Making Tax Digital: the future of the income tax system

In 2015/16, HMRC estimated that errors and lack of reasonable care accounted for around £9.4 billion of tax lost annually.

MTD was introduced to target this tax gap; the data required to be kept and submitted remains the same, but it will need to be in a digital format and have a digital audit trail from invoice to tax return. In essence, MTD involves compulsory digital record keeping and reporting by taxpayers.

After the initial announcement of MTD in 2015, multiple extensions to deadlines, Brexit and a global pandemic, MTD for VAT finally took full effect from 1 April 2021 for businesses above the VAT threshold. Making Tax Digital for Income Tax (MTD for IT) was due to be introduced from 6 April 2024 for individuals with gross income from self-employment or property in excess of £10,000, but in December 2022 the Government announced a delay to the implementation of MTD for income tax and also increased the income threshold from £10,000 to £50,000 (from April 2026) and £30,000 (from April 2027).

As part of the Labour Government’s first Budget in October 2024, the Chancellor reinforced the commitment to roll out MTD for IT and announced that the threshold would reduce to £20,000 by the end of the current Parliament. The commencement date for partnerships, including limited liability partnerships, is still uncertain.

Where a taxpayer has multiple trades and properties, the threshold applies to the gross combined income, e.g. if the individual has gross rental income of £30,000 and gross trade income of £30,000, they would exceed the £50,000 MTD threshold which applies from April 2026.

UK individual taxpayers meeting the thresholds will be required to undertake quarterly digital submissions through approved HMRC software. For those who are mandated to use MTD for income tax, a final declaration replaces the requirement to file a Self Assessment tax return.

For Self Assessment taxpayers who are outside the scope of MTD, there will be no change and they will continue to make tax return submissions under the existing system.

At this stage, there is no proposal to change the existing tax payment dates.

Affected taxpayers meeting the £50,000 threshold will need to be registered for MTD before April 2026, with the first quarterly digital submission required by 5 August 2026.

The introduction of Making Tax Digital for Income Tax may initially appear as just another administrative requirement, but there are advantages for taxpayers:

• cloud accounting systems can be linked to bank accounts to pull data directly into the system, saving time and reducing the risk of errors;
• data can then be used to assist with business forecasting and cash flow management, enabling taxpayers to make informed real time decisions on their finances.

We are building an integrated digital service to better serve the bespoke needs of each of our clients. This service will not only work within the requirements of MTD but provide additional benefits by pulling in data from multiple sources, displaying that data in an accessible and intuitive form and using data analytics to provide valuable insight.

We recommend looking beyond the minimum requirements and putting in place a system which can provide valuable, real-time information to assist with decision making and budgeting for tax liabilities.

Each taxpayer’s requirements will depend on current accounting systems and the level of adaptation necessary to meet their obligations under MTD. In some cases, a data cleansing exercise may be needed to transfer information across to a new system and as this can take time, it is always recommended to start the process early to avoid a last-minute rush to meet the implementation deadline.

• All tax records, invoices and receipts must be held digitally
• Quarterly digital ‘updates’ must be submitted to HMRC using compatible software by 5 August, 5 November, 5 February and 5 May each year.
• This does not need to include accounting adjustments or tax relief claims
• A final declaration must filed by 31 January following the end of the tax year, with adjustments and details of all other income sources and gains

For taxpayers who are mandated to use MTD for IT, the final declaration replaces the requirement to file a self-assessment tax return. For self-assessment taxpayers who are exempt from MTD for income tax, there will be no change. They must continue to make tax return submissions under the existing system.

HMRC has confirmed that there will be no easement for taxpayers mandated to use MTD in the first year, however, penalties for filing late will not be applied until four quarterly submissions are late.

Late filing penalties will be based on a points system, which is fairer in theory but could be more costly for repeat offenders than the current system. Each late return will give rise to a penalty point which expires after 24 months. Once the penalty threshold is reached, there is a fixed penalty of £200 for each missed return.

The total points will be reset to zero if the following two conditions are met:

1. 12 months of compliance with quarterly submissions or 24 months of compliance with annual submissions; and
2. All submissions that were due within the preceding 24 months have been submitted.

Approval code: NTEH7022506