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Making Tax Digital For Income Tax – A Sole Trader’s Guide

Making Tax Digital is a flagship programme of the UK government. The objective is to simplify the process for businesses and individuals, like sole traders, to submit their tax more accurately. As the name suggests, the basic principle is the legislation of digitalising the processes of recording tax data and submitting tax returns.

There will soon be new legislation whereby MTD applies to Income Tax. Read on to learn answers to questions that sole traders may have about this. This article explains what it will mean for your business finances.

 

What does ‘Making Tax Digital for Income Tax’ mean?

 

The full name is Making Tax Digital for Income Tax Self Assessment (MTD for ITSA). It is a new piece of legislation set to come into effect in April of 2026. It will apply to self-employed individuals, businesses and landlords whose income exceeds £50,000. Come April 2027, this will be extended to those earning more than £30,000.

It is set to completely remove the need to manually submit tax returns every year. MTD has been compulsory for many businesses for sometime, but the next step involves rolling the scheme out to sole traders.

 

How will MTD for Income Tax benefit sole traders?

 

Sole traders will find that MTD for ITSA could make the processes of keeping on top of your tax obligations far simpler. Through the use of MTD-compatible software, the benefits will extend beyond the simplification of accounting tasks. The best MTD compliant solutions provide:

 

  • Enhanced visibility into cash flow.
  • A way of keeping digital records and submitting tax returns online with less human error.
  • Technologies to automate tasks so that you don’t get so bogged down doing admin.
  • More awareness of what you owe in tax. This enables you to set aside an accurate amount of money to prepare for paying your tax.
  • Regular data checks to identify accounting errors sooner.
  • A real-time understanding of your financial performance and position, helping smarter decision-making.
  • Mobile apps that can easily capture and digitise paper receipts.
  • Enhanced collaboration by integrating software into your accounting platform.

 

MTD for Income Tax Recent Updates

 

  • On 19 December 2022, HMRC posted a statement on MTD for Income Tax. This update confirmed that the legislation was to be pushed back from its intended launch date. It was supposed to happen in April 2024, but will now take place as described earlier: in April 2026 and April 2027.
  • Subsequent to this phased approach, MTD for ITSA will not be extended to general partnerships in 2025. However, the government has reaffirmed its commitment to implementing this at a later date.
  • The statement does not mention any changes to planned reforms to basis period rules. These remain set to come into action from April 2024. The year from April 2023 will thus be a transitional one.

 

What are the deadlines for MTD for Income Tax?

 

MTD for Income Tax is now set to come into force from April 2026. At this point, sole traders and businesses with a gross income that exceeds £50,000 will be affected. The following year (April 2027) this will extend to those who earn over £30,000. When the new legislation comes into force, all businesses that exist immediately before April 2026 will be required to adhere. It doesn’t matter when their accounting period ends.

With regards to general partnerships, there are currently no confirmed plans for when MTD for Income Tax will apply.

 

So when does the legislation start for sole traders?

 

The ‘digital start date’ for sole traders who gross more than £50,000 will be 6 April 2026. On the same date in 2027, that threshold will be lowered to people earning over £30,000.

Digital start dates will always be 6 April. This is relevant for sole traders who find themselves having to adhere to MTD for Income Tax from 2026.

 

Who is MTD for Income Tax going to affect?

 

There will be millions of sole traders, landlords and, eventually, partners of partnerships who this new legislation will affect. It will transform the way these people handle their taxes.

That said, it will only be relevant to people with a total income of £50,000+ (or £30,000+ the following year). If your income from businesses or properties doesn’t exceed these thresholds, you will be able to continue with the current Self Assessment system if you prefer.

The thresholds stated apply to gross turnover or income. This is not the same as profit. Be advised it also means TOTAL gross income if you currently have 2 or more trade/property businesses.If any of the following apply to you, you will not be required to follow MTD for Income Tax:

 

  • Things like disability, age, remote location or another reason make it impractical for you to keep business records using digital tools (this is called ‘digital exclusion).
  • Your business is operated by members of a religious society whose beliefs prohibit the use of electronic communications or record-keeping.
  • You are in the process of insolvency.

 

If any of these exceptions apply to you, you will need to contact HMRC to make a claim for exemption. HMRC will have a period of 28 days to make a decision on your claim. MTD for Income Tax also excludes the following groups:

 

  • Estates.
  • Trusts.
  • Non-resident companies.
  • Trustees of resident pension schemes.

 

What does MTD for Income Tax mean for sole traders?

 

We have talked about thresholds and timescales for MTD for Income Tax, but what else will it mean?

 

Digital record-keeping

If you are subject to the new MTD legislation, you will have to keep digital records of income and expenses using MTD-compatible software.

 

Self Assessment


You will need to submit digital updates at least quarterly and file an end-of-period statement (EOPS). A final declaration of income will need to be submitted by 31 January every year. Your accounting software will automate much of this.

 

How to prepare for MTD for Income Tax

 

  • Work out if MTD for Income Tax will affect you. Take a look at those thresholds and compare them to your income.
  • Align your accounting periods with the standardised reporting dates. This will make the quarterly updates more efficient for you.
  • Assess how much of your business admin will be compatible with the requirements of MTD for Income Tax.
  • Ramp up your digitalisation as early as possible to prepare. Specifically, by implementing MTD compliant software.

 

Why choose Eventura for your accounting software?

 

Eventura have been helping businesses in their digital transformation journey for two decades. From the implementation of industry-leading, MTD compliant accounting solutions such as Sage 200 and NetSuite, to helping them move their entire operations to the cloud and away from costly and restrictive on-premise solutions.

As well as being NetSuite Solution Providers, Sage 200 Partners and Microsoft Gold Partners, we also offer a wide range of managed IT services, meaning we can take your business as a whole and help it achieve digital transformation.

If you would like to speak to one of our experts, you can request a free call back here.

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