Making Tax Digital is the biggest shake-up of the self-assessment tax system in decades. The new rules will transform the way tax returns are submitted, introducing the need for electronic annual submissions and quarterly updates. Recently HMRC has shared an ‘act now’ warning, targeting 860,000 sole traders and landlords who need to get ready for the changes if they haven’t already started. If you’re concerned about MTD here’s a quick overview of what you need to consider.
What is Making Tax Digital?
Making Tax Digital is a new system for sharing tax information with HMRC. It affects self-employed people and those who make income from property. The starting threshold at which MTD kicks in (the new rules begin in April) is £50,000. On 6 April 2027, the threshold will fall to £30,000, and from April 2028 it will drop to £20,000.
Once you’re in the threshold you’ll need to use commercial software to send your annual tax return and quarterly updates, showing your total income and expenses from property and self-employment.
Am I affected?
To check if you’re affected, check your 2024-25 tax return. If your combined income from property and/or self-employment was more than £50,000, you’ll have to move to the new system. Exemptions do apply – check with your accountant if you think this might be the case. There are some loopholes too, such as the rent a room scheme which offers an allowance of up to £7,500.
What exemptions are there?
Some groups will not have to use the system, regardless of earnings. These include:
- Those who don’t have a national insurance number.
- Until at least April 2029: disabled people who receive the blind person’s allowance.
- Until at least April 2027: those receiving qualifying care relief who earn income from property or self-employment.
- Limited companies. MTD only applies to individuals.
You can also apply for an exemption if you have reasonable grounds against using digital software (due to age, disability, no internet access, or if you’re a member of a religious order which forbids you using a computer).
Applications are assessed on a case-by-case basis.
What process do I need to follow?
You – or your accountant – should manage the process accurately. MTD-compliant software will be needed to send your annual return and quarterly digital updates, due just over one month after the quarter ends. So, for example, records for the first quarter (6 April 2026 to 5 July 2026) must be submitted by 7 August 2026. Late submissions will incur penalties, although these will be waived in the first year as an acknowledgement that the system is new. In the future though late submissions will incur a penalty point; four points will generate a £200 fine.
Making Tax Digital is a significant change to how tax returns will be managed for many people. In the short term it’s likely to feel a lot to manage. One of the best steps to keep things simple is to ensure you have a bank account you use solely for your business. Do also speak to your accountant to ensure you have access to compliant software and are tracking your income and expenses accurately.
To discuss any aspect of your tax return, or Making Tax Digital, please get in touch with our friendly team.