Making Tax Digital (MTD) will fundamentally change how some taxpayers keep records and report to HMRC.
Below is a list of questions to help you understand MTD and what it will mean in your situation.
Information is correct at time of publishing: 01/07/25
MTD for Income Tax is a new system for recording and reporting income and expenses if you are either self-employed and/or receive income from rental properties.
Your MTD for Income Tax mandation date will depend on the level of your qualifying income.
HMRC determine eligibility by looking at income on a current year – 2 basis. For example, to be mandated from April 2026, HMRC will look at qualifying income arising in the 2024/2025 tax year.
It is important to remember that when considering the income threshold, HMRC look at gross turnover/rental income i.e. before the deduction of expenses.
At present, income arising from a partnership is not qualifying income for MTD for Income Tax purposes. Qualifying income for MTD for Income Tax relates solely to income from self-employment, and income from property. If you have no income from these sources, or your income from qualifying sources is lower than the threshold limits, then you do not need to register for MTD for Income Tax. You will, however, still need to report your income under the current Self-Assessment tax rules.
Qualifying income for MTD for Income Tax relates solely to income from self-employment, and income from property. If you have no income from these sources, or your income from qualifying sources is lower than the threshold limits, then you do not need to register for MTD for Income Tax. You will, however, still need to report your income under the current Self-Assessment tax rules.
HMRC base mandation on total qualifying income received in a tax year. In this situation, your total qualifying income is £45,000. You would therefore be mandated to comply with MTD for Income Tax from April 2027.
Yes. HMRC base mandation on total qualifying income received in a tax year. In this situation, your total qualifying income is in excess of £50,000. You would therefore be mandated to comply with MTD for Income Tax from April 2026.
Under MTD for Income Tax, all records must be kept digitally. Whilst in most cases, it would be beneficial to use MTD compatible software, the use of spreadsheets is permitted, although bridging software would be required in order to submit the information to HMRC.
Here at Torgersens, we work with a number of different software providers. We are happy to discuss your own needs with you. For an informal chat, please contact:
Caroline Embleton (Sunderland office), Jonathan Carroll (Jarrow office), Sean Blackhall (Gosforth office).
A quarterly update contains information relating to income and expenditure arising from each self-employment source, all UK properties, and all foreign properties.
The updates contain summary totals (not individual transactions). HMRC do permit the submission of 3-line accounts (total income, total expenditure and net profit) if your turnover from each source is below a certain threshold (currently the VAT threshold).
You are not required to submit a balance sheet, and you can choose to make accounting adjustments, for instance to reflect depreciation, prepayments and accruals, at the final declaration stage.
Quarterly reporting periods can be based on a calendar year or a tax year. An election must be made prior to filing the first quarterly update.
We would recommend that the quarterly filing dates are aligned with your own accounting year end dates. For example:
No, the Self-Assessment Tax Return will be replaced by a Final Declaration, which should still be filed by no later than 31st January following the end of the tax year (the same deadline as under the current Self-Assessment tax regime).
The Final Declaration will include details of all taxable income received within the tax year including salaries/pensions, investment income (interest and dividends) and any other income not reported under MTD for Income Tax (for example share of partnership profits).
At present, HMRC have advised that there will be no changes to the Self-Assessment Tax payment dates.
Each business has its own digital start date.
If you commence trading after the MTD for Income Tax rules come into effect, then ordinarily, your start date for MTD for Income Tax would be 6th April of the year following the tax year in which you first have to file a Self-Assessment Tax Return for the new business.
Once you have been mandated for MTD for Income Tax, you must file quarterly reports and final declarations for a minimum of three years, unless your qualifying income source has ceased.
You will be required to file a final update covering the period from your last update to the date on which the income source ceased. You must also notify HMRC of your cessation date before the filing deadline for that quarter.
MTD mandation is ordinarily determined by looking at the tax year 2 years prior.
If you were not mandated for MTD at the start of the tax year, then you would not be required to file quarterly tax returns immediately.
Either method is possible. It is important that you communicate with your accountant to ensure that you understand who will take responsibility for the registration.
A new penalty regime will come info effect from April 2026 for those taxpayers with qualifying income in excess of £50,000.
The new system is very similar to the system in place for MTD for VAT, and uses a points based approach.
One penalty point will be issued per missed submission deadline.
Financial penalties will be charged once an individual received 4 penalty points (currently £200).
Where points continue to accrue after the threshold is breached, additional financial penalties will be imposed.
If the threshold is not breached, penalty points are automatically removed from the record after 2 years.
In certain, very limited, circumstances, HMRC may exempt tax payers from engaging digitally. These circumstances include:
- Disability
- Religious beliefs
- Location – for example if there is no reliable internet connection where you live, and it is inconvenient for you to travel to another location in order to comply with the digital record keeping process.
- Age
You will need to apply to HMRC to claim an exemption, and will need to be able to explain how your current circumstances prevent you from being able to comply.
HMRC will then either agree to an exemption or will advise why they do not believe that you should be exempt. In this case, you would have the right to appeal against their decision.
If an exemption is granted, but your circumstances change, you must notify HMRC immediately. It is likely that you will then be expected to comply with MTD from the start of the next tax year.
Additionally, if you have already been granted an exemption under MTD for VAT, then you would not be required to reapply for an exemption under MTD for Income Tax.
Some taxpayers are automatically exempt from MTD for Income Tax. These include:
- Taxpayers who have a Power of Attorney
- Non-UK resident foreign entertainers/sportspeople who have no other income that qualifies for MTD for Income Tax.
- Taxpayers for whom HMRC cannot provide a digital service.
