Everything you need to know about Making Tax Digital for Income Tax

Making Tax Digital (MTD) is a UK Government initiative to move the tax system online, replacing manual processes with digital record-keeping, calculations, and submissions. It aims to improve efficiency, accuracy, and close the tax gap.

Taxpayers are required to use HMRC-approved software such as FreeAgent or Xero for tax returns, maintain digital records, and provide regular updates on income and expenses. Maxing Tax Digital is being rolled out in phases to streamline and simplify the tax processes for the likes of online sellers, sole traders and business owners.

In this article, we look at what has already been implemented, how to prepare for the next phase of the scheme (Maxing Tax Digital for Income Tax), and how our expert accountancy team is ready to guide you through these changes.

Making Tax Digital (MTD) for VAT has been in effect since April 2022, requiring all VAT-registered businesses to comply. Manual input into HMRC’s portal is no longer allowed; instead, MTD-compatible software or digital spreadsheets must be used to maintain VAT records and submit quarterly returns. While many VAT-registered businesses are already compliant with MTD, businesses that aren’t VAT-registered and lack MTD-compliant practices may face challenges. It’s important to prepare in advance to ensure a smooth transition.

The next phase of Making Tax Digital (MTD) is for Income Tax (MTD for IT), which will become mandatory for sole traders and landlords in two stages:

• April 2026: MTD for IT is mandatory for those with a turnover over £50k.
• April 2027: MTD for IT applies to those with a turnover exceeding £30k.

To comply, businesses must:

• Use HMRC-approved software to maintain digital records.
• File quarterly updates with HMRC instead of submitting just one annual self-assessment.
• Submit an End of Year Final Declaration.

HMRC will use the information provided in these updates to calculate your tax liability. A tax bill will be issued based on the submitted data, and payment will be due accordingly.

This phased rollout of MTD for IT is designed to streamline the tax process, increase accuracy, and reduce administrative burdens. It is essential for affected businesses to prepare early, adopt the necessary digital tools, and familiarise themselves with the quarterly reporting requirements to ensure smooth compliance when the new rules take effect.

The rollout of Making Tax Digital (MTD) is ongoing, and while the Government has confirmed that MTD for IT will become mandatory in 2026 and 2027 for certain taxpayers, details about future phases are still evolving. It’s expected that MTD for IT will eventually apply to all income taxpayers, with MTD for Corporation Tax following, though specific dates have not yet been confirmed. Rest assured, the Government is taking a gradual approach, and businesses will have ample time to prepare for any changes ahead.

Most accounting software, such as FreeAgent, and Xero, come with their own mobile apps, offering a wide range of features, including on-the-go record-keeping. Digital record-keeping is essential for MTD compliance, but it also provides significant benefits. You can easily scan receipts and invoices on the go, with the software automatically categorising them.

This approach helps you stay on top of your records, avoiding last-minute scrambling to sort through paperwork, especially before tax deadlines. Additionally, it provides a digital backup of all your records, simplifying the process of tracking allowable expenses and reducing your tax liability.

The benefits of accounting software are clear, and while MTD for IT won’t be mandatory until April 2026 , it’s smart to make the move to digital accounting now. Partnering with CloudAccountant.co.uk offers even more advantages, providing you with expert support, efficient processes, and significant time savings.

We recommend FreeAgent, an award-winning, industry-standard cloud accounting software trusted by over 150,000 contractors, freelancers, and small businesses. With its powerful mobile app, you can manage your finances on the go, giving you full control wherever you are.

HMRC-approved, FreeAgenct ensures full compliance with MTD regulations and keeps you future-proofed against any changes, regardless of your business structure or tax obligations.

At CloudAccountant.co.uk, you’ll work closely with your own dedicated accountant, who will expertly handle all your business and personal accounting needs. Our team is committed to maximizing your tax efficiency, keeping you compliant, and providing unlimited support and advice on every aspect of your finances.

Xero is a powerful accounting software that helps businesses manage their finances efficiently with features like real-time reporting, invoicing, and bank reconciliation. An online accountant can guide you through using Xero effectively, ensuring accurate financial records, optimising tax strategies, and providing valuable insights to grow your business.

If you’re ready to learn more about Making Tax Digital, and how our accountancy service can benefit you, request a callback or get an instant quote today.

If you’d like to know more about how we can help you prepare, you can get in touch with one of our team by completing the form on our website, emailing: team@cloudaccountant.co.uk or giving us a call on 01625 546 232.