Making Tax Digital – your top ten questions answered by tax expert

Following the Budget announcement on 30 October 2024, which confirmed the Government’s commitment to delivering Making Tax Digital (MTD) for income tax, many people will be wondering how this will affect them.

Liam Colter, Tax Director at Wilson Nesbitt, explains when MTD will be coming in, and who will be impacted by these changes the most.

How does Making Tax Digital change income tax self-assessment?

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) means that businesses and landlords with qualifying income must keep digital records and update HMRC each quarter using compatible software.

Under the requirements of MTD for ITSA, if you are subject to income tax on the profits of your trade, profession, vocation or property business, you will need to keep your accounting records electronically, either by using suitable software or on a spreadsheet.

You’ll also need to file quarterly returns to HMRC with details of your income and expenditure together with any other information that HMRC specifies. A final declaration will then be submitted after the tax year once your tax affairs have been finalised.

Although the way you report your income is changing, the way you pay your tax isn’t. The current system of payments on account and the balancing payment by 31January following the tax year is expected to remain in place for the foreseeable future.

When does Making Tax Digital Start? Key dates and deadlines

MTD for ITSA will be rolled out in two phases:

• From April 2026, self employed individuals and landlords with income over £50,000
• From April 2027, self employed individuals and landlords with qualifying income over £30,000

The government also plans to extend MTD for ITSA to those with income over £20,000 by the end of the current parliament, with confirmation expected in a future fiscal statement. They remain committed to the future introduction of MTD for partnerships so expect this to also be phased in over the next few years.

What are the reporting requirements for Making Tax Digital?

If your business falls within the MTD for ITSA you will need to send quarterly updates of your income and expenses. These updates will be ongoing and will need to follow the below schedule, no matter when your accounting period ends:

• Quarterly Update 1: Covers 6 April to 5 July – Filing deadline: 7 August
• Quarterly Update 2: Covers 6 April to 5 October – Filing deadline: 7 November
• Quarterly Update 3: Covers 6 April to 5 January – Filing deadline: 7 February
• Quarterly Update 4: Covers 6 April to 5 April – Filing deadline: 7 May

As a business, you can also opt for a ‘calendar quarter election’ which allows you to align your quarterly updates with the end of the previous month. If you choose this option, the quarterly updates will be as follows:

• Quarterly Update 1: Covers 1 April to 30 June – Filing deadline: 7 August
• Quarterly Update 2: Covers 1 April to 30 September – Filing deadline: 7
• November
• Quarterly Update 3: Covers 1 April to 31 December – Filing deadline: 7 February
• Quarterly Update 4: Covers 1 April to 31 March – Filing deadline: 7 May

What does this mean?

To put it simply, your first quarterly updates for MTD for ITSA will need to be filed by 7 August 2026. These will either cover the quarter ending 5 July 2026, or 30 June 2026.

Don’t forget, you’ll need to submit separate quarterly updates for each trade or property business you run. However, there’s no need to make any tax or accounting adjustments to the information provided in these quarterly updates.

What information needs to be reported for Making Tax Digital?

If you are a person with trading/property income you must provide the following update information in each quarterly update:

• Quarterly update period start date
• Quarterly update period end date
• Totals of the amounts falling within income and expenses set out in the following table

Business income and expenses

• Turnover
• Other business income

Allowable and disallowable business expenses

• Cost of goods bought for resale or goods used
• Construction industry – payments to subcontractors
• Wages, salaries, and other staff costs
• Car, van, and travel expenses
• Rent, rates, power, and insurance costs
• Repairs and maintenance of property and equipment
• Phone, fax, stationery, and other office costs
• Advertising
• Business entertainment costs
• Interest on bank and other loans
• Bank, credit card, and other financial charges
• Accountancy, legal, and other professional fees
• Other business expenses

Property income and expenses

• Total rent
• Other income from property
• Premiums for the grant of a lease
• Reverse premiums and inducements

Allowable and disallowable property expenses

• Rent, rates, insurance, and ground rents
• Property repairs and maintenance
• Non-residential property finance costs
• Residential property finance costs
• Residential finance costs brought forward
• Legal, management, and other professional fees
• Costs of services provided, including wages
• Travel expenses
• Other allowable property expenses

Foreign property income and expenses

• Total rents
• Other income from property
• Premiums for the grant of a lease

Allowable and disallowable foreign property expenses

• Rent, rates, insurance, and ground rents
• Property repairs and maintenance
• Non-residential property finance costs
• Residential property finance costs
• Unused residential property finance costs brought forward
• Legal, management, and other professional fees
• Costs of services provided, including wages
• Travel expenses
• Other allowable property expenses
  

If you’re a joint property owner, this option allows you to report only the share of the property income in your quarterly updates, rather than including expenses. Further information on this relaxation is expected later this year in the form of a Joint Property Notice.

Final declaration

The Final Declaration will bring together all business and personal information needed to determine the final tax liability, including information from MTD sources of income (such as trading and property income) and non-MTD sources of income (like dividends and interest) as well as any allowances and reliefs.

Each taxpayer will only need to submit one final declaration, which must be filed by the normal self-assessment deadline of 31 January following the relevant tax year.

Are there any exemptions to Making Tax Digital for ITSA?

Taxpayers with qualifying income below £50,000 will be exempt from MTD for ITSA in 2026/27.

