Introduction

If you're self-employed, you might have heard about the government's initiative called Making Tax Digital (MTD). But what does it mean for you, and how will it affect the way you manage your taxes? Let's break it down in simple terms.

What is Making Tax Digital (MTD)?

Making Tax Digital is a government program aimed at transforming the tax system to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. The goal is to make the tax system more efficient, effective, and easier for taxpayers to use.

MTD for Income Tax: What You Need to Know

For self-employed individuals, MTD for Income Tax means that you will need to keep digital records of your income and expenses and submit quarterly updates to HMRC (Her Majesty's Revenue and Customs) using compatible software. This is a shift from the traditional annual tax return to a more frequent reporting system.

Key Points to Remember

1. Digital Record-Keeping: You will need to maintain digital records of all your income and expenses related to your business. This can be done using accounting software, spreadsheets, or apps that are compatible with HMRC's MTD system.

   
   

2. Quarterly Updates: Instead of submitting one annual tax return, you will now need to send updates to HMRC every three months. These updates will provide a snapshot of your income and expenses for that period.

   
   

3. End-of-Period Statement: At the end of the tax year, you will need to submit a final declaration, known as the End-of-Period Statement (EOPS). This will confirm the total income and expenses for the year and make any necessary adjustments.

   
   

4. Final Declaration: Alongside the EOPS, you will also need to submit a final declaration to HMRC, which will replace the traditional Self Assessment tax return. This declaration will confirm that all the information provided throughout the year is accurate and complete.

Thresholds for MTD for Income Tax

From April 2026, self-employed individuals with an annual income of more than £50,000 will be required to comply with MTD for Income Tax.

This threshold will be lowered to £30,000 from April 2027.

Benefits of MTD for Self-Employed Individuals

1. Accuracy: By keeping digital records and submitting updates regularly, you can reduce the risk of errors and ensure that your tax information is always up-to-date.

2. Efficiency: Digital record-keeping and quarterly updates can save you time and make it easier to manage your tax affairs.

3. Transparency: With more frequent reporting, you can have a clearer picture of your financial situation throughout the year.

Getting Started with MTD

To get started with MTD for Income Tax, you will need to:

1. Choose Compatible Software: Select accounting software or apps that are compatible with HMRC's MTD system. Many options are available, so choose one that suits your needs and budget.

   
   

2. Sign Up for MTD: Register for MTD with HMRC. You can do this online through the HMRC website.

   
   

3. Keep Digital Records: Start maintaining digital records of your income and expenses. Make sure to update these records regularly to stay on top of your tax obligations.

   
   

4. Submit Quarterly Updates: Every three months, submit your income and expense updates to HMRC using your chosen software.

   
   

5. Submit End-of-Period Statement and Final Declaration: At the end of the tax year, submit your EOPS and final declaration to HMRC to complete your tax reporting.

Conclusion

Making Tax Digital for Income Tax is a significant change for self-employed individuals, but it can bring many benefits, including improved accuracy, efficiency, and transparency. By understanding the requirements and getting started with digital record-keeping and quarterly updates, you can ensure that you stay compliant and make the most of the new system.

If you have any questions or need assistance with MTD, feel free to reach out to us. We're here to help you navigate the changes and make your tax reporting as smooth as possible.