Making Tax Digital (MTD)
In a nutshell, what exactly is Making Tax Digital?
HMRC have introduced Making Tax Digital; a new way for most landlords and self-employed people to submit their tax returns online. There is of course nothing new about submitting information on-line, we have been helping people with that for many years.
HMRC now require you to submit your income and expenditure online every three months, throughout the tax year. To many people this may seem like an extra burden on their time, and indeed it can be, however there are some positives to this too, which we will cover further down on this page.
So why have HMRC decided to make this massive change to the self-assessment system?
Simply put, the tax gap is the difference between tax which is legally owed and what is actually collected from the tax-payer.
In the 2023 to 2024 period, small businesses accounted for the largest share of the tax gap by customer group, contributing 60%. In contrast, the wealthiest individuals represented the smallest portion, at just 5%.
As you might have guessed by now, tax gaps also exist for corporation tax, capital gain tax, national insurance contributions etc.
You can find out more about the “tax gap” by clicking here.
Who exactly is required to use Making Tax Digital?
You’ll be required to follow the Making Tax Digital (MTD) rules for Income Tax if all of the following conditions apply:
- You’re a sole trader or landlord registered for Self Assessment
- You earn income from self-employment, property, or both
- Your qualifying income* exceeds £20,000
* Gross income, turn-over or sometimes called takings
What are the deadlines for self-employed people being required to use Making Tax Digital?
The date you must start complying with MTD depends on your level of qualifying income in a tax year:
- Over £50,000 in the 2024–2025 tax year: You’ll need to start from 6 April 2026
- Over £30,000 in the 2025–2026 tax year: You’ll need to start from 6 April 2027
- Over £20,000 in the 2026–2027 tax year: The government plans to introduce legislation to lower the income threshold
What About Partnerships?
Business partnerships will also be required to follow MTD for Income Tax in the future, with further details and timelines to be announced.
Not yet started your new business venture?
You’re not required to start using MTD for Income Tax until after submitting your first Self Assessment tax return. However, you can choose to sign up earlier if you wish.
So I can just submit my return online by the HMRC webpage?
No, unfortunately not, you will need to use software authorised by HMRC to make your submissions. If you find this daunting or simply can not afford the time for this, please speak to us, we have solutions to fit everyone.
I don’t use a computer, what can I do?
We can help you with this, please do get in touch. Unfortunately without speaking to us, there are few practical alternative methods of submitting your quarterly returns to HMRC.
Can I just make less money, or spend more on taxable expenses so I am under the threshold?
As mentioned above, the government plan to introduce measures to lower the current £20,000 threshold, so it is not that simple. Remember the threshold is based on turnover, not profit!
What are the penalties if I do not start using Making Tax Digital?
Late submission penalties will now follow a points-based system — you’ll receive one point for each late return. This approach means that occasional mistakes won’t automatically lead to a financial penalty.
The new late payment penalties are designed to be fairer, taking into account both the amount of tax owed and the length of time it takes to settle the payment.
You can find more about the penalties by clicking here.
Finally, what are the benefits for me of Making Tax Digital?
A New, Simpler Way to Manage Your Tax
These updates are designed to help you stay on top of your finances, plan ahead, and grow your business with more confidence. They’ll also help make sure everyone is paying the right amount of tax — which means more funding for important public services like the NHS, schools, and policing, as well as support for economic growth across the UK.
Going Digital with Your Records
Switching to Making Tax Digital for Income Tax means saying goodbye to paper-based systems and outdated spreadsheets. Instead, you’ll be able to:
- Keep your records secure and in one place
- Reduce mistakes in your bookkeeping
- Create records straight from your bank feed
- Move data easily between systems
- Save time by cutting down on manual entry
- Avoid losing receipts and paperwork
A Clearer Picture, All Year Round
By keeping your records up to date and using the features built into your software, you’ll cut down on admin time and reduce the risk of mistakes. That means you can focus more on running — and growing — your business.
Making Tax Digital for Income Tax helps you to:
- Get an in-year estimate of your tax bill
- Stay on top of your cash flow
- Make more informed business decisions
- Avoid overpaying or underpaying tax
It also allows HMRC to respond more accurately to your situation — like adjusting payments on account — and catch any errors sooner, helping to ensure you’re always paying the right amount at the right time.
