What is Making Tax Digital for Income Tax?

Joseph Cox
December 28, 2022
12 min read
March 7, 2024

What is Making Tax Digital for Income Tax?


Why do you need to know about Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax Self Assessment is new legislation which will require some UK individuals to keep digital records and file quarterly returns.

Often shortened to MTD for ITSA, these new rules will come into effect from 6 April 2026, and there are several good reasons you should start thinking about this now.

In this article, we briefly outline who it applies to, when to prepare, and how to do it.

Who does MTD for Income Tax apply to?

MTD ITSA will apply to sole traders and landlords with acombined revenue above £50,000 per year starting 6 April 2026 (this was scheduledto come into effect April 2024 but HMRC has decided to delay implementation.

What will you need to do?

The new rules bring in three requirements:

  • Keep digital records of your business income and expenses
  • File quarterly submissions to HMRC using MTD compliant software
  • Complete an end of year return and final declaration (which replaces the current Self Assessment return)

When do you need to prepare?

The first deadline that will apply is for the first reporting quarter after the rules come into effect will be 5 August 2026. However, we would not recommend leaving it this late.

Some businesses should start preparing straight away, and we explain who this applies to below. Businesses that are simple and straightforward and have a good handle on their finances already can afford to wait until closer to the first filing deadline.

In general, we would recommend waiting no longer than March 2024 to get ready. However, for almost everyone, there are good reasons to start preparations earlier.

Benefits of MTD for Income Tax

Getting your business ready for MTD for ITSA will mean that your business has better oversight of its finances and tax obligations.

You’ll need to use MTD capable software also provides a set of tools for making accounting tasks easier and quicker.

Being MTD ready benefits your business by letting you:

  • Know how much tax you owe, so you no longer set aside too much or too little cash
  • Automate record keeping of expenses and revenue, saving you time
  • Collaborate easily with an accounting partner with better information sharing and date
  • See your financial position and performance throughout the year and make faster decisions
  • Have greater visibility of cash flow
  • Save the end of year headache of going back and retrieving expenses
  • Lower the risk of missing expenses and lower your tax bill

How to prepare for MTD for income tax?

Here’s our step-by-step guide to making sure you are ready for MTD for ITSA.

Figure out if it applies to you

The rules apply for any business with a revenue over £50,000. You need to total all of your trading income here. If you are a sole trader who generates £30,000 of income from your trade and also a landlord with £30,000 of rental property income, then these rules apply to you.

If you are under the threshold, then signing up for the scheme is not legally required. You may still wish to digitise your business to get the benefits discussed above, but you will have the option to carry on using the current Self Assessment system where you make only one annual filing, instead of five.

Digital Exclusion Exemption

There is an exemption for individuals who are unable to meet the requirements due to age, disability, location or if it is contrary to your religion. You will need to apply for this exemption directly with HMRC.

Align accounting periods if you have more than one business

This is the main action that you should start thinking about right away.

If you have multiple businesses that have different accounting periods, you are likely to benefit from aligning these now. This will substantially reduce the amount of time and money you spend on accounting for these separate businesses.

Set up your MTD ready systems

Speak to an expert that can help you put these systems in place and start benefiting from time-saving and better visibility over your businesses. We are happy to help you get started with best-in-class systems like Xero and Dext, which can help automate mundane tasks and give you good data about your business so that you can make better decisions, quicker.

Need an accountant? Get in touch today. See how we can take your business to the next level, together.