Making Tax Digital (MTD) For Income Tax Self-Assessment
The government intends that Making Tax Digital (MTD) for income tax will eventually apply to most people who are self-employed and/or receive property income. It was originally due to become mandatory from April 2024 for those with annual gross income of £10,000 or more from self-employment and property letting. However, the government announced in December 2022 that they would be allowing more time for both businesses and landlords and HMRC to get prepared for the introduction of the new programme.
Therefore, the timetable for compulsory compliance with the MTD rules is now as follows:
From April 2026, for those with annual gross income of over £50,000 from self-employment and property letting
From April 2027, for those with annual gross income of between £30,000 and £50,000 from self-employment and property letting
At this stage, MTD will not apply to those who have annual gross income of less than £30,000. However, MTD may be extended to those with a lower turnover in due course, as the government have confirmed the threshold level will be kept under review. If you are self-employed and receive property income, the gross annual income figure above applies to total gross income from both sources.
What is MTD for Income Tax Self-Assessment?
Under the requirements of MTD for ITSA, individuals who are subject to income tax on the profits of their trade, profession, vocation or property business will be required to keep their accounting records electronically (either using suitable software or on spreadsheet) and file quarterly returns to HMRC with details of their income and expenditure together with any other information that HMRC specifies. A final declaration will then be submitted after the tax year once the individual’s tax affairs have been finalised.
Although the frequency of reporting is to change, the timing of tax payments will not and the current system of payments on account and balancing payment by 31 January after the tax year is expected to remain in place for the foreseeable future.
Example: Mr Yani
Yani is self-employed as a cycle delivery rider. He receives regular income payments from the platform he works through, after they deduct their charges. In March 2023, £1,300 was paid into his bank account. This was after fees of £200 were deducted by the platform before he was paid. His actual earnings were as follows:
Earnings: £1,500
Platform fees: £200
Received in bank: £1,300
Yani’s gross income is £1,500. The platform fees of £200 are a business expense to be claimed in his self-employed accounts in due course.
Example: Martha
Martha rents out a property in the UK. The property is managed by letting agents on her behalf. Each month, she receives a payment from the agents, which is the rental income after the agents have deducted their fees. In March 2023, Martha received a payment of £820, as follows:
Rent paid by tenant: £1,000
Letting agent fees: £180
Received in bank: £820
Martha’s gross income is £1,000. The letting agent fees of £180 are an expense of the letting to be claimed in her property rental accounts in due course.
It will be possible to join MTD voluntarily before you are mandated to do so.
Timetable for MTD for Income Tax Self-Assessment
On 19 December 2022, it was confirmed that mandation of MTD for ITSA will be phased, with the exact date dependent on the taxpayer's income:
From April 2026, self-employed individuals and landlords with an income of more than £50,000 will be mandated into MTD for ITSA.
Those with an income of between £30,000 and up to £50,000 will be mandated from April 2027.
Exemptions from MTD for Income Tax Self-Assessment
Income threshold
As noted above, the roll out of MTD for ITSA will be phased, depending on the level of a taxpayer's income. Self-employed individuals and landlords with income over £50,000 will be mandated into MTD for ITSA from April 2026, with those with income between £30,000 and £50,000 mandated from April 2027. Those with income under £30,000 will not be brought into MTD for ITSA for now, but the Government is keeping this decision under review.
More information on how we understand the £30,000 and £50,000 income thresholds will work in practice can be found in our technical article How does the income exemption work for MTD for ITSA?
Digital exclusion
In line with the exemptions for MTD for VAT, individuals should not have to follow the MTD for Income tax rules if any of the following apply:
It’s not reasonably practicable for them to use digital tools to keep their business records or submit quarterly returns due to age, disability, remoteness of location or any other reason (often referred to as ‘digital exclusion’).
They are subject to an insolvency procedure.
The business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records.
Where any of the above apply, the individual has to apply to HMRC to claim an exemption, with HMRC having 28 days to either grant or deny the application.
We understand that where a business has already qualified for an exemption from MTD for VAT, they will also be exempt from MTD for ITSA.
Other exemptions
The following are also exempt from MTD for ITSA:
Non-resident companies
Trustees, executors and administrators
Foreign businesses of non-UK domiciled individuals
Foster carers
Those with no National Insurance Number
Reporting requirements
Final declaration
The Final Declaration will bring together all business and personal information needed to determine the final tax liability, including information from MTD sources of income (e.g. trading and property income) and non-MTD sources of income (e.g. dividends and interest), allowances and reliefs.
Only a single final declaration will be required for each taxpayer. This will be due by the normal self-assessment deadline of 31 January following the relevant tax year.
Digital records
A key element of Making Tax Digital (MTD) for income tax is that there is a legal requirement to maintain business records digitally. This means that some kind of electronic record-keeping system will need to be used. For example, this could be an accounting software package, a spreadsheet-based system, or via an ‘app’ on a smartphone.
