What Is MTD for Income Tax?
MTD for Income Tax is part of HMRC’s wider Making Tax Digital initiative, aimed at modernising the UK tax system. Under MTD for ITSA, affected individuals will be required to:
- Keep digital records of their income and expenses
- Submit quarterly updates to HMRC using MTD-compatible software
- Complete a Final Declaration at the end of the tax year (replacing the traditional Self-Assessment return)
Who and When Will Be Affected?
MTD for Income Tax is subject to individuals and sole trade businesses who file a self-assessment and meet a certain level of QUALIFYING INCOME from self-employment and/or rental income.
PHASE 1: From April 2026, MTD for Income Tax will apply to:
- Self-employed individuals and landlords with a combined total annual INCOME of over £50,000.
PHASE 2: Then from April 2027, it will apply to:
- Self-employed individuals and landlords with a combined total annual INCOME of over £30,000.
PHASE 3: Then from April 2028, it will apply to:
- Self-employed individuals and landlords with a combined total annual INCOME of over £20,000.
What is the Qualifying Income based on and types?
The qualifying income is based on the income from your most recently filed tax return. Therefore for tax year starting in April 2026, the most recent filing deadline would be January 2026 which would be for the figures for 2024/2025 tax year.
Examples of Qualifying Income are:
- Income from Self-Employment: This is prior to deducting expenses.
- Gross Rental Income: Again this is prior to deducting any expenses.
Examples of NON-Qualifying Income are:
- Employment Income
- Pension Income
- Savings/Investment Income
- Capital Gains
- Foreign Income
- Partnership Income
What are you required to do under MTD for Income Tax?
To comply with MTD for Income Tax, you will need:
- Digital Record-Keeping: Keep your income and expenses updated using MTD-compatible software
- Quarterly Returns: You will now be required to submit income and expenses for the quarter to give HMRC a picture of your financial position.
- End of year tax return(final declaration): This finalises your figures for the year and adjusts for tax allowances or reliefs. You will also declare any non-qualifying income not covered by MTD for Income tax.
Benefits of MTD for Income Tax?
While MTD for Income Tax may seem like more work, it also brings advantages:
- Real-time tax updates so you’re not caught off guard at year-end
- Fewer errors thanks to digital record-keeping
- Better budgeting by seeing your tax position more clearly
- Potentially less stress at year-end
How to Prepare for MTD for Income Tax
Prepare early to ensure a smooth transition and to ensure full compliance:
- Check your eligibility: File your tax return for tax year 2024/2025. This will determine your qualifying income and confirm if you qualify for MTD for Income Tax.
- Software: Speak to your accountant regarding MTD for Income Tax software and transition to this.
- Review current record keeping to ensure it will make the transition to MTD seamless.