Understanding MTD IT for Self-Employed Business Owners

Making Tax Digital (MTD) is a key element of HMRC’s digital transformation plan, aiming to simplify and modernise the UK tax system. MTD for VAT was the first phase, launched in April 2019. The next major step is MTD IT for Self-Employed, which will roll out in phases starting in April 2026.

Who Needs to Follow MTD for ITSA?

HMRC will review the 2024–25 tax return data to identify individuals who must join MTD from April 2026.

• From April 2026: MTD ITSA becomes mandatory for self-employed individuals and landlords with total gross income over £50,000.
• From April 2027: The threshold lowers to £30,000.

Examples:

• David (Consultant) earns £60,000 in 2024–25 → MTD applies from April 2026.
• Sarah (Online Store Owner) earns £40,000 in 2025–26 → MTD applies from April 2027.

If your income is near or above these thresholds, it’s wise to prepare early and choose an MTD-compatible software for Income Tax.

Understanding Your Obligations Under MTD for ITSA

MTD changes how income is reported, not what income is taxed. Here’s a breakdown of your new obligations:

1. Keeping Digital Business Records

• You must maintain digital records of all business income and expenses using MTD-compatible software.
• Bridging software can be used to submit figures from spreadsheets.

You can also refer to the following article to understand what a digital record means under the MTD scheme: Understanding Digital Records for Making Tax Digital (MTD).

2. Types of Returns Under MTD IT for Self-Employed

MTD replaces the annual tax return with a digital, multi-step process:

✅ Quarterly Updates

• Sent four times a year for each source of self-employment or property income.
• Summary of income and expenses. No tax is calculated at this stage.

✅ Final Declaration

• Replaces the SA100 form.
• Combines all income (including PAYE, savings, capital gains, pensions).
• Declares reliefs and calculates the final tax due.

3. What Types of Income Must Be Reported?

Quarterly (for each source):

• Self-employment income
• UK property rental income

Final Declaration (annual for all sources):

• Employment income (PAYE)
• Savings interest & dividends
• Capital gains
• Foreign income
• Pensions (state & private)
• Other income (benefits, commissions, etc.)

Other income sources not part of MTD ITSA yet:

• Income from business partnerships
• Trust income
• Estates or settlements
• Non-resident landlord income

These will continue to be reported via traditional Self Assessment methods until HMRC brings them into the MTD framework at a later stage.

5. When Should You File?

Quarterly Updates:

Final Declaration: Due by 31 January after the tax year.

6. What is the Final Declaration?

The Final Declaration is your last digital submission and replaces the SA100. It:

• Finalises all income (including employment, savings, property, etc.)
• Applies year-end adjustments
• Declares reliefs (e.g., pensions, Gift Aid)
• Crystallises your final tax and NI liability

Amendments can usually be made within 12 months using MTD software.

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Implementing MTD ITSA need not be daunting. The right software will simplify each step, from keeping digital records to filing your Final Declaration.