The difference between how much tax should be paid and how much is actually collected is called the ‘tax gap’. A 2024 report estimated it at almost £40bn. Making Tax Digital for Income Tax (MTD) is part of the government’s strategy to reduce the gap. It introduces requirements for businesses to keep digital records and submit information to HMRC in closer to real-time.
Who MTD will affect
According to David Wright, a technical officer at the Association of Taxation Technicians (ATT), MTD applies to unincorporated businesses – sole traders and the self-employed – and landlords and will be introduced in phases. Self-employed optometrists and locums are squarely in the firing line of the regime.
Wright explains that the date from which a taxpayer might have to join MTD will depend on their combined level of income from trading and property, before expenses. HMRC calls this ‘qualifying income’.
He says: ‘From April 2026, taxpayers with qualifying income of more than £50,000 will need to comply with MTD. From April 2027, that will drop to income over £30,000. While we’re only referring to businesses here, if the owner is also a landlord, they will need to look at their total income (before expenses) from both sources.’
Wright gives an example – someone who is self-employed whose business has an annual turnover of £48,000 will have to comply with MTD from April 2027.
He notes that if they also have a rental property generating gross rent of £15,000 per year, ‘both sources of business income would need to be combined, meaning they would be in scope of MTD from April 2026 as the combined qualifying income is over £50,000.’
Tax will still be due by January 31 after the end of the tax year and the due dates for paying tax will not change.
Those unaffected
For now, Wright says that taxpayers with qualifying income under £30,000 can continue without change, but ‘the government plans to extend MTD to those with qualifying income above £20,000 at some point during the current parliament.’
The intention is to also extend MTD to cover partnerships and limited companies at some point.
What MTD will involve
Wright explains that MTD has three key components: digital records, quarterly updates, and a year-end declaration.
Under digital records, Wright says taxpayers will have to use software to keep digital records of the amount, category and date of income and expenses relating to their business.
Then, there are quarterly updates where, as he explains: ‘A summary will have to be submitted to HMRC of the income and expenses of the business every quarter, based on the digital records kept.
‘The quarterly updates won’t be as detailed as the annual tax return, but a separate quarterly update will be needed for each trade or property business.’ He warns that if a person also rents out a property, they will have eight quarterly submissions to make each year.
Next comes the year-end declaration. As Wright details, after the fourth quarterly update has been submitted, the taxpayer will need to file a ‘digital tax return’.
He says it is similar to the current self-assessment return and ‘will pre-populate income and expenses from the quarterly updates already filed; the entries will need to be adjusted for accounting and tax purposes.’
He adds that any non-business income sources – bank interest, salaries or pensions – will need to be reported too, while also claiming relevant tax reliefs.
Lastly are digital links. According to Wright, this means: ‘All transfers of data will have to be sent digitally. This includes submitting quarterly updates, making any corrections, and filing the year-end declaration.’
It also includes transfers of business records, for instance, between the taxpayer and their bookkeeper or accountant.
Getting ready for the change
The exact date from which taxpayers have to comply with MTD will depend on the qualifying income reported on their most recent tax return.
For instance, tax returns for the year ended April 5, 2025, will be due for submission by January 31, 2026. If that tax return reports gross qualifying income of more than £50,000, that individual will have to join MTD from April 2026.
Here, Wright warns: ‘If business owners don’t plan in advance, they could only have two months to prepare for MTD after filing their 2024/25 tax return.’
If someone has set up business since April 2024, Wright says they will need to scale their income: ‘Take a business that started on January 1, 2025, and has earned gross income of £10,000 per month. The 2024/25 tax return will show £30,000 of income, which is below the MTD threshold for April 2026, but they’ll need to adjust that to estimate a full year’s worth of income – £120,000.’ Therefore, they’ll need to comply with MTD from April 2026.
The HMRC has provided a helpful online tool that may assist in checking when to start using MTD here.
Another issue for Wright is record-keeping. He says: ‘If a taxpayer keeps paper receipts and works out the accounts and tax position after the end of the year, they’ll need to start using software and keep records on a timelier basis.’
For small, straightforward businesses, a spreadsheet will help. ‘Bridging software’ is already available to feed the data from spreadsheets into other software products, which can support MTD filing obligations.
Even so, the demands of record-keeping and administration will increase for the majority of businesses affected by MTD. This is why Wright reckons: ‘Those that don’t already have an adviser may find it worthwhile seeking recommendations and finding qualified professionals who can support the business with MTD.’
Finally, while HMRC will be writing to taxpayers it believes needs to comply with MTD, anyone in scope of MTD will need to register; HMRC will not do it automatically.
Summary
Whether taxpayers like it or not, change is coming. It makes sense, therefore, to seek advice sooner rather than later on how to comply. HMRC’s guidance about MTD – Making Tax Digital for Income Tax is available on gov.uk, along with Benefits of Making Tax Digital. While the ATT has published a frequently asked questions page with information about MTD.
