Making Tax Digital for Income Tax (MTD IT) is part of the UK Government’s plan to transition the UK tax system to a modern, digital tax service eradicating the need for manual paper intensive processes. It means that businesses and individuals with qualifying income will be required to maintain digital records and update HMRC each quarter using compatible software.
The roll out of Making Tax Digital will be the most significant change to the Self Assessment regime since its introduction in 1997.
We have created a tailored end to end solutions for our clients which are Making Tax Digital for Income Tax ready.
If you're likely to be affected, it is crucial that you start preparing now to ensure that you keep up to date with your tax affairs.
Who will be impacted?
Initially, MTD IT will be rolled out to sole trade businesses and landlords with qualifying income in a phased approach starting from 2026.
- 6th April 2026 - Sole trade businesses and landlords with qualifying income over £50,000
- 6th April 2027 - Sole trade businesses and landlords with qualifying income over £30,000
- 6th April 2028 - Sole trade businesses and landlords with qualifying income over £20,000
The UK Government is currently considering options for those who have qualifying income of less than £20,000.
Working out your qualifying income
Your qualifying income is the total income you get in a tax year from self-employment and property.
All other sources of income reported through Self Assessment, such as income from employment (PAYE), a partnership or dividends (including those from your own company), do not count towards your qualifying income.
HMRC will assess your gross income (also called your turnover) before you deduct expenses.
For example, your gross income (income before you deduct expenses) could be:
- £24,000 from rental income
- £27,000 from self-employment income
In this example, your total qualifying income would be £51,000.
Visit the HMRC website for more information: Find out what counts as qualifying income
What will I need to do?
Taxpayers with qualifying income will be required to:
- keep digital records of all business-related income and expenditure – this can be either using directly compatible software, or using spreadsheets to store records;
- submit quarterly updates of their income and expenses per trade no later than one month and seven days following the quarter end; and
- submit a ‘final declaration’ in place of the usual submission of a Self Assessment Tax Return.
If you think you will be impacted by these changes and need help or advice, Contact us.
FAQ's
Using MTD compliant software, you will need to submit a summary of your income and expenses every quarter per trade.
Standard Update Periods
The standard update periods are based on the tax year.
|
Period |
Deadline |
Quarter 1 |
6 April – 5 July |
7 August |
Quarter 2 |
6 April – 5 October |
7 November |
Quarter 3 |
6 April – 5 January |
7 February |
Quarter 4 |
6 April – 5 April |
7 May |
Taxpayers can also elect to use the calendar year quarters for their update periods:
|
Period |
Deadline |
Quarter 1 |
1 April – 30 June |
7 August |
Quarter 2 |
1 April – 30 September |
7 November |
Quarter 3 |
1 April – 31 December |
7 February |
Quarter 4 |
1 April – 31 March |
7 May |
After you submit your fourth and final quarterly update, you will need to file a ‘digital tax return’ or ‘final declaration’. This will need to be filed using Making Tax Digital for Income Tax compatible software by 31 January following the end of the relevant tax year.
Your software should be pre-populated with the income and expenses from the quarterly updates you’ve already filed to enable you to:
- adjust these entries for accounting and tax purposes (e.g. claiming reliefs or allowances, such as capital allowances).
- add details about these other income sources, such as savings or dividends, using your compatible software.
Hodge Bakshi already use MTD compliant software and, if you are already a Hodge Bakshi client, we will discuss the most suitable solutions available to you based on your individual circumstances.
Whilst HMRC do not provide MTD compatible software themselves, they have published a list of compatible software available for MTD, including bridging software – MTD Compliant Software
No, HMRC will not register taxpayers within the scope of MTD automatically.
If you are a Hodge Bakshi client and your qualifying income meets the relevant thresholds, we will contact you to discuss your options and can also register you for MTD.
Otherwise, you will need to sign up to use MTD on the HMRC website.
Taxpayers with multiple sources of qualifying income will be required to provide separate updates for each type of qualifying income source.
For example, if you run a small plumbing business but also let out one or more UK properties, this would count as two separate sources of income.
You will need to submit:
- 4 quarterly updates for your income from your plumbing business
- 4 quarterly updates for your rental income
- 1 final declaration covering all income and any adjustments
All of the above must be submitted through MTD compliant software.
Once Making Tax Digital for Income Tax becomes a legal requirement, if you do not send your updates by the relevant deadline, you may receive a late submission penalty.
HMRC are rolling out a new penalty regime alongside MTD IT, based on points accumulated for missing submission deadlines. Quarterly updates and final declarations will be tracked separately, with a late submission incurring one penalty point. Once the number of penalty points crosses a threshold, an automatic £200 fine will be levied toward the taxpayer. The thresholds are as follows:
- Annual submissions (i.e. final declaration): 2 points;
- Quarterly submissions (i.e. quarterly updates): 4 points.
Penalty points will remain on a taxpayer’s record for 24 months before being automatically removed. They are not, however, removed if the number of relevant penalty points sits at the threshold; a ‘period of compliance’ (that is, a period where all relevant submission obligations are met) must be met depending on the submission frequency.