A Guide to MTD for Income Tax

From April 2025, HMRC will write to all Self Assessment taxpayers who declared £50,000 of income or more in their 2023/24 tax return. This letter will explain what MTD is and the actions the taxpayer will need to take.

For accountants and bookkeepers, now is the time to start communicating these changes to your clients and to help those affected prepare well ahead of the implementation deadlines.

Your guide to MTD for Income Tax

MTD for Income Tax is the UK government’s initiative to modernise the tax system by requiring self-employed individuals and property landlords to submit tax information digitally. HMRC will roll out this major tax reform in stages:

• April 2026 – Self-employed individuals and landlords earning over £50,000 per year must comply.
• April 2027 – Those earning £30,000 or more a year will be required to adopt MTD for Income Tax.
• Date TBC – Those earning more than £20,000 a year will transition at a later date during this current parliament.

These limits are significantly lower than the current VAT registration threshold of £90,000, initially suggested as the MTD for Income Tax threshold. As a result, millions will have to change how they file their tax return data.

Who is affected by MTD for Income Tax?

MTD for Income Tax will apply to registered Self Assessment taxpayers, including:

• Self-employed individuals with annual earnings exceeding £50,000 (£30,000 from 2027 and £20,000 at some point before 2029).
• Landlords who earn rental income from property in the UK or overseas above the thresholds mentioned.

If your taxable income falls within these bands, you must transition to digital record-keeping and submit tax updates via MTD compatible software by the appropriate deadline.

Furthermore, taxpayers with more than one source of income, such as a hairdresser who also rents out a holiday cottage, will need to make separate submissions for each business.

HMRC has yet to announce when partnerships and limited companies will have to join the scheme.

How will tax reporting change?

Under MTD for Income Tax, affected individuals will need to:

1. Maintain digital records of their income and expenses.
2. Use MTD compatible software to record financial transactions and submit tax information to HMRC.
3. Submit quarterly updates instead of a single annual tax return.
4. Report all accounting adjustments and allowances.
5. Confirm all other sources of income have been filed, such as interest on savings, dividend income etc.
6. Submit a final declaration and pay any tax owed to HMRC by 31 January.

Steps to prepare for MTD for Income Tax

As part of this guide to MTD for Income Tax, we want to equip you with practical tips on preparing for the forthcoming changes. This includes:

1. Assess your current tax process

Determine how much of the tax process you want to handle yourself and where you may need professional support from your accountant or bookkeeper. Consider whether to:

• Manage everything independently with MTD compliant software.
• Work with an accountant or bookkeeper to ensure compliance.
• Undertake bookkeeping training if you plan to handle financial records yourself.

2. Choose MTD Compatible software

To comply with MTD for Income Tax, you need HMRC-approved software. Popular options include:

• QuickBooks – A well-known choice for self-employed individuals.
• Xero – Ideal for small businesses and landlords.
• FreeAgent – Suitable for freelancers and micro-businesses.
• Bridging software – If you prefer Excel to record your income and expenses.

3. Get training if necessary

Consider training options if you’re new to bookkeeping or digital tax reporting. Accountancy Learning has developed a self-study bookkeeping course called The Balancing Act, which is an excellent way of understanding bookkeeping principles. If you’d like to take your learning to the next level, they also provide training for AAT qualifications in bookkeeping and accounting,

By undertaking bookkeeping training, you or your staff can navigate the new MTD for Income Tax system efficiently.

4. Register for MTD for Income Tax

You must sign up for MTD for Income Tax before your deadline. You can do this via the HMRC website, either by yourself or through your accountant or bookkeeper.

5. Keep up with the filing deadlines

Instead of filing a single annual tax return, MTD requires you to submit quarterly updates. Stay organised and set reminders for yourself to avoid missing any deadlines and potential penalties.

Conclusion

This guide to MTD for Income Tax has identified a significant shift for self-employed individuals and landlords, but the transition can be smooth with the proper preparation. Choosing the right software, deciding how much of the work you will handle yourself, and getting professional training, where needed, will help you stay compliant.

For bookkeeping training, please get in touch with Accountancy Learning on 01392 982716or email [email protected]. If you already have an accountant or bookkeeper, do speak with them now for guidance on how to comply with the new requirements and get prepared as soon as possible.

Taking action now will help you avoid last-minute stress and ensure a seamless transition to MTD for Income Tax.