Making Tax Digital is a significant part of HMRC’s approach to the modernisation of tax administration. It is essential that tax payers have considered if the new rules will apply to them.
From April 2026, those with income in excess of £50,000 per annum from self-employment and rent will be required to maintain digital records and submit quarterly summaries followed by an annual declaration. This threshold of £50,000 will be reduced in future years.
Qualifying Income
Under MTD rules, qualifying income is the total income you get in a tax year from self-employment and property before deducting any expenses. Income that does not count towards qualifying income includes:
- employment (PAYE)
- dividends (including those from your own company)
- a State Pension
- private pensions
- partnership income. Partnerships will come within the scope of MTD in the future.
Qualifying income includes a share in rents from jointly owned property, and income from multiple sources is aggregated. For example, if you get £24,00 from self-employment and £27,000 from rental income, the qualifying income is £51,000.
Those with multiple sources of self-employed income will need to submit a quarterly submission for each income source.
When You Cease Trading
Self-employment or property income that has ceased since the submission of the last tax return will be included in qualifying income if there is another continuing source of self-employment or property income. If all self-employment or property income sources have ceased since the submission of the last Self-Assessment tax return, you will not need to use Making Tax Digital for Income Tax and you must notify HMRC.
Accounting Periods
If your year-end has changed and the accounting period is now longer or shorter than 12 months, the income needs to be annualised for the purposes of calculating the qualifying amount.
VAT and Cash Basis Accounting
If you use cash basis accounting and are VAT registered, you can choose to include or exclude VAT when you declare your business income. If included, it will count towards your qualifying income.
Trust Income
If you are a beneficiary of a bare trust, or if you have property or trading income from a trust which is mandated directly to you, this income will also be included as part of the qualifying amount.
Software Requirements and Practical Challenges
Once a taxpayer is within MTD, it will not possible to use the HMRC Self-Assessment software to file the year-end return and commercial software will be required. It is still unclear if any practical free options will be available.
Opting out of MTD
HMRC must grant permission to those that are “digitally excluded”. This includes:
- those whose age, health condition or disability stops them from using a computer, tablet or smartphone to keep digital records or submit them to HMRC.
- practising members of a religious society or order whose beliefs are incompatible with using digital communications or keeping digital records, and they do not use a computer, tablet or smartphone for business or personal use.
- due to location, internet access is not available at a home or business, and access is not available at an alternative location.
There is also a temporary exemption until April 2027 for those who claimed averaging relief, received trust or estate income in 2024/25, or for some taxpayers who are non-resident or have some types of foreign income.
Consider Incorporation
In some circumstances incorporation or a partnership may be suitable options. These need careful consideration and advice should be sought.
MTD Registration
Thousands of taxpayers HMRC believe will be affected have already been contacted. However, this will not be definitive and the onus is on the taxpayer to register.
To discuss if MTD will apply to you or if you have any queries, please get in touch with Neil Armstrong, Tax Director E:
neilarmstrong@bakertillymm.co.uk T: 028 9032 3466
