Making Tax Digital for Income Tax for Self-employed
MTD for Income Tax is set to have a huge change in the way millions of people such as sole traders deal with taxes.
MTD for income tax will affect the self-employed with more than £50,000 of income from April 2026 and £30,000 of income from April 2027. It was announced in the 2025 Spring Statement that the income threshold is to be lowered to £20,000 from April 2028. In the future MTD will eventually be rolled out to Partnerships and Limited Companies. Meeting this criteria will in turn require the individual to be MTD compliant with the records kept and the way it is submitted to HMRC. Anyone below these limits are not required to sign up to MTD for Income Tax but can do so voluntarily.
MTD for Income Tax will not apply to:
- Partnerships
- Taxpayers claiming qualifying care relief such as foster carers
- Taxpayers who do not have a National Insurance number
- Taxpayers domiciled or resident outside of the UK will only need to comply with Making Tax Digital for Income Tax on their UK self-employment or rental income. Foreign income is not included for Making Tax Digital for Income Tax
- Trusts, estates, trustees of registered pension schemes and non-resident companies
- Trustees of charitable trusts or the trustees of exempt unauthorised unit trusts
- A Lloyds member in relation to your underwriting business
What counts as qualifying income?
Qualifying income is deemed as your turnover before deducting expenses and does not include income such as employment, dividends or savings. You may have income from more than one source such as both self-employment and rental income so you should combine the turnover and rental income to calculate your combined qualifying income. Individuals with foreign self-employment or properties will need to consider residency and domicile rules to determine the qualifying income.
What is Making Tax Digital and what do the changes mean?
Making Tax Digital, also referred to as MTD, is a change in the way individuals and businesses are expected to report and pay tax. It is designed to make it easier for you to keep on top of your affairs and for HMRC to receive information more regularly.
HMRC’s plan is to be one of the most digitally advanced countries when it comes to tax administration. MTD is a fundamental change in the way the tax system works to make it more effective, more efficient, and easier to get your tax right.
The changes are not being all rolled out at once but in the long run, like VAT-registered businesses who are already required to file under the MTD scheme, self-employed and landlord tax payers will be required to follow in their steps. In time partnerships and companies will also join the scheme.
MTD for VAT-registered businesses is already in effect and you are expected to be registered for the service unless you have a valid exemption.
What is Making Tax Digital for Income Tax and if my qualifying income exceeds the limits how will that affect me?
MTD for Income Tax requires an individual to record their business transactions using digital records, with the most convenient method being online accounting software. It is also possible to use spreadsheets however it will be necessary to use MTD IT compatible bridging software to ensure the figures are reported in the correct format and contain the digital links to satisfy MTD compatibility.
HMRC requires MTD compatible reports containing the total income and expenses to be submitted every 3 months (however you can do this more frequently if you wish) therefore in a tax year 4 quarterly submissions are required with a final declaration due (along with any tax due) by the following 31st January.
Each quarter’s figures should be submitted on a cumulative basis and once a quarter is submitted using your MTD compatible software then HMRC will provide an estimate of your tax liability. Tax payments are not required after each quarterly update.
The deadline for submitting the quarterly updates are as follows:
Q1: 6th April to 5th July – deadline 7th August
Q2: 6th July to 5th October – deadline 7th November
Q3: 6th October to 5th January – deadline 7th February
Q4: 6th January to 5th April – deadline 7th May
If you prefer you can opt for calendar months however this will need to be selected before the first quarterly update is submitted. The deadlines will remain the same as above for the standard update periods.
You may find that some of the online software will be easier to use if you choose a calendar month for your quarterly updates.
Once the 4 quarters have been completed the last submission is your final declaration – here you include any final year-end adjustments to your self-employment and you also declare any other reportable income or reliefs you normally declare on your self-assessment return. The deadline for this is 31st January after the end of the tax year and this is when any tax will be due for payment to HMRC.
The final declaration will replace the self-assessment tax return for those who are required to be registered for MTD for Income Tax but those under the threshold will continue to remain on the traditional self-assessment scheme.
Late filing and late payment penalties
Late filing and late payment penalties are expected to follow the same as for MTD for VAT. HMRC have confirmed there will be no penalty points issued in the ‘soft landing’ year of 6 April 2026-27 however, penalty points will be issued from the year 6 April 2027 onwards. Please see our webinar for more details.
HMRC have also confirmed there are no penalties for any inaccuracies of the data being submitted on the quarterly updates.
Software for Making Tax Digital for Income Tax
At Perrys we can work with any software you choose for your record keeping however not all will be compatible with Making Tax Digital for Income Tax. For the most up to date list of Making Tax Digital for Income Tax compatible software providers please visit the HMRC website https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax
