Understanding Making Tax Digital for Your Income Tax Assessment: How to Get Started

After many false starts, Making Tax Digital for your Income Tax Self Assessment is finally coming.

(Making Tax Digital (MTD): Income Tax Self Assessments (ITSA))

Will Making Tax Digital Change Anything for You?

The changes will apply to self-employment and rental income. If you’re not sure if you’re affected, I suggest talking to an accountant.

Why is this happening?

The main driver for this is the HMRC strategy to reduce the tax gap by requiring businesses and individuals to do the following:

• keep digital records
• use software that works with Making Tax Digital
• submit updates every quarter, bringing the tax system closer to real-time

This means quite a few businesses and individuals will have to change the way they currently maintain their business and rental records, but there is a staggered approach that depends on the size of your business or rental portfolio.

VAT-registered businesses already have to comply with these requirements and have done so for several years.

From 6 April 2026, the turnover threshold will be £50,000. Note that this applies to a combination of self-employment and rental, so if you have a self-employment turnover of £40,000 and rental income of £11,000, you will be caught under the new rules.

From 6^th April 2027, this turnover threshold reduces to £30,000.

And do note, this is TURNOVER, and GROSS RENTS RECEIVED, not profits or net rents!

Although the final details still haven’t been produced by HMRC, it is believed that quarterly ‘headline’ reports will have to be submitted to HMRC through appropriate software.

The quarters they will expect the returns for are the ‘calendar’ quarters, i.e., March, June, September, and December.  If you are already VAT registered and don’t currently use those quarters, it could be worth changing your VAT quarters; otherwise you could be making eight returns a year!

To make this transition as smooth as possible, I recommend doing the following:

1. Make sure your business transactions flow through a separate bank account.  Obviously, you can take drawings from this to live on but try to avoid using that account for personal expenses.  This will make it far easier when you come to connect to cloud software as it means all your business transactions are conveniently in one account.  Any additional expenses, such as credit card or cash purchases, should be logged in a spreadsheet.
2. Speak to your accountant to identify the best cloud software for you and your business.
3. Start using the relevant software before the deadline so you are used to it and can use it effectively. Alternatively, if the thought of this fills you with dread, start having conversations with your accountant so they can recommend bookkeepers who can help you with this – or even do it all for you!

If you have any questions, or if you’re unsure when this will affect you, it is always best to discuss these with your accountant before you make any final decision. Click here to get in touch with me.