Making Tax Digital: Key Facts and How to Prepare - Arnold Hill & Co.

 Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) is a major shift in how self-employed individuals and landlords report their income and pay taxes. Starting from 2026, the traditional once-a-year tax return will be replaced by a more frequent, digital-first system. But what exactly does this mean for you, and how do you need to prepare? 

Who is Affected?

MTD for Income Tax will affect sole traders and landlords with "qualifying income" - which includes all your business earnings or rental income, before any expenses are deducted. Here’s when different income thresholds will be required to start using the new system: 

• From 6 April 2026 – If your qualifying income is above £50,000

• From 6 April 2027 – If your qualifying income is above £30,000

• From 6 April 2028 – If your qualifying income is above £20,000

For example, if you are a sole trader and your total income from your business is £55,000 in the 2024/25 tax year, you will need to comply with MTD starting in April 2026. 

Will I Be Affected This Year?

HMRC will check your qualifying income based on your 2024/25 tax return to determine if you need to join MTD in the first wave (April 2026). If your income exceeds £50,000, you’ll be required to start submitting quarterly updates in April 2026.

If your income is approaching the threshold, it's essential to start preparing now to avoid any last-minute scrambling.

What's Changing?

Under MTD, the annual tax return will be replaced by quarterly updates. This means you’ll need to:

• Keep Digital Records: You will need to keep track of your income and expenses using MTD-compliant software. This can be accounting software like Xero, QuickBooks, or Sage - or you can use spreadsheets with "bridging software" to send data to HMRC.

• Submit Quarterly Updates: Instead of filing a full tax return every year, you will submit a summary of your income and expenses every three months. These aren’t complete tax returns but will give HMRC (and you) a snapshot of your business's tax position throughout the year.
  
  
• Final Declaration: At the end of the year, you will still need to submit a Final Declaration to HMRC (similar to your current Self-Assessment), where you’ll confirm your total income, claim any allowable reliefs, and settle your tax bill.

Key MTD Dates to Remember:

If you are in the first wave (starting in April 2026), here are the key milestones:

• 6 April 2026: Digital record-keeping becomes mandatory.

• 7 August 2026: First quarterly update due (covering April–June 2026).

• 31 January 2027: Deadline for the final old-style Self-Assessment return (for the 2025/26 tax year).

• 31 January 2028: Deadline for your first MTD Final Declaration.

Does This Change When I Pay Tax?

Although you’ll report more frequently, the payment dates will stay the same. You’ll still pay:

• 31 January: Balancing payment and first payment on account.

• 31 July: Second payment on account.

How Do I Prepare for MTD?

You don’t have to wait until April 2026 to get ready! Here’s how to start:

• Check Your Income: Review your income now. If your turnover is nearing the £50,000 threshold, you’ll need to start preparing for MTD.

• Choose Your Software: HMRC has a list of recognized software that will be compatible with MTD. Options like Xero, QuickBooks, and Sage are already set up for the change.

• Go Digital Today: Even if your income is below the threshold, it’s a good idea to start using accounting software now to get familiar with the system before it’s mandatory.
  
  
• Consider Your Business Structure: For some, MTD may prompt a reconsideration of how their business is structured. We can help assess if restructuring might be a good option. 

 Common Questions and Misconceptions: 

• "What if I don’t use accounting software?"
  You’ll need to start using MTD-compliant software or a spreadsheet with bridging software. Paper records alone will no longer be sufficient.

• "Will this mean I have to pay tax more often?"
  No - you'll be reporting quarterly, your tax payments will still follow the same deadlines as before (31 January and 31 July).

• "What happens if I miss a quarterly update?"
  Missing a deadline could lead to penalties. It’s important to stay on top of the quarterly updates.

 How We Can Help 

Adapting to Making Tax Digital (MTD) is a significant change, and we’re here to ensure you’re fully compliant and ready ahead of the deadlines. Our team offers tailored, professional services to assist you with every aspect of the transition. Here’s how we can help:

· Income Review & Threshold Check:
We’ll assess your turnover and determine your MTD requirements based on the income threshold, helping you stay ahead of key deadlines.

· Software Selection & Setup:
From selecting the right MTD-compliant software to setting it up for you, we’ll ensure you have the right tools in place and are ready to go digital.

· Digital Record-Keeping:
Our team will set up your digital record-keeping system and provide hands-on training, so you can track your income and expenses with ease.

· Quarterly Submissions:
We’ll handle your quarterly updates to HMRC, ensuring everything is accurate and submitted on time - saving you hassle and avoiding penalties.

· Final Declaration & Tax Preparation:
We’ll help prepare your Final Declaration at year-end, making sure your tax bill is accurate, and you’re on track with payments.

· Business Restructuring Advice:
If MTD prompts you to rethink your business structure, we’ll provide expert advice on potential restructuring options to improve tax efficiency.

· Ongoing Support:
We’ll keep you compliant with ongoing support, handling software updates, filing issues, and ensuring you’re always up to date with MTD changes.

Making Tax Digital may seem like a big change, but it’s designed to make your tax process smoother and more efficient. By getting familiar with the new system now, you can avoid any last-minute stress when the changes become mandatory. Contact us today to learn how we can support you through this shift.

Author, Drupen Patel - Personal Tax Senior Manager

Drupen.Patel@ArnoldHill.co.uk