In its bid to modernise the tax system and simplify tax reporting for businesses and individuals, the UK government introduced Making Tax Digital (MTD). The paramount purpose of MTD is to ensure tax returns filed by the taxpayers are more accurate, errors are reduced, and the process of filing taxes becomes more efficient. Likewise, for self-employed individuals, including sole traders, understanding MTD is crucial since it will help them maintain mandatory compliance with digital record-keeping and tax submission. Accordingly, in this guide, we will elaborate on what Making Tax Digital for the self-employed is and how they can comply with it.
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What is Making Tax Digital for the Self-Employed?
Making Tax Digital (MTD) is an initiative by HMRC to move tax administration into a digital system or to digitise the businesses’ way of managing tax. The prime objectives of MTD are:
Reducing Tax Errors:
Ensuring accurate and timely reporting of tax data for self-employed workers.
Increasing Efficiency:
Streamlining tax submissions using HMRC-compliant software and reducing the time taken to enter returns manually, which is hectic and strenuous.
Enhanced Financial Control:
Giving businesses an overall enhanced financial control.
Providing Real-Time Updates:
Helping businesses understand their tax position throughout the year by keeping real-time track of their tax deductions and submissions.
Furthermore, MTD applies to different tax business categories, such as VAT, Income Tax Self-Assessment (ITSA), and Corporation Tax. However, this guide will centre on MTD for Income Tax Self-Assessment (MTD for ITSA), which specifically pertains to self-employed individuals.
Understanding Making Tax Digital (MTD) for (Income Tax Self-Assessment) ITSA
In line with HMRC guidelines, Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) requires sole traders and landlords with qualifying income to maintain digital records and update HMRC quarterly using compatible software.
HMRC will introduce the MTD for ITSA for the self-employed in two phases:
- For sole traders and landlords with annual income over £50,000, MTD for ITSA will begin from April 2026.
- For sole traders and landlords with qualifying income over £30,000 annually, MTD for IT will start from April 2027.
To further clarify, HMRC has mandated that from April 2026, all self-employed individuals, including sole traders and landlords, who earn over £50,000 will have to shift to using Making Tax Digital (MTD) for their income tax payment. Consequently, sole traders will no longer rely on traditional tax returns for reporting their income. Similarly, from April 2027, the same holds for those earning over £30,000. However, those earning under the thresholds will continue to use the Self Assessment system.
How Does MTD for ITSA Work?
As per the present IT scheme, which only requires one filing per year (October 31 for paper returns and 31 January if filing online), MTD for IT will need the businesses to submit cumulative quarterly updates to HMRC.
In addition, for the individuals earning above the threshold,
- Unlike previously, where it was compulsory to use HMRC’s website to file returns, they will now maintain digital records using compatible accounting software to record their income and expenses.
- They will submit quarterly updates by sending quarterly summaries of their earnings and expenses to HMRC.
- File an End-of-Year Finalisation (EOPS), in which they submit a final declaration confirming their tax liabilities.
- Use HMRC-recognised software to ensure their chosen accounting software is congruent with MTD requirements.
- Make a final declaration including any other taxable income by January 31 of each year.
However, the deadlines for completing your tax obligations and making payments are not changing.
How Self-Employed Individuals can Comply with MTD for ITSA?
The following steps outline how self-employed individuals can ensure compliance with Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA)
Choose Compatible Software:
HMRC requires self-employed individuals to use MTD-compatible software to maintain accurate digital records and submit tax payments. It is because now you will sign up to MTD for ITSA via your cloud-based software rather than sign up on the HMRC website.
Accordingly, you necessarily need to have HMRC-compatible software in place. Also, your software provider will guide you on how to sign up for MTD for ITSA. Further down the line, to sign up, you will need your business name, accounting period, business commence date, email address, National Insurance (NI) number, and accounting type.
Now, some of the HMRC-approved software options include:
- QuickBooks
- Xero
- FreeAgent
- Sage
It is noteworthy that you must ensure that the software integrates with HMRC’s MTD system and supports real-time tax calculations.
Maintain Digital Records:
Fortunately, with the introduction of MTD, business owners will not have to resort to or be reliant on manual bookkeeping or spreadsheets. Instead, they can effectively store financial records digitally with the accounting software. Moreover, your software should track your:
- Business income.
- Allowable or tax-deductible expenses.
- VAT (if applicable).
Read our following guides to learn more about what the tax-deductible costs are for the self-employed, and how they can cut down their tax bill:
- How to save taxes as self-employed workers in the UK?
- What are allowable expenses for self-employed people in the UK?
Submit Quarterly Updates:
Every three months, your compatible software will combine your digital records to calculate totals for each income and expense area. These summaries are termed quarterly updates. More specifically, under MTD for ITSA, you must send quarterly income and expense reports to HMRC. The quarterly deadlines or the standard update periods for reporting income and expenses for the current tax year are given as follows:
Q1 (April – July): Due by 5 August
Q2 (July – October): Due by 5 November
Q3 (October – January): Due by 5 February
Q4 (January – April): Due by 5 May
Ultimately, these standard quarterly submissions ensure that HMRC has up-to-date tax records, which in turn reduces any last-minute surprises for you.
