Making tax digital for the self-employed

If you are a sole trader, landlord, or self-employed individual, your record-keeping and reporting obligations to HMRC will soon change.

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is a part of the government’s tax strategy to modernise the UK tax system. It will affect anyone who is self-employed or operates as a sole trader.

In this blog, we examine the changes that you need to be aware of, their dates, and how you can prepare for them.

What is Making Tax Digital for Income Tax Self Assessment (ITSA)?

Making Tax Digital for Income Tax changes how sole traders, self-employed and landlords report their income and expenses to HMRC. Paper record keeping will no longer be allowed, as you will need to keep digital records in software that works with HMRC’s Making Tax Digital for Income Tax system.

Who will need to use Making Tax Digital for Income Tax Self Assessment?

You’ll be required to change to digital records and reporting for Making Tax Digital for Income Tax if all of the following apply:

• You’re an individual registered for Self Assessment.

• You get income from self-employment or property, or both.

• Your qualifying income is more than £30,000.

The government has announced that if your total gross income from self-employment and property is over £20,000, you’ll need to use MTD for ITSA in the future, but no definite timeline has been set yet.

What is included in your qualifying income for MTD for ITSA?

Your qualifying income is the total gross income (income before you deduct expenses) you receive in a tax year from self-employment and property rental.

If other sources of income are reported on your Self Assessment return each year, for example, from employment (PAYE) or dividends from your own company, these do not count towards your qualifying income.

Qualifying income can include:

• Income from jointly owned property.

• You can include or exclude VAT from your qualifying income if you are VAT registered.

• Income from being a beneficiary of an interest in possession trust. Property or trading income paid directly to you that bypasses the trustees will be classed as qualifying income.

• If you receive disguised investment management fees or income based carried interest.

Your residency or any foreign property income will also affect your qualifying income, so check with a qualified accountant about what needs to be included.

Assessing qualifying income for MTD for ITSA

HMRC will use your Self Assessment tax return from the previous year to assess your qualifying income for the current year.

You won’t be required to start using MTD for ITSA until after you’ve submitted your first Self Assessment tax return.

What do I have to do to comply with MTD for ITSA

You’ll be required to use compatible software that works with Making Tax Digital for Income Tax to:

• Store electronic records of your business income and expenses in MTD compatible accounting software.

• Switch to digital reporting and submit quarterly updates to HMRC.

• Submit your tax returns digitally and pay tax due by 31 January the following year.

When do I need to start using Making Tax Digital for Income Tax?

HMRC is phasing in MTD for ITSA, which will become mandatory in two phases starting from 6 April 2026.

From 6 April 2026, those individuals with annual gross income from self-employment or property letting over £50,000 will be required to use compatible software to keep digital records and file digital returns.

From 6 April 2027, those individuals with annual gross income from self-employment or property letting over £30,000 will be required to use compatible software to keep digital records and file digital returns.

If your total gross income from self-employment and property is over £20,000, you’ll need to use MTD for ITSA in the future, but no definite timeline has been set yet.

If you become a sole trader or a landlord after 6 April 2026

You won’t need to start using MTD for ITSA until after you’ve submitted your first Self Assessment tax return. However, you can choose to sign up voluntarily at any time.

Who will need to use the MTD ITSA service from 6 April 2026?

You’ll need to use MTD for ITSA from 6 April 2026 if all of the following apply. You:

• Are an individual registered for Self Assessment.

• Get property rental income or self-employment income, or both, before 6 April 2025.

• Have qualifying income of more than £50,000 in the 2024 to 2025 tax year.

What will happen by 6 April 2026?

1. You’ll need to submit your Self Assessment tax return for the 2024 to 2025 tax year by 31 January 2026.

2. HMRC will review your tax return to check if your qualifying income is more than £50,000.

3. If it is, HMRC will inform you that you must start using Making Tax Digital for Income Tax by 6 April 2026. If you have an accountant, they can do this on your behalf.

4. You or your accountant must ensure you use a software provider that uses appropriate software compatible with Making Tax Digital for Income Tax and authorise it.

5. You or your accountant must sign up for Making Tax Digital for Income Tax.

Who needs to use MTD for ITSA service from 6 April 2027?

If all of the following apply, you must use Making Tax Digital for Income Tax from 6 April 2027. You:

• Are an individual registered for Self Assessment.

• Get self-employed income or property income, or both, before 6 April 2025.

• Have qualifying income of more than £30,000 in the 2025 to 2026 tax year.

What will happen by 6 April 2027?

