HMRC is gradually transforming the UK tax system by introducing Making Tax Digital (MTD), a programme designed to modernise and streamline the way individuals and businesses manage their taxes. While MTD for VAT has been in place since April 2019, the next phase, MTD for Income Tax (MTD for IT), is set to roll out soon. This blog explores what MTD for IT entails, who it will affect, when it will come into force, and how you can prepare for this significant change.
What is Making Tax Digital for Income Tax?
MTD for IT is a government initiative that requires individuals and businesses with income over a certain threshold to keep digital records of their income and expenses and submit quarterly updates to HMRC via MTD compatible software. The goal is to make the tax process more efficient, reduce errors, and ensure that everyone pays the right amount of tax.
Who will be affected by MTD for Income Tax?
MTD for IT has already been delayed a couple of times, as it was initially due to come into force in 2023. The last update from HMRC was in December 2022, which confirmed the following:
- MTD for IT will apply to self-employed individuals and property landlords.
- There are currently two phases:
- Phase 1 applies to those with an annual income of £50,000 or more.
- Phase 2 applies to those with an annual income between £30,000 and £50,000.
- Phase 3 applies to those with an annual income between £20,000 and £30,000.
- As of yet, HMRC has not made any further announcements regarding how or when individuals earning less than £20,000 a year or partnerships will be required to join the scheme.
- Individuals who run VAT registered businesses who have to comply with MTD for VAT will also have to comply with MTD for IT.
When will MTD for Income Tax come into force?
The rollout for MTD for IT is planned as follows:
- Phase 1 - April 2026: Mandatory for self-employed individuals and landlords with an income of £50,000 or more.
- Phase 2 - April 2027: Mandatory for self-employed individuals and landlords with an annual income between £30,000 - £50,000.
- Phase 3 - April 2028 - Mandatory for self-employed individuals and landlords with an annual income between £20,000 - £30,000.
If you fall within these categories, it's essential to start preparing now to ensure a smooth transition.
What does MTD for Income Tax involve?
Regardless of which date you are mandated to join MTD for IT, the compliance process will be as follows:
- You must record all your income and expenditure in a digital format that can be linked directly to HMRC’s MTD for IT platform.
- You must submit your income and expense information quarterly, not annually, as with the current Self Assessment process.
- You will be able to make accounting adjustments or allowances to your digital records.
- Before the 31 January tax filing deadline, you must submit a Final Declaration, which replaces the Self Assessment part of the return, and pay any tax that is due.
As we can see from the above process, the move to digital recording will significantly change how many people currently record and submit their income tax information.
Practical tips to prepare for MTD for Income Tax
- Understand your income and threshold:
- Start by assessing your annual income to determine if you will be required to comply with MTD for IT in 2026 or 2027 or later if your income is below £30,000 a year.
- Monitor your income level and plan accordingly, especially if you anticipate crossing the threshold in the coming years.
- Choose MTD compatible software:
- You will need to use MTD compatible software to record your income and expenses and submit updates to HMRC. Start researching and selecting accounting software that suits your business needs. Many providers offer free trials or introductory packages.
- Popular options include Xero, QuickBooks, and Sage. These platforms not only comply with MTD requirements but also provide additional features like invoicing and expense tracking.
- If you use spreadsheets to record your income and expenditure, you may want to look at MTD compatible bridging software, which will digitally link your spreadsheet to HMRC’s MTD for IT platform. This can be a cheaper and more straightforward option if you don’t want to purchase accounting software.
- Digitise your record keeping:
- If you use paper-based records, now is the time to switch to digital record keeping. Ensure all your financial data is accurately recorded and organised.
- Regularly update your records to avoid a last-minute rush when quarterly submissions are due.
- Familiarise yourself with quarterly reporting:
- Under MTD for IT, you’ll need to submit information on your income and expenses to HMRC every quarter. This is a significant change from the annual Self Assessment process.
- Consider setting reminders or using automation features in your software to ensure you meet these deadlines without stress.
- Speak to an accountant:
- If you're unsure about how MTD for IT will impact you, or if you need help setting up the necessary systems, consulting an accountant, such as DWilkinson&Company can be invaluable.
- We can explain how the MTD for IT regulations will apply to you, provide tailored advice, help you choose the right software, and ensure you remain compliant with the new rules.
- Plan for the costs:
- While some MTD compatible software is free or low-cost, additional expenses may be involved in transitioning to digital record-keeping and meeting compliance requirements.
- Budget for these costs and explore if they can be offset by the efficiency gains of a streamlined tax process.
- Stay informed:
- The rules and thresholds for MTD are still evolving. Keep up to date with announcements from HMRC and adjust your plans as necessary.
- Speak with your accountant regularly to ensure you're aware of any changes that might affect you.
Conclusion
Making Tax Digital for Income Tax represents a significant shift in how self-employed individuals and landlords manage their taxes. By preparing early, selecting the right tools, and staying informed, you can ensure the transition is smooth and hassle-free.
The key is to start now. Understanding the requirements, digitising your records, and getting comfortable with the new system will put you ahead of the curve and save you time and stress in the long run.
For further information, contact the team at DWilkinson&Company at 0113 320 0001 or email office@dwco.co.uk.
