Making Tax Digital (MTD) is transforming how UK businesses and individuals manage their tax affairs. After successfully rolling out MTD for VAT, HMRC is now extending this digital initiative to Income Tax Self Assessment (ITSA). Here's what you need to know to prepare your business.
What is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) requires eligible self-employed individuals and landlords to keep digital records and use compatible software to submit quarterly updates to HMRC.
This marks a significant shift from the traditional annual tax return process to a more real-time, digital approach to managing your tax affairs.
Key Point
MTD for ITSA doesn't replace the annual tax return entirely—you'll still need to make a final declaration, but the process will be based on the quarterly updates you've already submitted throughout the year.
Who Needs to Comply?
The rollout of MTD for ITSA is happening in phases:
Phase 1: April 2026
Self-employed individuals and landlords with total business and property income over £50,000 per year must comply.
Phase 2: April 2027
The threshold drops to £30,000, bringing more businesses into scope.
Phase 3: April 2028
The threshold reduces further to £20,000, expanding the requirement to even more small businesses.
If you're close to these thresholds, it's worth considering whether voluntary early adoption might simplify your tax planning, even if you're not yet required to comply.
What Changes for Your Business?
1. Digital Record Keeping
You'll need to maintain digital records of your income and expenses using MTD-compatible software. Paper records or basic spreadsheets won't meet the requirements.
2. Quarterly Updates
Instead of submitting one annual tax return, you'll provide HMRC with quarterly updates of your income and expenses. These updates are due within one month of the end of each quarter.
3. Final Declaration
You'll then make a final declaration (similar to a tax return) by 31 January following the end of the tax year, confirming all information and claiming any additional allowances or reliefs.
How to Prepare Your Business
Start Using Cloud Accounting Software
Choose MTD-compatible software that suits your business needs. Popular options include Xero, QuickBooks, FreeAgent, and Sage. Getting familiar with digital bookkeeping now will make the transition much smoother.
Review Your Record-Keeping Processes
Ensure you're capturing all income and expenses regularly throughout the year, not just at tax return time. The quarterly reporting requirement means you'll need more regular, organised records.
Consider Your Cash Flow
With quarterly updates, you'll have a clearer, more regular view of your tax position. This can help with cash flow planning, but you'll need to ensure you have funds available for payments on account.
Seek Professional Support
Working with an accountant who understands MTD can save you time and reduce the risk of errors or penalties. We can help you choose the right software, set up your systems correctly, and ensure you're meeting all requirements.
Common Concerns Addressed
Will this cost me more?
While there may be software costs, the improved visibility of your finances and potential to claim all available deductions can offset these expenses. Plus, better record-keeping can save you money in the long run.
What if I'm not good with technology?
Modern accounting software is designed to be user-friendly, and you don't need to be tech-savvy. Your accountant can also handle the submissions for you if you prefer.
What happens if I miss a deadline?
HMRC can charge penalties for late submissions. The key is to get into a good rhythm with your bookkeeping so quarterly updates become routine.
The Benefits of MTD
While the change might seem daunting, Making Tax Digital offers several advantages:
- •Better financial visibility: Regular updates mean you always know where your business stands financially
- •Fewer surprises: You'll know your approximate tax liability throughout the year, not just in January
- •Reduced year-end stress: The final declaration is simpler because you've been reporting all year
- •Improved accuracy: Digital records and real-time reporting reduce the risk of errors
- •Better business decisions: Up-to-date financial information helps you make informed choices
Take Action Now
Even if you're not required to comply until 2027 or 2028, there's real value in preparing early. The businesses that adapt most successfully are those that see MTD as an opportunity to modernise their financial management, not just another compliance burden.
If you're unsure whether MTD for ITSA applies to your business, or if you'd like help preparing for the changes, we're here to support you. Book a consultation call to discuss your specific situation and create a plan that works for your business.
Need Help with Making Tax Digital?
We can help you choose the right software, set up your systems, and ensure you're fully prepared for MTD for ITSA.
Book a Free Consultation