1. You must submit your tax return for the 2025 to 2026 tax year by 31 January 2027.

2. HMRC will review your tax return. They will then check if your income exceeds the £30,000 threshold.

3. If your qualifying income is above £30,000, HMRC will write to you and notify you that you must start using MTD for ITSA by 6 April 2027. If you have an accountant, they can do this on your behalf.

4. You or your accountant must find compatible software that works with MTD for ITSA and authorise it.

5. You or your accountant must sign up for Making Tax Digital for Income Tax.

Will HMRC automatically register me for MTD?

No. HMRC will not automatically register anyone who needs to comply with the new MTD rules. It is down to you or your accountant to formally register. Here at dns accountants, we will undertake the registration process for you and work with you to ensure you have MTD-compatible software.

Who is exempt from Making Tax Digital for Income Tax?

You may be automatically exempt from using Making Tax Digital for Income Tax if certain criteria are met. You do not need to apply for an exemption if you are automatically exempt.

Automatic exemptions include:

• Individuals with qualifying income below £20,000.

• Individuals who don’t have a National Insurance Number on 31 January will be exempt for the following year.

• Trustees and personal representatives

• Foster carers.

• Non-resident companies.

If you are exempt, you must continue to report your income and gains via a Self Assessment tax return.

Exemptions from MTD for ITSA that taxpayers can apply for

If you are not automatically exempt, you may be able to apply for an exemption.

You could be exempt if it’s not practical to use software for record keeping. However, you will have to provide evidence if this is the case.

You may also be exempt if you are subject to an insolvency procedure.

If your business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records, you may also apply for an exemption.

MTD quarterly reporting

From the date you qualify for MTD for ITSA, you must submit digital quarterly updates to HMRC. These quarterly reports are much less detailed than a tax return and will need to show the gross income received and the expenditure incurred during that period.

The expenses that must be reported are the same as those currently reported annually in your tax return. For example, the cost of goods bought for resale, salaries, travel expenses, rent, utilities, insurance, repairs and maintenance, etc.

Dates for quarterly reporting

Quarterly reporting periods will follow the tax year quarters, or you can elect to report on calendar year quarters as follows:

Tax year quarters

• 6 April to 5 July

• 6 July to 5 October

• 6 October to 5 January

• 6 January to 5 April

Calendar year quarters

• 1 April to 30 June

• 1 July to 30 September

• 1 October to 31 December

• 1 January to 31 March

Quarterly reporting must be submitted to HMRC by the seventh of the month following the end of the quarter period.

What happens if a mistake is made in a quarterly report?

Quarterly updates are submitted on a cumulative basis. Therefore, if a mistake is made in one quarter, it can be corrected in the following quarter’s report.

What is a final declaration for MTD?

A Final Declaration will be required to disclose other forms of income, such as investment or savings, and submit any claims for relief. The Final Declaration is due on 31 January, along with payment for any tax owed.

Will MTD for ITSA affect my tax payments?

No changes are being made to how your tax liabilities will be paid. You’ll still be required to pay any income tax you owe by 31 January of the next year.

Penalties

MTD for ITSA will be subject to the new Late filing and Late payment penalties.

The new penalty regimes uses a point-based system for late submission and the late payment of tax liabilities.

How can I prepare for MTD for Income Tax?

Whilst the first phase of MTD for ITSA doesn’t come into effect until April 2026, it’s worth preparing now. Here are our tips on how to prepare.

1. Start preparing for digital requirements by using digital accounting software and keeping digital records

If you’re not doing so already, you should look at compatible software packages and switch to using this accounting software for your financial records to begin digital record-keeping.

2. Photograph and keep your receipts digitally

You need to get into the habit of keeping digital copies of all your expense receipts. Recording expenditure digitally is a requirement of Making Tax Digital. This doesn’t mean just keeping a digital photo; it means creating a digital record of that receipt. Cloud accounting software can create digital records required by MTD from digital photos. But, get into the habit of taking a photo of a physical receipt and uploading it into your accounting software.

3. Speak to dns accountants to understand how they can support you with MTD changes

Your accountants should already be in contact with you to ensure you’ll be ready to comply with MTD for ITSA.

Our team here at dns accountants, are already preparing clients for MTD for ITSA and our online accounting software is already compatible. Speak to us for more help and advice on tax compliance and MTD compliance.

Summary

Making Tax Digital for Income Tax is a UK government initiative to modernise the UK tax system. Whether you are a sole trader, self-employed freelancer, or landlord, you need to understand MTD requirements and prepare for the changes in advance.

To find out more or get help and advice on MTD for ITSA, book a consultation or contact us today at 033 0088 3616 email contact@dnsaccountants.co.uk

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