15 Things you need to know about Making Tax Digital and Income Tax

Making Tax Digital (MTD) is a major government initiative that aims to make it easier for people and businesses to “get their tax right” and “stay on top of their tax affairs”. It will bring about…

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Making Tax Digital (MTD) is a major government initiative that aims to make it easier for people and businesses to “get their tax right” and “stay on top of their tax affairs”.

It will bring about the full digitalisation of the UK tax system, with people and businesses having to use software and apps to record and report tax data to HMRC. It is hoped that this will prevent errors that cost the UK almost £10bn a year in lost tax revenue.

MTD’s phased introduction began in 2019, affecting VAT first. Making Tax Digital’s influence will soon extend to Income Tax, after which sole traders, landlords and others will need to report their earnings to HMRC in a completely different way. Here are 15 facts you should know about Making Tax Digital and Income Tax.

Who will be affected by Making Tax Digital for Income Tax?

1 Making Tax Digital for Income Tax will affect sole traders (ie self-employed workers), which includes many freelancers, contractors and agency workers.

2 Landlords who declare their rental earnings via Self Assessment will also need to get ready for MTD for Income Tax changes.

When will MTD for Income Tax be introduced?

3 Sole traders with a gross annual income (ie earnings before tax and deductions) of more than £10,000 will need to comply with Making Tax Digital for Income Tax rules from their next accounting period starting on/after 6 April 2024.

4 Similarly, landlords who earn rental income of more than £10,000 (gross not just profit) will need to comply with Making Tax Digital for Income Tax rules from their next accounting period starting on/after 6 April 2024.

5 Many sole traders, landlords and accountants have already been part of a live pilot to test and develop MTD for Income Tax. If you’re self-employed or a landlord, you may be able to volunteer to sign up now, so you can get used to the changes. You can sign up voluntarily for Making Tax Digital for Income Tax if:

  • you’re a UK resident
  • you’re registered for Self Assessment
  • your returns and payments are up to date
  • you’re a sole trader with income from only one business and/or a landlord who rents out UK property.

6 You can sign up now for your current or next accounting period. If an accountant maintains your financial records and/or completes your tax returns, they can sign you up for MTD for Income Tax.

7 Visit GOV.UK to sign up voluntarily for Making Tax Digital for Income Tax. You’ll be asked for your: business name; email address; National Insurance number; accounting period; accounting type (eg cash or standard accounting); and Government Gateway user ID and password you use when you file your Self Assessment return (if you don’t have a user ID, you can create one when signing up).

What changes will MTD for Income Tax bring?

8 You’ll need to keep detailed digital records of your income and expenses and use MTD-compatible software to report your financial data to HMRC every quarter (ie three months).

9 The MTD-compliant software will generate summary updates, which will be sent to HMRC online every quarter.

10 The summaries will show how much tax you owe based on the information you’ve provided, which will help you to better budget for paying your tax bill at the end of the tax year.

11 At the end of your accounting period you need to finalise your business income and submit a final declaration (which will replace the annual Self Assessment tax return). Within this, you must confirm the accuracy of the updates you’ve sent, with any accounting adjustments made (eg any reliefs or allowances claimed).

12 You’ll still need to send HMRC a Self Assessment tax return for the tax year before you signed up for MTD for Income Tax.

How can I find out about MTD-compliant software?

13 If you’re already using software to maintain your financial records, HMRC recommends asking your provider whether they plan to make their software MTD-compatible, if it isn’t already so.

14 Government website GOV.UK lists software that’s compatible with Making Tax Digital for Income Tax.

Where can I find more information about MTD for Income Tax?

15 GOV.UK features HMRC guidance on a wide range of Making Tax Digital for Income Tax topics. HMRC has also created videos about MTD for Income Tax and you can view a recorded webinar on Making Tax Digital for Income Tax.

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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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