Making Tax Digital for Income Tax – what you need to know

Many successful electrical businesses are one-man bands, who have worked hard and carefully built up a loyal customer base over many years. When you’re doing everything yourself, it can be difficult to keep on top of the administrative part of running a business – especially when things keep changing.

Candy Richards, Regional Business and Stakeholder Engagement Manager (East Anglia) at the Federation of Small Businesses (FSB), said: “HMRC’s ongoing Making Tax Digital (MTD) programme, which aims to move businesses over to filing their taxes digitally, will be expanding its net as of April this year. All businesses with a turnover above £50,000 will be required to have moved over to MTD for Income Tax Self Assessment, while those with a turnover between £30,000 - £50,000 will have until April 2027 to make the switch. If your turnover is £20,000, you have longer to comply.”

She continued: “As a busy small business owner, it’s essential to understand the process, invest in the right software, and get ready for the change as early as possible. Unfortunately, failure to comply could lead to financial penalties that can swiftly mount up.”

If you think you will be affected by MTD Income Tax, don’t panic. We’ll be teaming up with Candy for a special episode of The Wire on MTD Income Tax in February, so if you’re an NICEIC-certified business, keep an eye out for details of that in The Circuit e-newsletter. In the meantime, read on to find out everything you need to know about the upcoming changes – and how NICEIC, in collaboration with the FSB, will be on hand to support you in the coming months.

What it is

MTD Income Tax is an online service for reporting the income you earn from self-employment or property to HMRC. Those who qualify for MTD Income Tax will have to submit a quarterly summary of their income and expenses for each business or property they get income from. These aren’t tax returns, so you won’t have to pay taxes four times per year.

After all four submissions have been made, you’ll then need to submit an MTD tax return, which will be pre-populated with the income and expenses data you’ve submitted throughout the year. You’ll just have to add in any income you’ve received from other sources, like bank interest or pensions. This will have the same deadline as the current Self Assessment process (31 January following the end of each tax year).

Using the service will require eligible businesses to use compatible commercial accounting software that either creates digital records or links to your existing records (for example, in an Excel spreadsheet).

You can find out more about choosing the right compatible software on the government website.

Who it affects

You’ll be required to use MTD Income Tax if:

• you’re a sole trader or landlord registered for Self Assessment
• you earn income through self-employment or by renting out a property
• your qualifying income was over £50,000 for the 2024/25 tax year.

‘Qualifying income’ essentially means the total income you earn each year from self-employment and property. If you earn £43,000 per year through self-employment and get £15,000 in rental income, then your qualifying income is £58,000.

In April 2027, individuals with a qualifying income of £30,000 in the previous tax year will be required to use the service, dropping to £20,000 from April 2028.

How to prepare

Sign up before you need to

That way, you won’t be scrambling to get it done when April rolls around. You’ll need the user and ID and password you got when you signed up for Self Assessment.

You may be asked for further proof of identity during the sign-up process, either by:

• using a phone app to compare a picture of yourself to the one on your driving license or passport
• answering questions relating to the information HMRC already holds about you, for example, your passport number, driving license, or a recent payslip.

Choose a compatible accounting solution

There are lots of options that are compatible with MTD Income Tax, but choosing the right one might feel like a bit of a minefield.

To help you out, the government website has a tool to help you find the right software based on your requirements, which can be found here.

Get your back office in order

It will be much easier to transition to MTD Income Tax if you’re already on top of your back office admin. Here are some quick top tips to keep your back of house neat and tidy.

Little and often does the trick - setting aside a short window each day for back office tasks can make a world of difference. By blocking out a small amount of time in your calendar and sticking to it, you’ll avoid the stress of letting paperwork pile up and having to tackle a daunting backlog at the end of the week.
This steady approach not only keeps your admin manageable, but also ensures your records are consistently up to date, saving you time and hassle in the long run.

Use software - as we mentioned earlier, if you meet the eligibility criteria for MTD Income Tax you will soon be required to use compatible software. Even if you aren’t eligible yet, modern software can make the world of difference to your administrative burden, making it easier to keep your records up to date and your back office more efficient.

Hire a qualified accountant - while software can certainly help streamline your day-to-day admin, a qualified accountant – for example, a Chartered Accountant with the Institute of Chartered Accountants in England and Wales (ICAEW) – will provide the expertise to help you steer clear of problems that could arise from missed deadlines or inaccurate records – common pitfalls for busy sole traders who are trying to wear a few too many hats.
A qualified accountant will make sure your financial information is spot on and that you’re keeping up with HMRC requirements, so you don’t get caught out by something you might have overlooked.

Use automation to your advantage - from direct debits to invoice scheduling, there’s a lot of back office processes that can be automated using simple online tools and software. Once you’ve set up an automation, you can sit back and relax, knowing the task will be done like clockwork without you even having to think about it.
The great thing is that a lot of the software options that are compatible with MTD Income Tax will likely also have the ability to automate some of the repetitive, time-consuming tasks – such as data entry or invoice generation – that are currently taking up hours of your time.

Go paperless - switching to digital records can make your life so much easier. With everything stored digitally, you can quickly find what you need using simple search tools, rather than digging through piles of paperwork. Storing your documents in the cloud not only means you won’t lose anything to spills or misplacement, but also keeps your important business data safe and backed up.

Here to help with the transition

We understand it can sometimes feel impossible to keep on top of your business admin, especially when everything keeps changing.

Keep an eye out for more information about our special edition of The Wire, during which Candy Richards from the FSB will outline the changes in detail and offer you the opportunity to ask questions about how MTD for Income Tax could affect your business. And for more information on how the FSB can support your business, visit their website.

Also stay tuned for more information and advice from NICEIC on this topic in Connections magazine, in our e-newsletters, and on our website.