numbers that you have calculated externally whether on spreadsheet, in a notebook, or even using existing software.

The problems arise when you transfer those numbers to the self assessment screens online. Have you remembered everything you’ve purchased during the tax year? Have you included all income streams? Have you typed the figures in correctly?

Let’s not ignore the fact that many self assessment returns are submitted fairly close to the January deadline, which means an additional 9 months of trading before having to backtrack and check the figure

• That’s an extra 9 months to potentially forget important costs or earnings.

• 9 months of added stress, because until you know how much tax you owe there’s that little voice in your head telling you you’re not sure what the final figure will be.

• 9 months less time to ensure you’ve got the funds to pay your tax bill.

According to HMRC over 700,000 self assessment returns were filed on deadline day itself in January 2025, and almost a million missed the deadline. By leaving everything to the last minute there’s an increased risk of making mistakes in the rush to submit on time, and what happens if your internet connection drops just as you go to hit ‘submit’? 😳

HMRC Press Release February 2025: https://www.gov.uk/government/news/115-million-file-self-assessment-by-31-january-deadline

So what does MTD mean in practical terms?

The ‘digital’ part of the process is designed to encourage sole traders and landlords to keep accurate records throughout the year, submitting a quarterly income and expenses update directly using compatible software, and a final declaration including any adjustments.

The submission dates will be:

• Q1.6 April to 5 July (due by 7 August)

• Q2. 6 April to 5 October (due by 7 November)

• Q3. 6 April to 5 January (due by 7 February)

• Q4. 6 April to 5 April (due by 7 May)

• Final Declaration (due by 31st January)

Will it affect me?

MTD for income tax is being phased in, depending on your qualifying income. You’ll need to use Making Tax Digital for Income Tax from 6 April 2026 if all of the following apply. You:

• are an individual registered for Self Assessment

• get income from self-employment or property, or both, before 6 April 2025

• have a qualifying income of more than £50,000 in the 2024 to 2025 tax year

In 2027 MTD will apply to individuals with a qualifying income of £30,000.

There will be some exemptions, for example if it’s not practical to use software due to age, disability, location etc, which are detailed here: https://www.gov.uk/guidance/apply-for-an-exemption-from-making-tax-digital-for-income-tax

The quarterly updates are designed for sole traders to keep on top of their income and expenses, but as each quarter includes cumulative figures it means any corrections or amendments can be made in the next submission. You also have the opportunity to make adjustments before submitting your final declaration, for example to account for prepayments or accruals, or to make corrections to allowable expenses.

What’s it going to cost me?

Much of the MTD information refers to ‘compatible software’, which simply means software that is capable of submitting the required information in the format accepted by HMRC.

Most commercial software solutions will be compatible with MTD, and some will even offer free to use versions. If your bank account is with Nat West or Mettle you get access to FreeAgent at no extra charge, and Sage have introduced their free Sage Individual.

HMRC won’t be providing their own software, but you can find a list of compatible software here https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax or you can speak to your accountant or bookkeeper for more options.

Before choosing your software there are some things to think about, and it’s worth looking at the reviews:

• How user friendly is it?

• Are there any hidden or additional costs?

• Are there any limits to the number of transactions before an upgrade is needed?

• How easy is it to upgrade if you choose that option later down the line?

• Can you use it to prepare management accounts or run different reports?

• Is it customisable, eg if you want to use it to prepare your sales invoices?

• Will it link to your bank account to download transactions?

• How easy is it to get product support?

Can I do it myself?

Yes. If you, understand your figures, do your own self assessments already, and are used to using software solutions for other parts of your business (or personal life), there’s absolutely no reason you can’t do your own submissions.

You just need to remember there will be 5 deadlines instead of 1, and it will involve keeping on top of the processing so set aside time to regularly review your transactions or input your expenses.

And if you get to a point where you’ve decided you really don’t have the time, or would just rather someone else did the leg-work for you while you concentrate on your core business activities, it’s easy to engage an accountant or bookkeeper to take over if your digital records are already in place.

Remember there’s still time to get your ducks in a row – but don’t leave it too late!

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If you need help getting started, have questions that haven't yet been answered, or would just like to outsource the whole thing, drop me a message and let's chat 😊