The Latest MTD for ITSA Update
Hidden within HM Revenue & Customs (HMRC) announcements on 26 March was a significant technical note entitled ‘Modernising the tax system through Making Tax Digital’. This update reveals that the income threshold for Making Tax Digital for Income Tax & Self Assessment (MTD for ITSA) will eventually drop to £20,000 per annum for sole traders and landlords.
If you’re in this category, you’ll need to transition your tax affairs completely to digital by April 2028. But don’t worry – we’ve got you covered with everything you need to know about these changes.
Understanding MTD for ITSA: Your Essential Guide
MTD for ITSA forms a crucial part of HMRC’s comprehensive initiative to modernise the UK tax system by transitioning the entire tax-return process to a fully digital framework. This shift represents a fundamental change in how self-employed individuals and landlords manage their tax obligations.
What Will You Need to Do?
If you’re a sole trader or landlord, you’ll soon be required to:
- Maintain digital records of all your income and expenses
- Utilise MTD-compatible software for your bookkeeping and accounting needs
- Submit quarterly digital reports to HMRC
- Complete a full digital tax return at the end of each tax year
When Will You Need to Comply?
The implementation of MTD for ITSA follows a phased approach based on your annual qualifying income:
- From April 2026: Mandatory for those with qualifying income exceeding £50,000
- From April 2027: Mandatory for those with qualifying income exceeding £30,000
- From April 2028: Mandatory for those with qualifying income exceeding £20,000
This staged rollout gives businesses and individuals time to prepare for the transition, though early adoption is encouraged to ensure a smoother changeover.
Implications for Your Bookkeeping and Tax Returns
For sole traders and landlords currently submitting self-assessment tax returns, there’s an increasing urgency to migrate your bookkeeping to a digital platform. The traditional methods of using Excel spreadsheets or storing receipts in a shoebox are rapidly becoming outdated.
Starting next year, any self-assessment taxpayer with annual income over £50,000 will need to utilise professional third-party software to meet the MTD for ITSA requirements. Fortunately, this transition isn’t as daunting as it might initially appear.
Most major cloud accounting platforms, including Xero, Sage and FreeAgent, are already configured to support MTD compliance. These platforms offer user-friendly interfaces and powerful features designed to simplify your tax management process.
How We Can Help You Prepare for MTD for ITSA
While getting compliant with MTD for ITSA should definitely be on your to-do list, there’s still ample time to update and prepare your bookkeeping system – so there’s no need to panic!
We recommend beginning your preparations well in advance of the mandatory implementation dates. This proactive approach will allow you to:
- Familiarise yourself with digital accounting systems
- Establish efficient record-keeping practices
- Test the quarterly reporting process
- Address any issues before the mandatory deadline
Our team of experts is ready to assist you every step of the way. We can explain the implications of MTD for ITSA in detail, guide you through the process of maintaining digital records, and help you select and implement compatible cloud accounting software that suits your specific business needs.
FAQ: Making Tax Digital for Income Tax
What exactly is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax is HMRC’s initiative to modernise the tax system by requiring self-employed individuals and landlords to keep digital records and submit tax information digitally using MTD-compatible software. It replaces the traditional annual self-assessment tax return with quarterly updates and an annual finalisation.
Do I need to submit tax returns more frequently under MTD?
Yes, instead of a single annual tax return, you’ll need to submit quarterly updates to HMRC based on your digital records, followed by an end-of-year finalisation. However, this doesn’t mean you’ll pay tax more frequently – payment deadlines remain unchanged.
What software can I use for MTD for ITSA?
You must use HMRC-recognised MTD-compatible software. Popular options include Xero, QuickBooks, FreeAgent, and Sage. These platforms handle both record-keeping and submission requirements.
Will I need to keep paper receipts under MTD?
While you’ll need to maintain digital records, it’s still advisable to keep original paper receipts as evidence for your digital entries. HMRC may request these during an investigation. However, many MTD-compatible software solutions allow you to scan and store digital copies of receipts.
What happens if I don’t comply with MTD for ITSA?
Non-compliance with MTD requirements may result in penalties from HMRC. There will be a “soft landing” period initially, but it’s best to prepare well in advance to avoid potential penalties once the system is fully enforced.
Can I get an exemption from MTD for ITSA?
Yes, exemptions may be available for individuals who cannot reasonably use digital tools due to factors such as disability, remoteness of location, age, or religious beliefs. You’ll need to apply to HMRC directly to request an exemption.
Take Action Today
Don’t wait until the deadline approaches to begin your MTD for ITSA preparations. Contact our team today, and we’ll help you understand the implications, assess your current systems, and develop a tailored plan to ensure your smooth transition to digital tax reporting.
Get in touch with our MTD specialists to arrange a consultation and start your journey toward MTD compliance with confidence and peace of mind.
