What is Making Tax Digital for Income Tax Self Assessment?
Definition of Making Tax Digital for Income Tax Self Assessment
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is a new way for self-employed business owners and landlords to report earnings and pay Income Tax. MTD for ITSA is part of the government’s wider Making Tax Digital (MTD) initiative.
When does MTD ITSA begin and who will it affect?
HMRC has advised that MTD for ITSA will come into effect from 6th April 2024. Self-employed business owners and landlords with a total business and/or property income above £10,000 per year will have to comply with MTD for ITSA from that date.
Partnerships with individuals as partners will have to follow the rules from April 2025. Limited liability partnerships (LLPs) and partnerships with corporate partners will be required to join at a future date yet to be announced.
Eligible business owners and landlords have been able to sign up to MTD for ITSA voluntarily since 2018 as part of a pilot scheme.
What are the MTD for ITSA rules?
From 6th April 2024, all affected self-employed business owners and landlords will need to:
- sign up for MTD for ITSA via HMRC’s website
- keep digital business records
- use MTD-compatible accounting software such as FreeAgent
- send quarterly business income and expenses updates to HMRC through the software
- finalise the business’s income in a declaration which confirms that the updates sent are correct, and make any accounting adjustments
- submit this final declaration to HMRC. This will replace the annual Self Assessment tax return.
How often will affected businesses have to send digital updates and what will they include?
Under MTD for ITSA, instead of sending a Self Assessment tax return to HMRC once a year, business owners and landlords will submit quarterly summary updates of their income and expenditure, followed by a final declaration at the end of the year.
Quarterly summaries will include details of the income and expenses for each self-employment and property business during each quarterly period. The standard quarterly periods in each tax year are:
- 6th April to 5th July
- 6th July to 5th October
- 6th October to 5th January
- 6th January to 5th April
Business owners and landlords can choose to submit updates that are based on calendar quarters instead of the standard quarterly periods. The calendar quarters are:
- 1st April to 30th June
- 1st July to 30th September
- 1st October to 31st December
- 1st January to 31st March
The deadlines for submitting quarterly updates are the same regardless of whether the business’s updates are based on standard quarterly periods or on calendar quarters. These deadlines are:
- 5th August
- 5th November
- 5th February
- 5th May
The quarterly updates will give business owners and landlords a year-to-date calculation of how much tax they owe, based on the information provided in the summary.
Affected business owners and landlords will also be required to use their accounting software to finalise their overall tax position at the end of the year. They will have to add any relevant details about personal income and tax reliefs and include an end of period statement (EOPS). The final declaration will replace the Self Assessment tax return.
The deadline for finalising tax affairs and paying Income Tax isn’t changing. As with the current Self Assessment system, business owners will need to do both by 31st January of the following tax year. For example, for the 2024-25 tax year, business owners and landlords will have to submit their final declaration and pay their tax bill by midnight on 31st January 2026.
MTD-compatible accounting software can connect to HMRC’s systems in order to send and receive updates. FreeAgent already supports MTD for VAT and is working closely with HMRC to ensure that small business owners, landlords and their accountants will be able to make MTD for ITSA submissions using the software.
Responsibilities for accountants and bookkeepers
As with MTD for VAT, accountants and bookkeepers will have to set up an Agent Services Account (ASA) in order to submit updates on behalf of their clients.
An important role for accountants and bookkeepers will be to ensure that their clients are aware of their responsibilities regarding MTD for ITSA and are fully prepared for the change.
Find out more about how FreeAgent is helping accountants and bookkeepers prepare for MTD.