Tax

Making Tax Digital for Income Tax – MTD ITSA

Posted on by Rebecca Trudgett

Making Tax Digital for Income Tax (MTD ITSA)

As an accountant who has lived with being told of the oncoming “doom” for 10 years since it was first proposed as the end of tax returns and aimed to create a “transformed tax system,” it is safe to say I am a little cynical about MTD and especially frustrated by the delays, as they have slowed progress in the profession.

As an accountant who works with clients who use Xero or similar software, I haven’t been that concerned about the 05/04/2026 deadline for the next phase, which will bring in sole traders and individuals with rental incomes over £50,000.

I am not expecting the new phase to be a significant change for most of my clients as they are all above the VAT registration limit and have tidy bookkeeping records (other than another report to submit quarterly for a handful). However, it made me wonder what would happen if I had a sole trader with an income between £50k and £90k and how I would help them prepare for MTD ITSA.  If you are (or might be) impacted by this change, this blog is very important reading.

Please note that some details on how the system will work in practice are not fully known or may change.

Background

Making Tax Digital for Income Tax (MTD ITSA) is part of the UK Government’s initiative to make the tax system more efficient and easier for taxpayers.

MTD ITSA is the system where taxpayers must keep digital records and submit their income and expenses to HMRC using approved software quarterly, much as people do with a VAT return.

Unlike a VAT return, you will only pay tax when the whole year is finalised, i.e. when you submit your tax return.

Unlike a VAT return, you are expected to submit a summary of the P&L for that quarter based purely on the movements through the bank and cash accounts, i.e., on a cash basis.

Then, at year-end, you will submit a final return to confirm any changes from the four submissions, and you may add accruals and balance sheet adjustments. The assumption is that you wouldn’t make too many changes and that the quarterly returns would be accurate.

Who Does It Affect?

MTD for Income Tax applies to:

  • Self-employed individuals and landlords with a total business or property gross income
    • From April 2026: MTD ITSA applies to businesses with turnover above £50,000.
    • From: April 2027: MTD ITSA applies to businesses with turnover above £30,000.
    • From April 2029 or 2030: MTD ITSA is anticipated to apply to businesses with turnover above £20,000. (may change)

You add together the turnover from rental property & self-employment, i.e. before expenses.

The rental and each business will be submitted separately, and you will need to keep bank records separate, i.e., separate licences in your software and separate dedicated bank accounts.

You ignore all other income when looking at the qualifying income.

New businesses that start partway through the year will be required to annualise their income and use this in the eligibility test.

It does not apply to companies, partnerships, employees or pensioners unless they have additional income from self-employment or property. (rules may be extended to partnerships)

Note that the eligibility test is likely to be based on the 2024/2025 year and is gross income before any costs are deducted, i.e., before agents’ fees.

If your 2024/2025 tax return reports a gross income of £52,000 from property rentals, you must comply with MTD ITSA starting in April 2026, assuming no exemptions apply.

Once in the system, you may have to reduce your income for 3 years before you can be removed without proof.

Several details remain to be shared, and some finer points may change (e.g., the deadlines may be the 7th or the 5th ).

Key Requirements

Digital Records: Taxpayers must maintain digital records of their income and expenses.

Approved Software: You must use MTD-compatible software to:

    • Record and categorise transactions.
    • Submit quarterly updates to HMRC based on your bank transactions.
    • Finalise your end-of-year position and submit a final declaration.

Quarterly Reporting: You will need to send quarterly updates on income and expenses to HMRC by the 5th or 7th of the month after the quarter end. i.e., in the March quarter, the deadline would be May 5 or May 7.  (the final decision is outstanding on whether it is the 5th or 7th )

End-of-Year Final Declaration: Replace the traditional self-assessment tax return with a final declaration.

Quarter ends: These can be the 5th or 31st of the month for any quarter but must be consistently applied. I suspect most people will opt for 31/3 as the software will be set up for this.

There will be late filing penalties, and the usual late payment penalties will be in place.

What Should You Do to Prepare?

Check Your Eligibility: Based on your income, determine if and when MTD ITSA applies to you. It will be important to complete your 2024/2025 Tax return early so you can set up software and receive any training you may need. You will likely receive a letter in the new year to confirm your eligibility.

Choose MTD-Compatible Software: HMRC maintains a list of approved software providers.

Start Keeping Digital Records: Transition your record-keeping system to a digital format if not already in place and move to weekly bookkeeping so you can meet the deadlines.

Consult your Tax Advisor or accountant: A tax professional can help ensure compliance and simplify the transition.

Consider your year-end and Quarters if they don’t tie up.

What can you do if you want to avoid doing quarterly reporting?

  • Incorporate in 2025/2026, but the MTD for corporation tax date has yet to be agreed upon, so it may not work for long.
  • Work less,
  • Retire,
  • Reduce your rental income

Quarterly reporting is easier to do than incorporation, and many people will find that digitalisation benefits their businesses once they adjust to the new way of doing things.

What is quarterly reporting going to cost?

  • Digital accounting records
  • Quarterly support from your accountant – will depend on how much you can do and what support you require.

One word of caution: if your four quarters submitted are significantly different from the final return, expect questions from HMRC. Make sure you have a good audit trail to show the changes made. I.e., don’t just file nonsense and expect no problems.

I recommend that you get your accountant to review your data quarterly to reduce the number of changes made and the likelihood of HMRC’s attention.

There are many advantages to maintaining digital records and keeping them up to date, including better visibility of your likely Tax bills and more frequent contact with your accountant.

TIPS

If you think the new rules may apply to you, I recommend recording your transactions in software starting in April 2025 so that you are 100% comfortable with the system by April 2026.

My second is to get a separate business bank account for every business you run as a sole trader and rental business you have as soon as possible. Make it as easy as possible to make the quarterly submissions.

If you need any help setting up Xero or need to check the Xero setup before you move into the MTD for income tax, please get in touch, and we can provide a quote to get you ready.