Get ready for Making Tax Digital for Income Tax

If your business is VAT-registered, you should already have heard of Making Tax Digital, because in April 2022 it ushered in new VAT record-keeping and reporting requirements. If you’re not familiar with Making Tax Digital or…

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Last Updated: 23rd March 2023

If your business is VAT-registered, you should already have heard of Making Tax Digital, because in April 2022 it ushered in new VAT record-keeping and reporting requirements. If you’re not familiar with Making Tax Digital or want to increase your knowledge about how it will affect you as a sole trader, landlord or someone else who pays tax via Self Assessment, here are a few key facts.

What is Making Tax Digital?

Making Tax Digital (MTD) is a major government initiative that is digitising the UK tax system. Making Tax Digital’s introduction began in 2019 and it’s taking place in stages. Full introduction of MTD across the UK tax system remains some way off. 

Making Tax Digital is happening because the government says it wants to make it easier for people and businesses to more successfully and efficiently manage their tax affairs. It hopes Making Tax Digital will also prevent basic tax errors, which currently cost the UK many billions in lost tax revenue each year.  

The first phase of MTD for VAT was introduced on 1 April 2019. It applied only to VAT-registered businesses with a VAT-taxable turnover above the VAT threshold (£85,000). From 1 April 2022, all VAT-registered businesses must comply with MTD for VAT rules, including VAT-registered businesses with VAT taxable turnover below the VAT threshold.

Now that Making Tax Digital for VAT has been introduced fully, Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) will be next (it will impact Corporation Tax after that). MTD for ITSA was slated for introduction on 6 April 2023, but it’s been delayed until 6 April 2026. According to the government, that’s because of COVID-19 and stakeholder representatives requesting more time so that taxpayers can prepare fully for MTD for ITSA.

Who must sign up for Making Tax Digital for Income Tax Self Assessment?

You must comply with Making Tax Digital for Income Tax requirements from 6 April 2026 if you’re registered for Income Tax Self Assessment and have a taxable self employed or rental income of more than £50,000.

You can apply for MTD for ITSA exemption if it’s not practical for you to use software to keep digital records or submit them to HMRC digitally, for example, because of your age, disability, location or another justifiable reason. MTD exemption can also be granted on religious grounds. You’ll need to explain your reasons to HMRC and an alternative solution will be found.

Key differences between Self Assessment and MTD for ITSA

The introduction of Making Tax Digital for Self Assessment will means sole traders, landlords and other Self Assessment taxpayers will no longer be required to submit a Self Assessment tax return each year. If you’re among them, instead, you’ll need to maintain digital records of your taxable income and expenses/costs and update them regularly and send them electronically to HMRC.

You must either use third-party MTD for ITSA-compliant software or “bridging software”, which works with non-MTD-compatible software, spreadsheets, etc, enabling you to send the required information digitally to HMRC. You authorise your MTD-compatible software via your Government Gateway user ID and password.   

Your MTD-compliant/bridging software will summarise your figures, which you’ll then need to send online via your HMRC digital account each quarter. You’ll get up to a month after the end of each quarter to do this (this is why annual tax return will no longer be necessary).

At the end of the tax year you must submit an end of period statement (EOPS) to HMRC, confirming the accuracy of the figures you’ve submitted, with any accounting adjustments made. You must also make a final declaration that confirms any other income you have received, such as from PAYE or investments, HMRC will then tell you how much tax you owe, which you must pay by 31 January in the following tax year. Late submissions or payments may result in fines.

Sign up for MTD for ITSA now?

Currently, you don’t have to sign up for MTD for Income Tax Self Assessment. However, some taxpayers have already joined a live test pilot for MTD for Income Tax Self Assessment. This can allow you to get used to the new MTD for ITSA requirements and address any teething problems you may encounter.

You’ll also be able to gain now from the advantages offered by MTD. For example, at any time, the software will tell you how much tax you owe, based on the figures you’ve entered, so you can better budget for paying tax and avoid any nasty surprises.

To sign up now for Making Tax Digital for Income Tax, you must be a UK resident who is registered for Self Assessment and your tax returns and Income Tax payments must be up to date.

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Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.

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