Key facts you should know about real-time recording for Making Tax Digital for Income Tax (MTD for ITSA)

You may have heard about Making Tax Digital (MTD), the huge, transformative government digital initiative that’s being introduced in stages. According to the government, it will make it easier for people and businesses to “get their tax right” and “stay on top of their tax affairs”.

MTD will bring about the comprehensive use of digital record-keeping and tax data-reporting software and apps, which HMRC believes will mean taxpayers will make far fewer avoidable tax mistakes. Basic tax errors are thought to currently cost the government many billions of pounds a year.

Whether related to VAT, Corporation Tax or Income Tax, Making Tax Digital will radically change the way that people and businesses manage and report tax data to HMRC. If you already pay Income Tax via Self Assessment, you and about 4.2m taxpayers (including landlords, sole traders and partnerships) with business and/or property income of more than £50,000 a year, will be affected when Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is introduced fully.

So, what key facts should you know about MTD for ITSA and real-time reporting?   

In this MTD for ITSA introductory guide you’ll learn:

• When MTD for Income Tax Self Assessment is being introduced.
• Your responsibilities under Making Tax Digital for ITSA.
• How recording in real time could benefit you.
• Best-practice tips on recording in real time.

When will MTD for ITSA be introduced?

Making Tax Digital is phased in for different taxes and MTD changes have already been introduced for VAT-registered businesses.

MTD for Income Tax Self Assessment was scheduled for introduction in April 2023. However, due to stakeholder feedback and the ongoing impact of COVID-19, the government decided to delay introduction until April 2026. That means, unless the government extends the deadline again, you must comply with MTD for ITSA requirements from 6 April 2026 if your taxable income is more than £50,000.

You can sign up voluntarily now to start using MTD for Income Tax Self Assessment if you’re: a UK resident; registered for Self Assessment with up-to-date returns and payments; a sole trader with income from one business, or a landlord who rents out UK property.

Need to know! You cannot sign up for MTD for ITSA now if you need to report income from any other sources (eg share dividend payments).

Three reasons to sign up now for MTD for ITSA

1. Signing up now can help you to get used to the new system long before you will be required to use it by law.
2. You can iron out any problems that may occur, so that everything is running smoothly long before April 2026.
3. As we shall see, real-time reporting can bring benefits that you can enjoy now rather than having to wait.

Need to know! Government website GOV.UK lists third-party software that is compatible with Making Tax Digital for Income Tax, which you’ll need to use. Your current accounting software may not be suitable. Your own spreadsheet-based system won’t be.

Your main responsibilities under Making Tax Digital for ITSA

• After you sign up for MTD for ITSA, you must keep detailed, regularly updated digital records for all of your business income and expenses, using MTD-compatible third-party software to record and report tax data to HMRC quarterly (ie every three months).
• The MTD-compliant third-party software you use will generate summary updates, which must be sent to HMRC every quarter via your HMRC digital account. You’ll be able to see how much tax you owe based on the information you’ve provided, so you can better budget for your tax bill at the end of the year.
• Once you’re satisfied that all of the information you’ve submitted is accurate, you make a final declaration at the end of the tax year and pay the Income Tax owe by 31 January of the following year.

Need to know! 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.

The advantages of MTD for ITSA recording in real time

Businesses that use accounting software are more productive, because they save time each month when maintaining their financial records and managing their tax admin. Time saved can be spent on activities that contribute greater value to the business.

Software makes managing your accounts and tax admin much simpler and less stressful. And when updated regularly, your accounts can give you an accurate picture of your business cash flow and financial health, which can help to stay in control. You can also make business decisions that are informed by the reality of your finances.

When it comes to real-time reporting, MTD ITSA-compliant software makes mistakes much less likely, which also means you won’t have to waste time later correcting basic errors. You’re less likely to forget to claim for business expenses if you have to enter them regularly into your MTD ITSA-compliant software, so your tax bill may even be lower. Crucially, almost effortlessly, you’ll be able to find out how much tax you owe, enabling you to better budget to pay your tax bills.

Need to know! Using MTD for ITSA-compliant software can make tax much more manageable. The stressful end-of-year scramble to complete your annual Self Assessment tax return will become a thing of the past.

Advice on recording in real time for MTD ITSA

• To maximise your benefits and to limit the chances that problems will arise, get into the habit of updating the data in your MTD ITSA-compliant software on the transaction date (ie when you pay money out or receive income).
• If that’s not possible, do it or as soon after as you can. Make it a habit; avoid putting it off. Always get it done long before your quarterly update is submitted to HMRC for that period.
• Download the software or app onto your smartphone or tablet, so that you can record in real time wherever you are and stay in touch with your finances and tax liability.

More information about MTD for Income Tax

Government website GOV.UK contains HMRC guidance on a wide range of Making Tax Digital for ITSA topics. You can:

• Follow the rules for Making Tax Digital for Income Tax.
• Sign up your business for Making Tax Digital for Income Tax.
• Watch a recorded webinar on Making Tax Digital for Income Tax Self Assessment.

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.