Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is the next major step in HMRC’s plan to modernise the UK tax system. After transforming VAT reporting, HMRC is extending digital record-keeping and online submissions to the self-employed and landlords.
The goal is simple but ambitious: reduce tax errors, improve accuracy, and give taxpayers a clearer view of their tax position throughout the year. If you’re self-employed or earn income from property, this article will walk you through what MTD for Income Tax means, who it applies to, how it works, and how to prepare.
What Is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax is a new way of reporting business and property income to HMRC. Instead of filing one annual tax return, affected taxpayers will keep digital records and send updates to HMRC every quarter using compatible software.
Under MTD ITSA, you must:
HMRC’s objective is to make tax administration more effective, efficient and easier for individuals and businesses to get right.
Who Needs to Use MTD for Income Tax?
You’ll fall under MTD ITSA if all of the following apply:
What Counts as Qualifying Income?
Qualifying income means your gross self-employment and property income before expenses.
It does not include income from employment (PAYE), dividends or partnership income.
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Thresholds & Start dates
These phased start dates are designed to give smaller businesses more time to prepare.
Who Is Exempt from MTD for Income Tax?
You may not need to join MTD ITSA if:
If you are exempt or granted an exemption, you’ll continue to submit your tax return through the traditional Self Assessment system.
How to Comply with MTD for Income Tax?
To comply with MTD for Income Tax, you need to follow the below steps.
Step 1: Choose Compatible Software
You must use software that is officially recognised as MTD-compatible by HMRC.
Your software must allow you to:
Important: HMRC will not offer a simple online filing service for those within MTD ITSA. You must use compliant software or appoint an agent who does.
Step 2: Keep Digital Records
You’ll need to record details such as:
All data must be kept digitally i.e. manual copy-and-paste or handwritten ledgers will no longer meet the requirements
Step 3: Submit Quarterly Updates
Every three months, you’ll send a summary of your income and expenses to HMRC. This doesn’t calculate your final tax but gives HMRC and you a live view of your earnings.
These quarterly updates will replace the current once-a-year reporting cycle.
Step 4: Final Declaration Submission
At the end of your accounting year, you’ll finalise your records and submit a Final Declaration. This step allows for adjustments, reliefs, and other personal income to be added much like the current Self Assessment return.
Step 5: Sign Up & Get Authorised
You can enrol for MTD ITSA either:
You can also sign up early before it becomes mandatory to get used to the new system.
Step 6: Prepare Ahead
Before your mandatory start date:
What Happens If You Don’t Comply?
Failing to comply, for example, not using compatible software, missing quarterly updates, or not keeping digital records may lead to:
Remember: once you are within the MTD system, you can no longer use the old Self Assessment online filing portal.
Benefits & Challenges
The benefits and challenges of the Making Tax Digital for Income Tax (MTD ITSA) are discussed as under:
Benefits
Challenges
Practical Tips for Getting Ready for Making Tax Digital for Income Tax (MTD ITSA)
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Conclusion
Making Tax Digital for Income Tax represents a major change in how millions of taxpayers interact with HMRC.
While it introduces new obligations particularly around software and quarterly reporting it also offers the opportunity to manage your finances more efficiently and stay on top of your tax position year-round.
The key to success is early preparation: understand the requirements, select the right software, and start keeping digital records now.