The UK tax system is undergoing one of its most significant transformations with the rollout of Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA). At Accounting People, we’re here to help you understand what this means, how it affects you, and how to prepare for a smooth transition. Whether you’re a landlord or a self-employed individual, this guide breaks down everything you need to know about the move to digital tax (MTD).
What Is Making Tax Digital for Income Tax?
Making Tax Digital (MTD) is HMRC’s initiative to modernise the UK tax system by shifting from paper-based to digital tax records. For Income Tax, this means:
- Keeping digital records of income and expenses
- Using HMRC-approved software to submit updates
- Sending quarterly summaries to HMRC
- Submitting a final end-of-year declaration instead of the traditional annual Self-Assessment return
This approach aims to make tax reporting more accurate, efficient, and user-friendly.
Who Will Be Affected?
MTD for ITSA will affect anyone who earns income through:
- Self-employment (sole traders)
- Property rentals (landlords)
Timeline for Implementation:
- April 2026: MTD becomes mandatory for those earning over £50,000 annually from self-employment and/or property income.
- April 2027: The threshold lowers to £30,000.
- Future date TBC: Individuals earning between £20,000 and £30,000 will also be brought into scope before the end of the current Parliament.
Partnerships and LLPs are currently excluded but are expected to be included after April 2027. Individuals in partnerships are not affected for their share of partnership income, but any other self-employment or property income may bring them into scope if it crosses the threshold.
What Are the Key Changes?
- Digital Record-Keeping Say goodbye to paper receipts. You must keep digital records using compatible software.
- Quarterly Submissions Instead of one yearly tax return, you’ll submit four quarterly updates to HMRC reporting your income and expenses.
- Final Declaration At the end of the tax year, you’ll submit a final statement confirming your income and claiming any relevant adjustments.
- Use of Software You’ll need to use MTD-compliant software that links to your digital tax account. HMRC won’t provide free software for income tax.
- Aligned Accounting Periods Businesses must report using the tax year (6 April to 5 April), even if they’ve traditionally used a different accounting period.
Why Is HMRC Making These Changes?
- To reduce errors and increase tax accuracy
- To make tax filing simpler and more efficient
- To give taxpayers real-time visibility of their tax liabilities
- To align with the digital way businesses already manage their finances
How Is the MTD Threshold Calculated?
- Based on the total gross income reported on your most recently filed tax return before the MTD start date.
- For April 2026, HMRC will use your 2024/25 tax return to assess eligibility.
- For new businesses or landlords, HMRC will annualise the income if it only covers part of the year.
What Doesn’t Count Toward the Threshold?
Income from savings, dividends, pensions, employment, and capital gains is excluded.
Also, income covered by reliefs like Rent-a-Room relief or the £1,000 trading/property allowances won’t be included unless you voluntarily declare them.
However, once you’re in MTD ITSA, you’ll need to comply with digital reporting for all business and property income — including income covered by allowances.
Will HMRC Register Me Automatically?
No — HMRC will not auto-enrol you. You’ll need to register for MTD ITSA manually, just like you do now for Self Assessment. Agents can help with registration, but no bulk registration service is currently available.
Simplification Options
To make things easier, HMRC plans to offer:
- Three-line accounts: Just total income and total expenses if you earn below the VAT threshold
- Simplified expenses: For those using flat-rate deductions
- Daily gross takings: For retailers, instead of line-by-line entries
- Joint property owners: Planned flexibilities to account for shared income reporting
Once You’re In, You’re In
Even if your income later drops below the MTD threshold, you must continue using MTD — unless your income stays under £30,000 for three consecutive years, after which you can apply to be exempt.
Software Requirements
You must use MTD-compliant software. HMRC will not offer free tools for MTD ITSA.
Options include:
- Commercial accounting software (e.g., Xero, FreeAgent)
- Bridging tools that connect spreadsheets to HMRC
Benefits of MTD for Income Tax
- Better visibility of how much tax you owe throughout the year
- Encourages better financial habits through regular reporting
- Potentially less paperwork and admin in the long run
- More accurate and timely tax reporting
Challenges to Be Aware Of
- Increased reporting frequency
- Need to purchase and learn new accounting software
- Learning curve for those unfamiliar with digital tools
- High transaction businesses (e.g. ecommerce) may need to integrate additional tools to simplify reporting
How Accounting People Can Help We’re already helping clients prepare for MTD by:
- Advising on MTD-compliant software
- Offering training and onboarding to get you comfortable with new systems
- Managing digital record-keeping and monitoring deadlines on your behalf
- Handling quarterly and year-end submissions to keep you compliant
Our team stays ahead of HMRC updates to ensure you remain fully compliant and stress-free.
Final Thoughts Making Tax Digital for Income Tax is a major shift, but it doesn’t have to be daunting. With expert help and the right tools, you can stay ahead of the changes and benefit from a modernised, efficient tax system.
Need help getting MTD-ready? Book a free consultation with The Accounting People today and take the stress out of tax.