Are You Ready For Making Tax Digital For Income Tax Self-Assessment Due From 2026?

If you are self-employed or a landlord, the roll-out of Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) begins in April next year. This is part of HMRC’s new commitment to modernising the way in which small businesses handle their tax, streamlining operations both for small business owners and for HMRC. Making Tax Digital (MTD) will leverage the opportunities offered by cloud technology and open banking to make it easier for everyone to get tax right. Many other countries have already done this or have digital systems in development. Unfortunately, spreadsheets don’t make the cut.

Originally announced at Budget 2015, and following formal consultation in 2016, HMRC implemented the first phase of MTD from April 2019 for VAT-registered businesses. Building on the successful introduction of MTD for VAT, the government announced in December 2022 that MTD for ITSA will be introduced for businesses, self-employed individuals and landlords with income over £50,000 from April 2026. Those with income over £30,000 will be mandated from April 2027. In Autumn Statement 2023, the government published the ‘Making Tax Digital Small Business Review Outcome’, setting out how MTD for ITSA addresses the needs of smaller businesses. At the same time the government introduced new simplifications into the design of MTD for ITSA aiming to minimise potential burdens and to streamline processes for all using it. 

What exactly is MTD for ITSA ? 

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) requires businesses and landlords with qualifying income to maintain digital records and update HMRC each quarter using compatible software.

Under MTD for ITSA businesses will be required to:

• Keep digital financial records (receipts, invoices etc)
• File a quarterly income and expenditure report on MTD compliant software
• File an annual income tax return through MTD compliant software

The primary objective behind the introduction of this policy is to minimise the tax gap for Self Assessment businesses which stands at about £5 billion. Making Tax Digital will make it easier for businesses to get their taxes right by eliminating errors in handling tax affairs which usually contribute to the widening tax gap. 

Will I be affected by MTD for ITSA?

Know More About Who’s Affected And Who’s Not

In order to remove any kind of confusions, currently as per the policy only businesses, self employed people and landlords will be mandated : 

• to operate MTD from 6 April 2026 in relation to their trading and property income chargeable to Income Tax and Class 4 National Insurance contributions, if their total qualifying income from these income sources for a tax year exceeds £50,000
• to operate MTD from 6 April 2027 in relation to their trading and property income chargeable to Income Tax and Class 4 National Insurance contributions, if their total qualifying income from these income sources for a tax year exceeds £30,000

What Counts as Qualifying Income In MTD for ITSA?

Understanding “Qualifying Income” And How It Affects Your Declaration

Qualifying income is the gross income from sole trade and property businesses (i.e. sole trade and property income combined and measured before expenses). For jointly held sources of income, only the relevant share is counted, e.g. if a husband and wife own a rental property equally, each spouse’s qualifying income would be their share of the gross rent. 

The thresholds for the two phases of MTD ITSA mandates will be assessed against the gross qualifying income reported on the most recent tax return filed prior to the mandated date (assuming all returns are filed on time).

For instance, 2024/25 tax returns will be due for submission by 31 January 2026. If that return reports gross qualifying income of more than £50,000, that individual will have to join MTD for ITSA from 6 April 2026.

If the trade or property income declared by an individual relates to a new source of income which started in the year, the figure reported will need to be adjusted proportionately in order to compare 12 months’ worth of income against the MTD ITSA mandatory threshold.

What Are The Reporting Requirements In MTD For ITSA?

Understanding Reporting Requirements In MTD For ITSA

Taxpayers will be mandated to maintain digital records of business and/or property income and expenses, including the following details:

• The amounts and dates of the transaction.
• The category of the expense (which is broadly aligned with those on the Self-Assessment return).

Taxpayers with turnover from either self-employment or property below the £90,000 VAT threshold can choose to submit simplified “three-line accounts” and just categorise each item as either income or expense and net profit.

Landlords will also be permitted to maintain less detailed records for jointly owned properties and will be allowed to avoid submitting quarterly updates for those properties and instead report them when finalising their year-end tax position.

However, separate quarterly updates will be required for each business a taxpayer is involved in so that an individual who is a sole trader and a landlord will need to provide eight quarterly updates each year.

Taxpayers must then complete a final declaration of their tax position through MTD-compatible software at the end of the year – based on the current Self-Assessment return of 31 January. This includes:

• All other sources of income (e.g., employment, dividends, bank interest) that have not already been reported.
• Claiming any relevant reliefs or allowances.

Digital records must not be kept in spreadsheets unless those spreadsheets are API-enabled or used in conjunction with bridging software that allows two-way communication with HMRC systems.

What Are Quarterly Reporting Deadlines In MTD for ITSA ?

Quarterly Reporting & Year End Taxation In MTD For ITSA Simplified

MTD for ITSA will fundamentally change the tax reporting rhythm. Practices should embed quarterly reporting into their operational cycle, setting up reminders, checklists and review procedures for each submission period.

The standard quarterly reporting deadlines are:

• 6 April to 5 July
• 6 July to 5 October
• 6 October to 5 January
• 6 January to 5 April

Businesses can elect to report for calendar quarters:

• 1 April to 30 June
• 1 July to 30 September
• 1 October to 31 December
• 1 January to 31 March

The deadlines for quarterly updates will be 7 August, 7 November, 7 February and 7 May following the end of the relevant quarter.

After the fourth and final quarterly update has been filed, the taxpayer will need to submit a ‘digital tax return’. This will have similarities with the current Self-Assessment return, but will pre-populate with the income and expenses from the quarterly updates already filed. Those entries will then need to be adjusted for accounting and tax purposes (e.g. disallowing elements of private use or capital expenditure). 

Depending on how the taxpayer (or agent) keeps the digital records, this year-end process may be done in software, or via a new HMRC online service.

As with ‘ordinary’ Self-Assessment, the filing deadline for the year-end return will be 31 January following the end of the tax year.

Which Software to use for MTDitsa?

You will need software which has been approved as MTD compliant by HMRC. A full list of approved vendors can be found on the gov.uk website here.

Sole traders with simple income may benefit from free or low-cost options, while landlords and complex businesses might need more advanced tools.

Some software can submit both quarterly updates and year-end tax returns, but other products will only do one, so it’s important to check first.

For example, an individual might create their own digital records and send their quarterly updates but still want their agent to submit their tax return. In this instance, software that sends quarterly updates is sufficient. 

Some software will be able to report all business income sources, whilst others may focus on a specific source. For example, there are products that are designed specifically for landlords.
Tools that integrate with your bank, point-of-sale or online sales platform will give you an immediate advantage. We’re big fans of Xero, but also have other options available depending on your needs and budget. Get in touch with us to discuss your needs so we can help you to remain compliant throughout these changes. 

How can we help?

We’re offering a fully compliant MTD solution to include quarterly bookkeeping, filing and annual preparation of your tax declaration for MTDitsa which is available for £50/month for the first 100 clients that reach out to us to make an MTDitsa arrangement. This is discounted to £25/month until 31st March 2025  if you sign up before November 2025 and includes your 2024 tax year self assessment preparation and filing for the period of 6th April 2024 - 5th April 2025 (due for filing by 31st January 2025). This pricing is available regardless of tax return complexity for our first 100 clients to make the move. We look forward to being your trusted partners through this period of change.