Making Tax Digital for Income Tax
Making Tax Digital (MTD) for Income Tax is part of HMRC’s strategy to digitise tax in the UK. MTD for VAT was introduced in 2019, and MTD for Income Tax will start being introduced from April 2026. The MTD scheme will also extend to partnerships and limited companies in due course.
Who is affected by MTD for Income Tax?
MTD for Income Tax will affect self-employed individuals and landlords (taxpayers) who are registered for Self Assessment in the UK.
Taxpayers who are VAT registered and already comply with MTD for VAT will also need to comply with MTD for Income Tax.
MTD for Income Tax will become mandatory for taxpayers with annual earnings of £50,000 or more a year from April 2026.
Taxpayers earning more than £30,000 a year must join the scheme from 2027 and those earning more than £20,000 from April 2028.
What income is included under MTD for Income Tax?
HMRC has stated that taxpayers should only include ‘qualifying income’ on their MTD for Income Tax submissions. Qualifying income includes:
- Gross income received during the current tax year from self-employment activities and/or income from UK or overseas property, including residential, holiday and commercial lets.
- The gross income figure is calculated before expenses are deducted.
Non-mandated income, such as PAYE employment, dividends, savings interest and pensions, do not count towards qualifying income but must be stated at the end of the MTD for Income Tax process on the Final Declaration.
A separate MTD for Income Tax submission must be made for each business if a taxpayer has more than one income source, for example, a plumber who also generates income from a commercial property.
What is the new system for MTD for Income Tax?
The current process for Self Assessment, which has been in place since 1996, consists of declaring all income sources for the previous tax year and filing one tax return by 31 January.
The new MTD for Income Tax system introduces significant changes to how taxpayers declare their income and file their tax returns. It involves:
- Using HMRC recognised MTD compatible software.
- Recording income and expenses information digitally.
- Submitting quarterly digital updates to HMRC.
- Filing accounting adjustments and allowances.
- Submitting a statement confirming all other sources of income have been filed and receive a final tax calculation from HMRC.
What is the process for MTD for Income Tax?
The simplest way to think of MTD for Income Tax is to break it down into five steps. These steps can be completed by either the taxpayer or the accountant, or a combination thereof.
Step 1. Keeping digital records
Create and maintain digital records of all income and expenses for self-employment and property income using compatible software for MTD for Income Tax.
Using an Excel spreadsheet with MTD bridging software such as the Absolute Excel Income Tax Filer qualifies as compatible software.
Step 2. Making quarterly updates
File quarterly updates of the above income and expenses. The standard quarters are as follows:
| Quarterly update period | Quarterly update filing deadline |
|---|---|
| 6 April to 5 July | 7 August |
| 6 July to 5 October | 7 November |
| 6 October to 5 January | 7 February |
| 6 January to 5 April | 7 May |
The Absolute Excel Income Tax Filer does this seamlessly.
Step 3. Business Source Adjustment Summary (BSAS) / Annual Summaries
After the fourth quarterly income and expenses submission has been made, make any income and expense adjustments, such as capital allowances, basis period adjustments and tax allowances.
The Absolute Excel Income Tax Filer includes the BSAS and annual summary forms, making the submission of this information very straightforward.
Step 4. Other income
Next, file any other non-mandated income. This could include savings interest, dividends or pension income.
Again, The Absolute Excel Income Tax Filer includes the appropriate links to enable users to declare this type of additional income.
Step 5. Finalising the MTD for Income Tax return and submitting the Final Declaration
Finalise the income earned during the tax year. A declaration has to be made stating there is no further income to report, and the tax position has been finalised for the year. The Final Declaration must be submitted to HMRC by 31 January; HMRC will confirm what tax is due, and any tax owing should also be paid by this date.
Guess, what? The Absolute Excel Income Tax Filer contains the Final Declaration too!
Next Steps
The transition from Self Assessment to MTD for Income Tax is underway. This includes:
- HMRC Communications
- From April 2025, HMRC will start contacting taxpayers who declared earnings of £50,000 or more on their 2023-24 Self Assessment returns. HMRC will explain what taxpayers need to do, which will include signing up to MTD for Income Tax and providing details of their chosen MTD for Income Tax software.
- Accountants and bookkeepers should ensure they are up to speed with the MTD for Income Tax rules and confirm how they will support their clients during the transition and on an ongoing basis thereafter.
- Voluntary MTD for Income Tax Beta Test
- Taxpayers and accountants could decide if they want to join HMRC’s voluntary MTD for Income Tax public beta scheme from April 2025 but the beta scheme is being rolled out throughout the year ahead of the new rules coming into effect from April 2026. HMRC has issued some eligibility rules for taking part in the beta test, which can be found here.
- Subject to meeting the eligibility criteria to sign up for the HMRC beta test, taxpayers and/or accountants can register their interest in using the Absolute Excel Income Tax Filer as their chosen MTD compatible software solution. Please register here if this is of interest.
- Research MTD for Income Tax software solutions
- Both taxpayers and accountants should review what MTD for Income Tax compatible software is available. This review should consider ease of use, cost, technical support and additional functionality that may or may not be needed.
- For a low cost, easy to use MTD solution, we recommend using the Absolute Excel Income Tax Filer.
The team at Absolute has been working closely with HMRC over the past couple of years to develop a bridging software solution that will enable people to comply with the new rules.
If you would like to discuss either the MTD for Income Tax process or find out more about our Excel Income Tax Filer software
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Making Tax Digital
What is Making Tax Digital for Income Tax?
MTD for Income Tax is replacing the current Income Tax Self Assessment process. It affects self-employed people and landlords with an annual income of over £50,000 and is being phased in from April 2026.
This new tax system requires taxpayers to digitally file quarterly income and expenses, along with an annual summary and final declaration that all sources of income have been confirmed.
