What Is MTD IT, and How Will It Affect Self-Employed Individuals?

Making Tax Digital for Income Tax (MTD IT) is a major change in the way self-employed individuals (Sole Traders) and landlords in the UK manage and report their taxes. It’s part of the government’s initiative to modernise the tax system, making it more efficient and less error prone.

If you’re self-employed, this change will likely affect how you record your income and submit your tax returns. Let’s explore what MTD IT is, how it will impact you, and what steps you need to take to ensure compliance.

What Is MTD IT?

MTD IT stands for Making Tax Digital for Income Tax. It’s an extension of the government’s Making Tax Digital (MTD) initiative, which already applies to VAT. MTD IT focuses on streamlining the process of reporting income tax for:

·       Self-employed individuals.

·       Landlords with annual rental income.

Under MTD IT, you’ll need to:

1. Keep digital records of your income and expenses.

2. Submit quarterly updates to HMRC through MTD-compatible software.

3. File a Final Declaration (Self-Assessment Tax Return) to confirm your annual income and tax obligations.

Who Does MTD IT Apply To?

MTD IT will apply to self-employed individuals and landlords with an annual business or property income as follows:

·       Exceeding £50,000, starting from April 2026.

·       Exceeding £30,000, starting from April 2027.

·       Exceeding £20,000, starting from April 2028.

How Will MTD IT Affect You?

1.     Digital Record-Keeping

If you’re used to keeping paper records or spreadsheets, you’ll need to switch to MTD-compatible software to maintain your records digitally.

2.    Quarterly Reporting

Instead of filing a single Self-Assessment tax return once a year, you’ll submit four quarterly updates to HMRC. These updates provide a snapshot of your income and expenses throughout the year.

The periods will be cumulative, so updates will be due for the following periods each tax year:

·       April to June (submission due by 7 August)

·       April to September (submission due by 7 November)

·       April to December (submission due by 7 February)

·       April to March (submission due by 7 May)

Each submission effectively supersedes the previous one.

3.    End of Year Submissions

You’ll still need to finalise your accounts at the end of the year, but the process will be streamlined through digital tools.

4.    Increased Transparency

With regular updates, you’ll have a clearer picture of your tax obligations throughout the year, reducing the risk of surprises at year-end.

What Do You Need to Do to Prepare for MTD IT?

1.     Determine If MTD IT Applies to You

Check your annual income from self-employment or property to see when you’ll need to comply with MTD IT.

2.    Choose MTD-Compatible Software

Popular options like Xero, and FreeAgent are MTD-compatible. These tools will help you maintain digital records and submit quarterly updates seamlessly.

3.    Organise Your Records

Ensure your income and expense records are accurate and up to date. If you’ve been relying on paper receipts, it’s time to transition to a digital system.

4.    Learn the New Process

Familiarise yourself with how to submit quarterly updates, End of Period Statements, and the Final Declaration.

5.    Seek Professional Advice

Navigating MTD IT can be complex, especially if you’re new to digital accounting. A trusted bookkeeper or accountant can guide you through the transition and ensure compliance.

How Pink Lily Accounting Solutions Can Help

At Pink Lily Accounting Solutions, we understand the challenges that MTD IT presents for self-employed individuals and landlords. Our goal is to make the transition as smooth and stress-free as possible.

Here’s how we can support you:

1.     Expert Guidance

We’ll help you understand how MTD IT affects your specific situation and create a plan to ensure compliance.

2.    Software Setup and Training

Choosing and setting up MTD-compatible software can be overwhelming. We’ll recommend the best option for your needs, handle the setup, and provide training to get you up to speed.

3.    Quarterly Reporting Support

We’ll assist with preparing and submitting your quarterly updates to HMRC, ensuring accuracy and timeliness.

4.    Year-End Submissions

From the End of Period Statement to the Final Declaration, we’ll manage your year-end submissions so you can focus on running your business.

5.    Ongoing Support

We’re here to answer your questions, troubleshoot issues, and provide peace of mind as you navigate MTD IT.

E-mail us now on karen@pinklilyaccounting.co.uk to see how you can work with us. 

Building a successful future, together.