Making Tax Digital (MTD) for Income Tax

What is Making Tax Digital, and how does it affect filing Self Assessment Income Tax

The way we handle Self-Assessment Income Tax in the UK is undergoing its biggest transformation in decades. Submitting four quarterly returns per tax year is an additional legal obligation for the self-employed. Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) is just around the corner, and it’s vital to understand how it affects you. Whether you’re a sole trader, a landlord, or both, the rules are changing.

Here is a breakdown of the most common questions we’re hearing from business owners today.

1. Who actually needs to join MTD?

MTD for Income Tax will be rolled out in stages based on your "qualifying income":

•From April 2026: If your qualifying income is over £50,000.

•From April 2027: If your qualifying income is over £30,000.

2. What counts towards the £50k / £30k thresholds?

Your "qualifying income" is the total gross income (before expenses) from:

•Self-employment (sole trader business)

•Property rental (UK and overseas)

If you have multiple businesses or properties, you must add the income from all of them together to see if you hit the threshold.

3. Does PAYE income or bank interest count?

The short answer is no.

•PAYE Income: Your salary from an employer does not count towards the MTD threshold.

•Bank Interest & Dividends: Savings interest, dividends, and pension income are also excluded from the "qualifying income" calculation.

Example: If you earn £40,000 from a PAYE job and £20,000 from a rental property, your qualifying income is only £20,000. You would currently be below the MTD threshold.

4. How much detail must be recorded?

Under MTD, you must keep digital records of all your business transactions. This doesn't mean you need to scan every receipt (though it's good practice!), but you must record the date, amount, and category of every piece of income and expenditure in MTD-compatible software.

5. What happens if a business closes?

If your business closes or your qualifying income falls below the threshold, you don't automatically leave MTD. You generally need to remain in the scheme until your income has been below the threshold for three consecutive tax years. If you cease trading entirely, you will need to notify HMRC to update your status.

6. Quarterly Submissions vs. The Final Return

One of the biggest changes is the move to quarterly updates. Every three months, you must send a summary of your income and expenses to HMRC.

•Do they have to be perfect? Not necessarily. Quarterly updates are intended to give you and HMRC a "real-time" view of your tax position.

•What if they differ from the final return? That’s okay. You (or your accountant) will make "End of Period Statements" and a "Final Declaration" at the end of the year to account for adjustments, reliefs, and allowances.

7. Can accountants still submit year-end adjustments?

Yes. Your accountant will play a crucial role in the "End of Period" process. While you (or your software) handle the quarterly data, your accountant will step in at the end of the year to handle complex adjustments, capital allowances, and ensure your final tax bill is accurate.

Is your business ready?

MTD is more than just a software change; it’s a shift in how you manage your business finances. Starting early with digital record-keeping will make the transition much smoother.

Need help getting started? Contact us today to discuss your MTD readiness.