Understanding Making Tax Digital for Income Tax Self Assessment (MTD for ITSA)

In this article we will explore the key aspects of MTD for ITSA, including its purpose, who it will affect, and how to prepare for its implementation over the coming months and years. 

 

What is MTD for ITSA? 

 

In an effort to streamline tax processes and reduce errors, the UK government introduced Making Tax Digital (MTD), a strategy designed to digitise tax administration. MTD for ITSA specifically targets the Income Tax Self Assessment system, requiring certain taxpayers to maintain digital records and submit updates to HM Revenue & Customs (HMRC) using compatible software. If you are unsure of whether the software you are using is compliant, do get in touch, and we can let you know. This transition aims to create a more accurate and efficient tax system, reducing the likelihood of mistakes associated with manual record-keeping. 

 

Determining Eligibility 

 

Not all taxpayers are immediately affected by MTD for ITSA. The rollout is planned in phases: 

• From April 2026: Self-employed individuals and landlords with annual business or property income exceeding £50,000 will be required to comply with MTD for ITSA. 

• From April 2027: The threshold lowers to include those with income over £30,000. 

It's important to note that these thresholds relate to gross income, not profit. Therefore, even if your net earnings are below these amounts, you may still fall within the scope if your total income surpasses the limits. 

 

Key Requirements Under MTD for ITSA 

 

Transitioning to MTD for ITSA involves several critical changes to how you currently manage and report your income: 

 

• Digital Record-Keeping: Taxpayers must maintain digital records of all business transactions using MTD-compatible software. This shift eliminates the traditional paper-based methods, ensuring more accurate and accessible records. There are a number of compliant software to choose from and we can help move you over to a system that will not only meet your MTD requirements but will also be more efficient for you to use. 

 

• Quarterly Updates: Instead of the annual tax return, taxpayers will submit quarterly updates to HMRC, summarising income and expenses. These updates provide a real-time view of tax liabilities, allowing for better financial planning and cash flow forecasting. 

 

• End-of-Period Statement (EOPS): After the tax year concludes, an EOPS must be submitted to finalise your tax position. This step allows for any necessary adjustments and ensures that all information provided throughout the year is accurate. 

 

• Final Declaration: Replacing the traditional Self Assessment tax return, the final declaration confirms that all income, expenses, and allowances for the year have been reported correctly. 

 

Choosing the Right Software 

 

Selecting appropriate software is crucial for compliance with MTD for ITSA. HMRC provides a list of compatible software options designed to cater to various business needs. We utilise many of these for our clients. When choosing software, consider factors such as: 

 

• Functionality: Ensure the software can handle all required tasks, including record-keeping, quarterly updates, and final declarations. 

 

• User-Friendliness: Opt for software that is intuitive and easy to navigate, reducing the learning curve and potential errors. 

 

• Support and Resources: Reliable customer support and educational resources can be invaluable during the transition. 

 

Steps to Get Ready 

 

To ensure a smooth transition to MTD for ITSA, consider the following steps: 

• Assess Your Eligibility: Determine when you are required to comply based on your income levels and the phased rollout schedule. We can help with your forecasting to ensure that you give yourself enough time to move over onto the new system. 

 

• Choose Compatible Software: Research and select MTD-compatible software that aligns with your business needs. 

 

• Digitise Your Records: Begin maintaining digital records of all transactions to comply with MTD requirements. 

 

• Stay Informed: Regularly consult HMRC updates and seek professional advice to stay abreast of any changes or additional requirements. 

 

Understanding Exceptions 

 

While MTD for ITSA aims for widespread adoption, certain exemptions apply: 

 

• Digital Exclusion: Taxpayers who cannot engage digitally due to age, disability, or remoteness may apply for an exemption. 

 

• Religious Grounds: Individuals whose religious beliefs are incompatible with digital record-keeping can seek exemption. 

 

It's essential to apply for these exemptions proactively if you believe you qualify. 

 

Future Developments 

 

The government has indicated plans to extend MTD for ITSA to partnerships and those with income over £20,000, although specific dates are yet to be announced. Staying informed about these developments is crucial for timely compliance. 

 

Embracing the Digital Tax Future 

 

Transitioning to MTD for ITSA represents a significant shift in how taxpayers manage and report income. By embracing digital record-keeping and timely updates, businesses and individuals can benefit from a more streamlined and accurate tax system. Proactive preparation, including selecting suitable software and understanding new requirements, will ensure a smooth journey into this digital tax landscape. 

Note: The information provided is based on current guidelines as of March 2025. Tax regulations are subject to change, so it's advisable to consult HMRC or a tax professional for the most up-to-date information.