Making Tax Digital for Income Tax: what does it mean for you?
Making Tax Digital (MTD) for Income Tax, also known as MTD for Income Tax Self Assessment (MTD for ITSA), will change the way millions of business owners and landlords report their earnings to HMRC. If you’re wondering how this might affect you, here’s a simple guide to the new rules.
Making Tax Digital: the story so far
Making Tax Digital is a government initiative that sets out a bold vision for the UK to have “one of the most digitally advanced tax administrations in the world”. It promises to “transform tax administration so that it is easier for taxpayers to get their tax right”.
- The first stage of Making Tax Digital, MTD for VAT, began in 2019. It first required certain VAT-registered businesses to keep their digital records and use MTD-compatible software to submit their VAT returns electronically. The scope of MTD for VAT expanded on 1st April 2022 and all VAT-registered businesses are now required to follow these rules.
- MTD for Income Tax is the second stage of Making Tax Digital and will replace the current system of annual Self Assessment tax returns. MTD for Income Tax will come into effect in April 2024 for self-employed business owners and landlords, and in April 2025 for partnerships with individual partners. Other types of partnership will join at a future date.
- MTD for Corporation Tax is expected to be the next stage in the initiative, although HMRC has advised that this won’t come into effect until 2026 at the earliest.
What is changing under MTD for Income Tax?
The most significant change under the MTD for Income Tax rules is that instead of sending a Self Assessment tax return to HMRC once a year, those affected will have to submit four quarterly updates about their business income and expenses. At the end of the tax year, they will also have to send an end of period statement (EOPS) and a final declaration.
Who will MTD for Income Tax affect?
Initially, MTD for Income Tax will affect self-employed business owners and landlords with a total business and/or property income above £10,000 per year. These individuals will have to follow MTD for Income Tax rules from 6th April 2024.
Partnerships with individuals as partners will have to follow the rules from 6th April 2025. HMRC has advised that limited liability partnerships (LLPs) and partnerships with corporate partners will be required to join at a future date yet to be confirmed.
What will I have to do under the new rules?
If you’re a self-employed business owner and/or landlord and you’re affected by MTD for Income Tax, you’ll have to take the following actions from 6th April 2024:
- Keep records of your business income and expenses in a digital format.
- For each type of revenue (self-employed business or property), send quarterly updates of your business income and expenses to HMRC.
- Finalise your business income by submitting an end of period statement (EOPS) for each source of income along with a final declaration.
Keep digital records
Under MTD for Income Tax, you’ll need to keep digital records of all your business income and expenses, including all your income from self-employment or property. It’s a good idea to start doing this as soon as possible so that you have plenty of time to prepare.
You can keep digital records using accounting software such as FreeAgent. You can pull your bank transactions directly into FreeAgent by setting up a bank feed, and the software offers powerful tools to manage all of your invoices, expenses, projects and more.
Send quarterly updates
Once you’re signed up to MTD for Income Tax, you’ll need to send a summary of your business income and expenses to HMRC every three months through MTD-compatible software. FreeAgent is on HMRC's list of compatible software for MTD for Income Tax for businesses. This means that if you're a business owner, you'll be able to use FreeAgent to follow the rules of MTD for Income Tax and make the required tax submissions. We're working closely with HMRC to ensure that FreeAgent will support MTD for Income Tax submissions for property through FreeAgent for Landlords - a brand new version of our software that's built specifically for landlords - before the legislation comes into effect in April 2024.
The deadlines for submitting quarterly updates will be the same for everyone who has to follow the MTD for Income Tax rules. From the start of the tax year on 6th April, these deadlines are:
- 5th August
- 5th November
- 5th February
- 5th May
Finalise your business income
At the end of the tax year, you’ll need to finalise your business income by completing an end of period statement (EOPS) for each source of income, along with a final declaration that replaces the current Self Assessment tax return.
This process lets you confirm that the updates you’ve sent are correct, and to add any details about personal income or reliefs or make any other necessary adjustments. As with the current Self Assessment process, you’ll have to submit the EOPS and final declaration and pay the tax you owe by 31st January of the following tax year.
To find out more about MTD for Income Tax and the wider MTD initiative, check out FreeAgent’s Making Tax Digital hub.