Making Tax Digital for Income Tax
What is Making Tax Digital for Income Tax?
Making tax digital is essentially a transition to electronic accounting records and submissions. Taxpayers will need to file quarterly summaries with HMRC, to let them know what your income is throughout the year.
Once you have submitted your quarterly summaries, HMRC will then ask you to submit your End of Period Statement. This is a final declaration and will replace your Self-Assessment and advise HMRC how much tax you are due to pay in total, based on your profit from either self-employment or property income.
It is worth noting that payment deadlines are currently expected to stay the same; this is the usual 31st January deadline after the tax year ends.
Who will be affected by this change?
- Sole Traders
- Partnerships (unincorporated)
- Landlords (individuals receiving income from property)
However, a small threshold has been implemented whereby if your income is below the threshold, you do not need to comply with Making Tax Digital ITSA.
When will you need to register for Making Tax Digital for Income Tax?
- Making Tax Digital for Income Tax and Self-assessment has been delayed by another year and is due to come into effect from April 2024.
- General Partnerships should comply with Making Tax Digital from April 2025. Other partnerships are to be confirmed, a date has not yet been announced.
- The government are not expecting the transitional year to be any earlier than April 2023.
Exemptions from Making Tax Digital for Income Tax
- £10,000 Gross Income Threshold (combined from all trades). This means that if your turnover from self-employment or property income is under £10,000 you do not have to register for Making Tax Digital, Income Tax. However, if you have multiple trades that bring you over the £10,000 threshold, you will need to register for MTD.
- Age, disability and remote location (digital exclusion) where it would not be beneficial to start keeping records in this way because of certain limitations.
- Insolvency procedure
- Religion i.e., if your religion does not allow the use of electronic devices
You must apply with HMRC for any exemption, who will review it and decide whether you are qualified to be exempt. Bear in mind that it is likely that businesses with a Making Tax Digital VAT exemption will also be exempt from Making Tax Digital for income tax.
Prepare for Making Tax Digital for Income Tax
Firstly, you will need to find a Making Tax Digital software. There are currently limited options however, FreeAgent and Xero plan to be available for MTD Income Tax and Self-assessment submissions from 2022.
If you are not keen on using a bookkeeping software such as FreeAgent or Xero, there are alternative options available such as using API-enabled spreadsheets or bridging software.
We recommend you start recording your income/expenses with your preferred Making Tax Digital compliant software from 2022. Although you don’t need to submit anything right now, you could start using software sooner to get yourself acquainted with how to use it and could even find yourself an accountant to support you with this.
Voluntary Registration for MTD for Income Tax
The government are currently running voluntary registrations which will allow you to sign up to Making Tax Digital for Income Tax to test the service. Just follow the link below!
https://www.gov.uk/guidance/check-if-youre-eligible-for-making-tax-digital-for-income-tax
Some helpful links:
Announcement for the year delay on Making Tax Digital for Income Tax and self-assessment: https://questions-statements.parliament.uk/written-statements/detail/2021-09-23/hcws308
Follow the link below to check when you need to sign up for Making Tax Digital (currently 2024, but any updates should be found here): https://www.gov.uk/guidance/check-when-to-sign-up-for-making-tax-digital-for-income-tax
Follow the link below to see what software is currently compatible with Making Tax Digital for Income Tax. This list should be updated with software as they become compatible, but you can also check with the software directly to see if it is ready. https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax
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