HMRC’s Making Tax Digital: What It Means for You

The UK government’s Making Tax Digital (MTD) initiative is transforming the way individuals and businesses report and pay tax. HMRC launched this program to modernise the tax system, improve efficiency, and reduce errors. While MTD has already been rolled out for VAT, the next major step is Making Tax Digital for Income Tax Self Assessment (MTD for ITSA), which will impact self-employed individuals and landlords.
What Is Making Tax Digital?
MTD is a government initiative to transition tax reporting from paper-based systems to digital platforms. Instead of submitting annual tax returns, businesses and individuals will be required to keep digital records and send updates to HMRC using compatible software.
The core aims of MTD are:

• Reducing errors in tax returns
• Simplifying the process of record-keeping
• Making tax management more efficient
• Enhancing transparency with real-time data reporting
  Who Does MTD for ITSA Affect?
  The next phase of MTD, set to begin in April 2026, applies to self-employed individuals and landlords with a total annual income over £50,000. Those earning between £30,000 and £50,000 will be required to comply from April 2027.
  Businesses and landlords below this threshold will not be required to sign up yet, but they can voluntarily use MTD-compatible software to keep digital records and submit tax information.
  Key Changes Under MTD for ITSA

1. Quarterly Updates – Instead of an annual Self Assessment tax return, businesses will submit income and expenses every three months via compatible software.
2. End of Period Statement (EOPS) – At the end of the tax year, an EOPS must be submitted to finalise income and claim relevant allowances.
3. Final Declaration – This replaces the traditional Self Assessment tax return and ensures all income is accounted for.
   What Do You Need to Do?
   If you are a self-employed individual or landlord earning over £50,000, it’s time to prepare for MTD by:

• Using compatible software: HMRC requires you to maintain digital records and submit tax data via MTD-approved software like Xero, QuickBooks, FreeAgent, or other recognised providers.
• Keeping digital records: Spreadsheets alone won’t be compliant unless they are linked to software that allows digital submissions.
• Understanding deadlines: Unlike the current Self Assessment system, tax reporting will now happen quarterly, meaning you need to stay on top of submissions throughout the year.
  Benefits of Making Tax Digital
  While MTD may seem like an added responsibility, there are clear benefits:
• Reduced errors: Digital submissions minimise mistakes caused by manual calculations.
• More visibility: Businesses and individuals will have a clearer view of their tax position in real-time.
• Better organisation: Regular updates prevent last-minute rushes to gather financial information before deadlines.
• Easier tax planning: Knowing your tax liability throughout the year helps with budgeting and avoiding unexpected tax bills.
  Get Ready for MTD
  Although MTD for ITSA doesn’t come into effect until 2026, now is the perfect time to get familiar with digital bookkeeping. If you need help transitioning to an MTD-compliant system, outsourcing your bookkeeping and tax management can ensure you stay compliant while focusing on growing your business.
  If you have questions about MTD and how it affects you, get in touch.