Making Tax Digital for Self-Assessment: What You Need to Know and Questions and Answers
The UK government is rolling out a significant change in the way self-assessment tax returns are filed, known as Making Tax Digital (MTD). This initiative aims to modernise the tax system, making it easier for individuals and businesses to keep on top of their tax affairs.
Making Tax Digital is a government initiative designed to transform the tax system by moving it online. The goal is to make tax administration more effective, efficient, and easier for taxpayers. MTD requires taxpayers to keep digital records and use compatible software to submit their tax returns.
The implementation of MTD for Income Tax Self-Assessment (ITSA) has been deferred to April 2026. This phased approach gives self-employed individuals and landlords more time to prepare for the transition. Here are the key dates to keep in mind:
From 6 April 2026: Individuals with a qualifying income of more than £50,000 from self-employment or property will need to use MTD for ITSA.
From 6 April 2027: The threshold lowers to £30,000, requiring more individuals to comply with MTD for ITSA.
What Does This Mean for People with Rental Properties?
If you own rental property in the UK and your rental income exceeds the qualifying thresholds (see above), you will need to comply with MTD for ITSA. This means:
Digital Record-Keeping: You will need to maintain digital records of your rental income and expenses. This can be done using MTD-compatible software, which will help you keep accurate and up-to-date records.
Quarterly Updates: Instead of submitting an annual tax return, you will need to send quarterly updates to HM Revenue and Customs (HMRC). This ensures that your tax information is always current.
End-of-Period Statement: At the end of the tax year, you will need to submit a final declaration to confirm your income and expenses for the year. This replaces the traditional self-assessment tax return.
Benefits of MTD
While the transition to MTD may seem daunting, there are several benefits:
Improved Accuracy: Digital record-keeping reduces the risk of errors and ensures that your tax information is accurate.
Better Financial Management: Regular updates help you keep track of your income and expenses throughout the year, making it easier to manage your finances.
Simplified Tax Process: Using MTD-compatible software can streamline the tax process, saving you time and effort.
Preparing for MTD
To prepare for MTD, landlords should start by choosing MTD-compatible software that suits their needs. Many software providers offer solutions specifically designed for landlords, making it easier to manage rental income and expenses. Ask us if you have any questions.
How Xero and FreeAgent Can Help
If you are a client of ours, you are highly likely use Xero or FreeAgent. These tools are excellent for preparing for MTD in the UK:
Xero: Xero is an all-in-one platform that simplifies business tasks. It helps you track cash flow, invoice instantly, and file digital tax returns. Xero's MTD-compatible software allows you to maintain digital records and submit VAT returns directly to HMRC. It also offers features like online payment services, forecasting tools, and automated data entry, making it easier to manage your finances and stay compliant with MTD.
FreeAgent: FreeAgent is another powerful tool that helps you manage invoicing, expenses, and estimates all in one place. It allows you to keep an eye on your tax obligations with a personal Tax Timeline and file Self-Assessment and MTD VAT returns directly to HMRC. FreeAgent's mobile app lets you take care of admin tasks on the go, ensuring you stay on top of your finances wherever you are.
By using Xero or FreeAgent, you can ensure that your digital records are accurate and up to date, making the transition to MTD smoother and more efficient.
Can People with Income Lower than £50,000 Still Do MTD for Self-Assessment?
Yes, individuals with an income lower than £50,000 can still opt to use MTD for self-assessment from April 2026, even though it is not mandatory for them until April 2027.
This can be beneficial as it allows them to familiarise themselves with the system and take advantage of the benefits of digital record-keeping and regular updates.
Will there be quarterly Tax Payments?
When individuals submit their MTD for self-assessment quarterly updates, they will not need to pay the tax on the profits for that quarter immediately.
Instead, the tax payment deadlines remain the same as they currently are, with the final tax payment due by 31 January following the end of the tax year.
Will there be penalties for Not Filing Quarterly?
If individuals fail to submit their quarterly updates on time, they will be subject to a new points-based penalty system. Missing a quarterly update will result in penalty points, and accumulating a certain number of points will lead to financial penalties.
The exact penalties can vary, but they are designed to be fairer and more proportionate to the frequency and severity of non-compliance.
Will a final Self-Assessment Return still need to be filed?
Yes, even with the quarterly updates, individuals will still need to file a final self-assessment return at the end of the tax year.
This final declaration will confirm the total income and expenses for the year and ensure that all tax obligations are met.