Article By Coconut
Making Tax Digital for Income Tax – you’ve heard of it, right? You know how it will impact you, when it’s being introduced and how it will change things? You may even have received a letter from HMRC telling you about it. None of that rings any bells?
Well, although the clock is ticking and the first phase of the introduction of MTD for Income Tax isn’t too far off now, there’s still more than enough time to get ready. And the sooner you do that, the better placed you’ll be to limit the impact of the significant changes that MTD for Income Tax will bring. So, what six steps should you take?
Sole traders/landlords with a gross trading/rental income of £50,000+ must comply with MTD for Income Tax requirements from 6 April 2026.
Gross trading/rental income means all trading/rental income before any tax expenses (ie associated costs) are deducted.
Sole traders and landlords with a gross trading/rental income of £30,000-£50,000 will be next affected, from 6 April 2027. Then those with a gross trading/rental income of £20,000-£30,000 must comply from 6 April 2028.
Those with annual gross trading/property income of £20,000 or less are not currently in the scope of MTD and HMRC has not yet announced when they will be.
If necessary, work out your gross trading/rental income, so that you’re clear about when MTD for Income Tax will affect you.
When you are affected by MTD for Income Tax, you’ll need to keep accurate digital accounting records, which you’ll need to update fully at least every quarter. That means ensuring that all income and tax expenses are recorded in digital records (ie accounting software).
You will not be able to keep paper accounting records, you will either have to use MTD for Income Tax-compliant accounting software or “bridging software”, which will enable you to report figures to HMRC if you would prefer to use spreadsheets to keep your sole trader or landlord financial records.
Under MTD, you’ll need to digitally report your income and expenses to HMRC every quarter. If you get MTD-compatible accounting software, this will be very easy, but you’ll need to ensure that your records are accurate and updated regularly.
After you send your fourth quarterly summary to HMRC via the software, final adjustments can be made and your updated tax bill estimate will be shown. If you receive other taxable income and have other tax expenses, you will need to provide HMRC with summaries of these.
A final annual declaration can then be made via the MTD-compliant software, confirming that the figures you’ve provided previously are accurate. HMRC will then give you a final tax bill for the year.
Basically, you have a month after the quarterly period end date to send your quarterly update digitally. Corrections and adjustments to previous updates can be made in your next update.
To comply with MTD for Income Tax quarterly digital reporting requirements you’re going to need the right accounting software.
HMRC is not making available its own MTD for Income Tax software, but the HMRC pages of the government’s GOV.UK website provides guidance on choosing MTD-compliant software, as well as some third-party MTD-compliant software options that are already available.
While some software will be able to report all taxable income sources, others may be suitable for only one (eg rental income). If you need to report different types of taxable income, for example, if you’re a sole trader who also earns income from renting out property, you need to make sure that your software can report all taxable income digitally to HMRC.
If you’re already using accounting software, find out from your software provider whether it is fully MTD for Income Tax compliant. You should also check with the software provider that your chosen product suits your specific needs.
You don’t have to become an accounting software expert, you just need some basic knowledge that enables you to make sure that your income and expenses are regularly entered into your digital records. Accounting software is remarkably easy to use and benefit from.
It’s really simple and quick to connect your business bank account to your accounting software, so that your income is automatically entered. It’s less straightforward if you use your personal bank account for sole trader or landlord income/expenses (the solution is to open a separate business bank account). Ditto if you accept cash payments or use cash to buy things for your business (using a card for all purchases gets you around this).
If you’re still using paper records, make the transition now, so you have enough time to learn the ropes, which shouldn’t take very long. Software providers and accountants normally provide onboard training.
Set aside time, whether each week or fortnight, to fully update your accounting software. Make this a habit. Stay on top of your figures, especially your expenses. Some accounting software allows you to use your phone to snap and store sales receipts for purchases. This will make quarterly reporting much easier.
They should be able to advise you on how to limit the impact of MTD for Income Tax. If you use an accountant regularly anyway, they’re likely to ensure that the software they get you to use is fully MTD for Income Tax-compliant. They’re also likely to provide some basic guidance on how to use it. Support from a good accountant or bookkeeper should make MTD compliance much simpler.
The whole point of Making Tax Digital is to make your life easier when it comes to managing your tax affairs, not more difficult. If you get the right accounting software solution, it should take care of much of the hard work for you. There really isn’t too much to worry about.
Coconut is the easy way to sort your finances without the headache.
Built with sole traders in mind, it helps you track income, log expenses, and keep on top of your taxes - without piles of paperwork or confusing spreadsheets. Whether you're on site or on the move, Coconut makes it simple to know what you’re earning, what you’re owed, and how much tax you need to set aside. Less faff, more graft.
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