Making Tax Digital: What You Need to Know About Income Tax

After several delays, HM Revenue & Customs (HMRC) has confirmed that 'Making Tax Digital for Income Tax' (MTD) will take effect from April 2026. If you're wondering what MTD means for you as a taxpayer, you're not alone. This shift in the way we manage taxes is significant, but don’t worry – we’re here to explain it clearly so you can stay on top of it.

What is Making Tax Digital?

In simple terms, Making Tax Digital is a government initiative designed to modernize the UK tax system. The aim is to make it more efficient and user-friendly for both individuals and businesses. Rather than relying on paper forms and manual records, the goal is to keep all records digitally. This will help reduce errors, save time, and streamline the entire process for taxpayers.

How will it affect income tax?

Currently, we file your self-assessment tax return using tax software, based on figures you provide either on paper or via email. Under the new system, you will need to keep your financial records electronically and send regular updates to HMRC. Initially, this will affect self-employed individuals and landlords, but it will eventually apply to everyone who pays taxes.

Here’s what you need to know:

• 1. Digital Record Keeping
  If you’re self-employed or a landlord with a turnover (not profit) over £50,000, you’ll need to track your income and expenses using digital tools. This could include accounting software or even a digital spreadsheet – anything that allows you to store your financial data electronically.
• 2. No More Annual Tax Returns (Well, Almost)
  Instead of submitting a single large tax return each year, MTD will require you to submit quarterly updates to HMRC. These updates will include your income and any business-related expenses.
• 3. Using Accounting Software
  The core of MTD is digital tools for submitting your updates. You’ll likely want to use accounting software (many cloud-based) to track your earnings and keep your records in order. Alternatively, a digital spreadsheet can also be used to send your updates to HMRC.
• 4. Real-Time Information for HMRC
  Once MTD is in place, HMRC will have access to your financial updates in real time. This means they can spot errors or discrepancies sooner, reducing the chances of any surprises when it’s time to file your tax return.
• 5. Penalties for Missing Deadlines
  As with any tax system, deadlines will be important. Missing them could result in penalties. It’s crucial to stay organised and keep your digital records up-to-date to avoid any extra charges.

Who Will MTD Affect?

From April 2026, MTD will apply to self-employed individuals and small businesses with a turnover of over £50,000 per year. Starting in April 2027, this threshold will drop to £30,000, and there are plans to lower it further to £20,000, though no exact date has been set for that change.

What Do You Need to Do?

• 1. Get Your Records Online
  Start by organising your financial records digitally. Whether you use accounting software or a spreadsheet, ensure everything is stored electronically.
• 2. Choose the Right Software
  If you opt for accounting software, ensure it's MTD-compliant. Many software providers have already updated their systems to meet the new requirements, so you shouldn’t have trouble finding one that works for you.
• 3. Stay On Top of Deadlines
  Make sure you know when your updates are due. Staying organised and meeting deadlines will help you avoid fines and stress later on.

If you’ve received, or will soon receive, a letter from HMRC, it’s likely that you’ll be required to follow MTD guidelines from April 2026 based on your 2023/24 tax return.

If you have any questions or concerns, feel free to get in touch.