The way you report and manage your taxes is changing. Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) is the next big step in HMRC’s drive to modernise the UK tax system. But what does it mean for you? Let’s break it down.
What is Making Tax Digital (MTD)?
The Purpose of MTD
Making Tax Digital is a government initiative aimed at making tax reporting more efficient, reducing errors, and bringing the UK’s tax system into the digital age. It is designed to ensure taxpayers keep up-to-date records and submit accurate data, ultimately reducing the risk of late payments and penalties. By shifting towards digital systems, the government aims to streamline processes for both HMRC and taxpayers alike.
How MTD Affects Businesses and Individuals
Initially focused on VAT, MTD is now extending to Income Tax Self-Assessment (ITSA). This means that if you are a landlord or self-employed earning above a certain threshold, you’ll need to comply with the new digital reporting rules. Unlike the old method of submitting a single annual tax return, businesses and individuals will now have to maintain real-time digital records and send updates throughout the year, offering greater visibility over their tax liabilities.
MTD for Income Tax Self-Assessment (MTD ITSA)
What is MTD ITSA?
MTD ITSA requires individuals with business or property income above £50,000 to maintain digital records and submit quarterly tax updates to HMRC using MTD-compatible software. This transition marks a major shift from manual record-keeping and annual tax returns to a more structured, ongoing tax reporting system.
Who Needs to Comply?
Self-employed individuals with income over £50,000 (lowering to £30,000 in 2027).
Landlords earning more than £50,000.
Partnerships (to be included in future phases).
Important Deadlines
April 2026 – MTD ITSA becomes mandatory for individuals earning over £50,000.
April 2027 – The threshold lowers to £30,000.
Future rollout – HMRC plans to extend MTD ITSA to more taxpayers over time.
How Does MTD ITSA Work?
Digital Record-Keeping
Under MTD ITSA, you must store all financial transactions digitally using compatible software. This means manual record-keeping and paper receipts are no longer sufficient. Businesses and landlords must ensure that their software is capable of recording income, expenses, and tax data in line with HMRC’s requirements.
Quarterly Updates and Tax Submissions
Instead of filing a single tax return at the end of the financial year, MTD ITSA requires you to submit updates every three months. These updates allow HMRC to track your income and expenses throughout the year, reducing the chances of underpayments or late filings.
The Role of Software in Compliance
HMRC-approved software helps track income, expenses, and tax liabilities in real time. Popular choices include Xero, QuickBooks, and FreeAgent. These tools allow for automated bookkeeping, real-time tax estimations, and seamless data integration with HMRC systems, making compliance much easier.
Examples of MTD ITSA Thresholds
Example 1: Self-employment and rental income exceeding £50,000
Self-employment income: £30,000
Rental income: £25,000
Total gross income: £55,000
Outcome: This individual must comply with MTD ITSA from April 2026.
Example 2: Self-employment below £50,000 but rental income pushing it over
Self-employment income: £40,000
Rental income: £15,000
Total gross income: £55,000
Outcome: Even though the self-employment income alone is below £50,000, the combined total is over the threshold, so MTD ITSA applies.
Example 3: Combined income below £50,000 and exempt from MTD ITSA
Self-employment income: £25,000
Rental income: £20,000
Total gross income: £45,000
Outcome: Since the total combined income is below the threshold, this individual is not required to comply with MTD ITSA (until the £30,000 threshold applies in 2027).
Penalties for Non-Compliance
Late Submission Penalties
If you fail to meet the deadlines for submitting your quarterly updates or final declaration, you may face penalty points. HMRC’s points-based system means:
Missing a single deadline may result in a warning.
Repeated failures could lead to monetary fines, increasing based on the number of missed deadlines.
Errors and Inaccuracies in Digital Records
Incorrect reporting could result in fines or penalties, particularly if errors lead to underpaid tax.
Using non-compliant software could result in HMRC rejecting your submissions, causing further penalties.
How to Avoid Penalties with Expert Support
At Giraffe Accountants, we help you avoid penalties by:
Ensuring accurate digital records using HMRC-approved software.
Keeping you on track with submission deadlines.
Providing expert tax advice to prevent costly errors.
How Giraffe Accountants Can Help You
At Giraffe Accountants, we specialise in helping individuals and small businesses navigate the complexities of MTD ITSA. Whether you need help determining if you qualify, choosing the right software, or ensuring compliance, we’re here to support you every step of the way.
Our Expert Guidance on MTD ITSA
We help businesses and individuals understand their obligations under MTD ITSA, ensuring a seamless transition to the new digital tax system.
Helping You Choose and Integrate Software
With so many MTD-compatible software options available, selecting the right one can be confusing. We assess your business needs and recommend the best software to streamline your tax reporting, ensuring a smooth transition.
Ensuring Full Compliance and Avoiding Penalties
We help ensure that your records are accurate, your quarterly submissions are timely, and your final declarations meet HMRC’s requirements. With our support, you’ll never have to worry about non-compliance penalties.
Ongoing Support and Tax Planning
Beyond compliance, our expert team provides year-round tax planning advice. By monitoring your finances, we help you manage your tax liabilities efficiently and plan for the future.
FAQs on MTD for Income Tax
1. Do I need to sign up for MTD ITSA now?
If your income exceeds £50,000, you must comply by April 2026.
2. What software should I use for MTD ITSA?
HMRC-compatible software like Xero, QuickBooks, or FreeAgent is recommended, see our online accounting and app advisory page for details on how we can hgelp.
3. How often do I need to submit tax updates?
You must submit quarterly updates, plus a final declaration at the end of the tax year.
4. Can I still use paper records?
No, all records must be stored digitally using approved software.
5. Where can I get help with MTD ITSA?
Contact Giraffe Accountants for expert advice on compliance and setup.
Need help with MTD ITSA? Let’s chat! Visit Giraffe Accountants for expert guidance.
