You Guide to Making Tax Digital for Income Tax

Making Tax Digital (MTD) is a government “digital first” initiative to modernise HMRC’s tax system, with the aim of making the whole process of administrating tax simpler and more efficient.

All of an individual’s or entity’s tax information will be in one place (the digital account) and tax will be paid based on business activity during the year.  It will be possible to upload and update the tax account in real time.

MTD started with MTD for VAT which commenced in April 2019.

The next step is MTD for Income Tax (MTD for IT), which will be phased in from April 2026.  

MTD for IT has three main requirements;

• Keeping digital records 
• Making quarterly submissions to HMRC and
• Making a final, year-end declaration.

Those affected will be required to keep digital records for Income Tax purposes.  

The quarterly submissions will report details of your gross income and expenses.  The reports will be cumulative so no corrections will be necessary.

The changes are potentially so fundamental that it will be necessary to review your current record keeping systems and to reconsider what work you decide to do yourself and which activities you wish to include in the service we provide.

There is however a very simple antidote to the complexities of MTD for IT and this is for businesses to use compliant accounting software.  In many cases, this will be best achieved using Cloud Accounting Software.

HMRC’s MTD Journey

HMRC’s journey with Making Tax Digital started with MTD for VAT.  This has been in place for almost six years.  In our experience, the process has been a smooth one.  VAT registered businesses were required to keep digital records and make their quarterly submissions digitally.  

Granted, VAT registered businesses were reporting quarterly anyway and the introduction of MTD for VAT was more of a change to the way the reporting was managed.

In contrast, it will be a completely new process for those affected for MTD for IT, but we believe that it just requires being more “on top of”’ your record keeping and will ultimately be of benefit to you.  By keeping up to date digital records, you will have a real time view of your financial affairs and potential tax liabilities which will assist with tax planning and cash flow.

It should be noted that the implementation date for MTD for IT has been deferred several times, amidst much controversy.  The MTD project was first announced in 2015 with the roll out of the VAT element in 2019. 

MTD for IT will now be implemented in phases, beginning on 6 April 2026.

We are not expecting any further delays and you should assume this change is happening effective next year even though we expect significant teething issues.

Who is Within Scope of MTD for IT?

Self Employed Individuals

At Autumn Budget 2024 the government announced that MTD for IT will be made mandatory for self-employed individuals.

The first phase of this will be those with annual gross income of over £50,000.

The second phase will be those with gross income of over £30,000.

The third phase will be those with annual gross income of over £20,000.

Individuals receiving income from property

At the same time it will be mandatory for individual landlords, and individuals receiving income from property. 

Again, the first phase will be those with gross income from property over £50,000.

The second phase will be those with income from property over £30,000.

The third phase will be those with income from property over £20,000.

Jointly held property

If you own a share in a property, it is only your share of the income that you need to take into account to establish whether you are affected.

Individuals with combined sources

Individuals with sources of income from both self-employment and property will need to count the combined income to establish if they are affected.

If you are self-employed with a turnover of, say £27,000 and you also receive gross rental income of £24,000, you will be required to join MTD for IT in the first phase.

Non-UK residents

Individuals who are not-UK resident receiving income from UK property will be required to join MTD for IT if their gross income is within the specified limits.  

Non-UK property

If you receive income from overseas properties you must include the gross income from these sources when calculating your gross income.

Income under £20,000

At present, it is not anticipated that individuals with an annual gross income of up to £20,000 will be within the scope of MTD for IT.

Who is Not Within Scope of MTD for IT?

At the present time the following will not be required to join MTD for IT: 

• Partnerships
• Trusts and Estates
• Partners in a partnership, in relation to their profit share only.  If you have other income sources that fulfil the criteria you will be required to report those sources.
• Lloyd’s members in relation to their underwriting business
• Non-resident companies
• Personal representatives of someone who has died.

 Whilst it is fully anticipated that these persons and entities will be required to join MTD for IT at some point, at present HMRC do not have a time scale for this.

Exemptions from MTD for IT

Limited automatic exemptions exist for: 

• Individuals without a National Insurance Number
• Foster carers, where this is your only source of income.

Those who are digitally excluded for reasons such as age, disability or location will need to apply for exemption, unless already exempt from MTD for VAT.

What is Gross Income?

Self-employed

For the self-employed, your gross income is your turnover before taking into account any allowable costs or expenses.

Property income

Your gross income is the amounts of rent your tenants pay, before taking into account any allowable costs or expenses.

If you receive your rent through an agent, with their fees deducted, you must add back their fees to calculate your gross income.

New income sources

If your source of income starts during the tax year, you will have to calculate what the income would have been for the whole 12 months in order to determine if you are affected.

If you start to receive gross rental income of £2,000 per month in October you will receive £12,000 during the tax year.  For the purposes of determining whether you need to be reporting under MTD for IT you must calculate the gross income as though you would be receiving it for the whole year, so £24,000.

In the next two articles, we’ll be sharing more essential information about the MTD scheme including important deadlines, software choices, registering for MTD and next steps.

We would be pleased to work with you in evaluating your response to MTD for IT. As your accountant, we will support you through the changes and provide the ongoing services that you need.  Please get in touch to find out more.