From 2027/28 onwards, the exemption threshold will drop to £30,000.

It’s important to note that these thresholds apply to gross trading or property income
(turnover), not profit. If you have multiple trades or property businesses, your total gross income will determine whether you need to comply. For example, if you earn £16,000 in rental income and £37,000 from a sole trader business, your total income exceeds £50,000, meaning you must comply with MTD for ITSA from April 2026.

Digital exclusion

You should not have to follow the MTD for ITSA rules if any of the following apply:

• It’s not reasonably practicable for you to use digital tools to keep your business records or submit quarterly returns due to age, disability, remoteness of location or any other reason (often referred to as ‘digital exclusion’).
• You are subject to an insolvency procedure.
• The 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.

Where any of the above apply, you will need to apply to HMRC to claim an exemption, with HMRC having 28 days to either grant or deny the application.

We understand that where a business has already qualified for an exemption from MTD for VAT, they will also be exempt from MTD for ITSA.

Other exemptions

The following are also exempt from MTD for ITSA:

• Non-resident companies
• Trustees, executors and administrators
• Foreign businesses of non-UK domiciled individuals
• Foster carers
• Those with no National Insurance Number

How will HMRC apply the threshold?

When checking if you meet the £50,000 or £30,000 income threshold for a specific tax year, HMRC will look at the tax return from two years prior (i.e. the return with a filing deadline just before that tax year begins).

• For 2026/27 (the first year MTD for ITSA is introduced), HMRC will assess your 2024/25 tax return.
• For 2027/28, HMRC will check your 2025/26 tax return, and so on.

Let’s say your qualifying income is as follows:

• 2024/25 – £47,000
• 2025/26 – £35,000

Here’s how HMRC will apply the thresholds:

• For 2026/27: Since your 2024/25 income is under £50,000, you will not need to join MTD for ITSA.
• For 2027/28: Since your 2025/26 income is above £30,000, you will need to join MTD for ITSA from 6 April 2027.

Which figures will HMRC look at to decide your income?

HMRC have indicated they will look at the following Self Assessment return boxes in
applying the £30,000 and £50,000 thresholds:

• Self-Employment Turnover
• Self-Employment Other Income
• UK Property Income –
• Other UK Property Income (grant of lease)
• Other UK Property Income (reverse premiums)
• Furnished Holiday Let (FHL) Income
• Foreign Property Gross Income
• Foreign Property Income (premiums)

The figures reported in these boxes will be combined and, if the total exceeds the relevant threshold, you will be required to join the MTD for ITSA from the start of the next tax year following the filing deadline for that return.

Income that is not declared on the SA return will not be considered when applying the thresholds.

For example, Rent-a-Room receipts below the £7,500 threshold, as well as trading or property income below £1,000 where the trading or property allowance is claimed, will not count – provided they are not included on the SA return.

What about new trades or businesses?

If you start a new trade or property income partway through the year, HMRC will annualise the turnover data. This means they will estimate what your earnings would have been for the full tax year based on the income you made in the partial year.

For example, if a trade starts on 1 January and has a turnover of £10,000 to 5 April, that will be annualised to give a figure of £40,000 for the purposes of the threshold test.

However, MTD regulations allow for an alternative approach if annualising would be unfair or unreasonable. This could be used for seasonal businesses where income is not expected to be even throughout the year, though HMRC has not yet confirmed its position.

What if you drop below the threshold?

Once you are mandated into MTD for ITSA, you will only become exempt if your qualifying income falls below the £30,000 threshold for three consecutive tax years (based on filed tax returns, or quarterly updates where the deadline has not yet passed for filing the return for a year).

For example, let’s assume you have the following qualifying income:

• 2024/25 – £55,000
• 2025/26 – £33,000
• 2026/27 – £24,000
• 2027/28 – £14,000
• 2028/29 – £8,000

You will be mandated into MTD for ITSA from 2026/27 as the £50,000 income threshold is applied to income for 2024/25. It doesn’t matter that your income in 2025/26 is below the £50,000 threshold.

In order to be exempt, you will have to have three consecutive years where you were within MTD, but your qualifying income was less than £30,000. That means that you won’t be exempt from MTD for ITSA until 2029/30.

Depending on the facts and circumstances, it may be possible to apply for exemption before then on the grounds it is ‘not reasonably practicable’ for you to comply with MTD. However, you would need to convince HMRC that you meet the requirements for this exemption.

Summary

MTD for ITSA is coming, and this will have a big impact on sole traders and property owners with income above the thresholds.

Figures declared on your 2024/25 tax return will determine if you are brought within the scheme from 2026/27, with the first submission due to HMRC by 7 August 2026.

This will not only be an extra administrative burden but also a financial one, with extra accountancy/advisor fees expected to cover the additional work and submissions.

If you don’t currently record your income and expenses digitally and prefer to keep written manual records, providing them to your accountant or advisor annually to prepare your accounts and tax return, you can expect a significant increase in fees due to the additional work.

We recommend speaking with your advisor to explore ways to reduce their time and fees.

If you plan to handle MTD yourself, you may need to invest in additional technology and software, further increasing costs.

Here at Wilson Nesbitt, we can help with your registration, complete your MTD returns, and take the stress out of this new regime, all at competitive local market rates.

To discuss your tax options with Liam, get in touch with us here.