Submit End-of-Year Finalisation:
As part and parcel of complying with Making Tax Digital (MTD) for ITSA, another significant requirement is the submission of an End-of-Period Statement (EOPS) at the end of the tax year. Notably, this statement acts as a modern replacement for the traditional Self-Assessment tax return. Furthermore, EOPS plays a substantial role in confirming all relevant financial details for the year, total income earned, any tax reliefs claimed, and allowable deductions. Thus, by submitting the EOPS, you can ensure that your tax records are accurate and congruent with MTD regulations.
Submit Tax Payments:
Eventually, after you have submitted your EOPS, HMRC will process your submissions. Once done, it will provide you with a tax bill based on your reported income. It is worth mentioning that the tax payment deadlines remain the same:
31 January: If you are submitting an online tax return, you must submit it by midnight 31 January. This payment will be for any remaining tax due for the previous tax year.
31 October: if you are sending your tax return in paper form, you will have to submit it by midnight on 31 October.
31 July: If you make advance payments on your bill (known as ‘payments on account’), you will normally have a second payment deadline of 31 July.
Advantages of Making Tax Digital for the Self-Employed
Increased Accuracy:
First and foremost, the paramount upside of complying with MTD for ITSA is enhanced accuracy. You are wondering how. Unarguably, when software takes care of the numbers, the possibilities of human error drastically drop down, e.g. by automating your data entry, bookkeeping records can automatically complete your quarterly updates. Consequently, it eliminates the need to manually enter them into your returns. Therefore, using digital software can help you reduce human errors in your tax calculations and submissions.
Real-Time Tax Estimates:
Next, MTD-compatible software provides you with real-time updates for tax liabilities. MTD-compatible software offers continuous updates on your tax situation, allowing you to stay abreast of your financial standing throughout the year. Fortunately, the real-time feature of MTD helps you effectively plan for upcoming tax payments and reduces the risk of unexpected/unanticipated bills occurring due to unforeseen changes in your financial circumstances. In the long run, having a better grasp of your tax obligations in real time enables you to make more rational decisions and manage your finances with greater efficiency.
Improved Efficiency:
Similarly, submitting quarterly updates under Making Tax Digital (MTD) offers a significant advantage for the self-employed since it alleviates the stress of last-minute tax filings. Further elaborating, under quarterly updates, the reporting of your earnings and expenses spreads out throughout the year. As an outcome, individuals can maintain better financial oversight and ensure more accurate record-keeping. What’s more, this approach not only helps you stay compliant with tax obligations but also helps to avoid the rush and potential errors that often come with end-of-year submissions (EOPS).
Better Financial Planning and Management:
Likewise, with Making Tax Digital (MTD, you can ensure the enhancement or improvement of financial management for your businesses. For instance, when you submit quarterly updates, you gain a clearer understanding of your business’s total tax liability, which in turn facilitates more effective tax planning and cash flow management. Beyond that, this proactive approach allows businesses to prepare for their tax obligations well in advance, minimizing any unforeseen tax scenarios at the end of the fiscal year. Additionally, by digitally tracking expenses and income, self-employed workers can streamline their budgeting processes, ensuring a more organized financial outlook. Subsequently, MTD transforms how businesses manage their finances and promotes a more strategic and efficient approach to financial responsibilities.
Streamlined Bookkeeping:
Another considerable benefit of Making Tax Digital (MTD) for self-employed individuals is the streamlined approach to bookkeeping. Although it requires more frequent updates to HMRC, considering these updates are more concise, they allow for a simplified reporting process. To go into detail, instead of facing the overwhelming and laborious task of annual bookkeeping, self-employed individuals can viably break it down into manageable monthly or quarterly tasks. Ultimately, with MTD, self-employed workers can maintain accurate records more easily, reduce stress, and ensure timely compliance with HMRC tax obligations throughout the year.
How Accountingfirms can Help Self-Employed Individuals with MTD
Coming to grips with the transition to Making Tax Digital (MTD) can be a bumpy road, especially for self-employed individuals unfamiliar with digital tax reporting. In this regard, Accountingfirms can offer you expert assistance in:
- Registering for MTD with HMRC.
- Choosing and setting up MTD-compatible software.
- Maintaining accurate digital records and ensuring compliance.
- Filing quarterly and end-of-year submissions accurately.
- Providing real-time tax advice and planning.
By appointing a qualified and location-based accountant registered with Accountingfirms, self-employed individuals can ensure the fulfilment of their tax obligations seamlessly while steering clear of penalties.
Conclusion
In the end, Making Tax Digital (MTD) is a significant step toward modernising the UK’s tax system. More importantly, from April 2026, self-employed individuals whose earnings surpass £50,000 must comply. Therefore, it is crucial to understand Making Tax Digital (MTD) for them.
Furthermore, for self-employed individuals seeking guidance on how to maintain digital records, submit quarterly updates, and use MTD-compatible software, Accountingfirms connects self-employed individuals with experienced and registered accountants who can help with MTD registration, tax filings, and software selection. With us, ensuring compliance with MTD does not have to be stressful.
Hence, transition smoothly to the digital tax system and focus on growing your business with us.
Get in touch with our young, clever, and tech-driven professionals if you want to choose the solution to tax burden or accounting problems in the UK for your income. We will ensure to offer the best services.