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Self-employed, landlords, and businesses – The way you declare your taxes is changing
Making Tax Digital for Self Assessment is swiftly approaching and some people have never even heard of it. One of our current goals is to educate the self employed and landlords on this huge digital tax change. Here’s your guide to navigating this change.
What is Making Tax Digital all about?
Making Tax Digital or MTD is the next step HMRC is putting in place to force the self-employed to digitally record and report their expenditure and income.
It will require individuals to submit 4 returns a year and a year end final declaration (replacing the tax return). These returns will have to be submitted digitally.
How can I get prepared for this change?
- Find out when this change will affect you (see further down for more information on this)
- Choose an accounting software (if you’re not already using one). More about this below.
- Start using the software, and consider undertaking training on it. (Find out more about our software training options).
- Talk to your accountant and/or bookkeeper about planning for MTD. Establish who will be responsible for what tasks and when they will need to be completed.
When will I have to start digital tax?
This is dependent on your income. The first to be affected are those who have a qualifying income over £50k for the 2024-25 tax year. The first submission will be due by 7th August 2026 for the period April, May and June 2026. Other income brackets will follow. Please click here for more details from the HMRC website.
At whatever point you need to start, you will need to register with HMRC. This is not the same as registering for self employment and is specifically for the Making Tax Digital for Income Tax for Self Assessment.
I’m already using software, can I use it for MTD?
If you’re already using software, then you have a head start on the rest of the pack.
Ask your provider if they’re ready for Making Tax Digital. If they’re not ready, ask if and when it will be. It’s very unlikely they won’t have a plan for this but if they don’t, it’s time to move.
Which software should I use for Making Tax Digital?
There are a number of free software packages out there, but like anything free, free does not necessarily mean good. But if you’re on a budget, free software is better than no software.
Alternatively, If you’re passionate about your Excel spreadsheet, you can get what’s known as “bridging software” which connects your spreadsheets to HMRC’s online portal. These are not ideal but are a potential temporary solution.
We personally recommend either QuickBooks or Xero because not only will they support you with MTD requirements, they do a whole lot more. It also opens up avenues for add-ons such as Apron and Satago. Putting all of these software together creates an entire financial ecosystem which can save you time and money and revolutionise your bookkeeping.
Quickfire questions to ask when choosing an accounting software
- Does it connect to my bank? (This will save you time)
- Does it connect to external software and which ones? (The more add-ons you can get, the more time you’ll save.)
- Does it have industry specific features? (For example, Hammock is designed for landlords)
- Is it within my budget and are there hidden costs? (some software packages only give the best features to those paying for the premium versions)
- Is it easy to use? (Always do a trial. Everyone is different, and the software your friend thinks is hard, you may find easy).
Next Steps
One of our favourite quotes is “You don’t know what you don’t know”. Knowledge is power so the most empowering thing you can do is to stay in the know but that can be a challenge.
The easiest thing to do is to outsource as much as you can to a bookkeeper and accountant. However, if you’re on a budget, this isn’t always a cost effective option so here are some quick tips to keep up to date:
- Choose and set up your software. We can help with software recommendations and offer discounts on Xero, QuickBooks, and Hammock. Book a meeting here.
- Subscribe to HMRC’s mailing list. They send out regular advice with links to free webinars.
- Have your work regularly checked over by a bookkeeper and have one on hand to run things by. (We have clients who do all their own bookkeeping but we check it’s correct on a monthly basis and answer their burning questions. Find out more here).
- If you want to do your own bookkeeping, let us guide you through your first return for a fixed fee of £50 + VAT. Register your interest here.
- Subscribe to our newsletter for monthly bookkeeping updates.
- Do as much training as you can on the software you’re using. We are offering free training on either Xero or Quickbooks to help you get started. Register your interest here.
- Don’t forget to register with HMRC, or we can do it for you (£25 + VAT fixed fee). Register your interest here.
MTD FAQ’s
Making Tax Digital (MTD) is being introduced by HMRC as a key part of the government’s plan to modernise the tax system, improve accuracy, and reduce the “tax gap” (the difference between tax owed and tax collected).
The primary goals and reasons for its introduction include:
- Reducing Errors: HMRC research has shown that using MTD-compatible software reduces the potential for mistakes in record-keeping and tax calculations compared to manual, paper-based systems.
- Modernising the System: The initiative moves processes onto a modern, digital platform, bringing the UK tax system into the 21st century, similar to systems in other countries.
- Closer to Real-time Information: Instead of one annual tax return, businesses and individuals provide quarterly updates, giving both taxpayers and HMRC a clearer, more up-to-date view of their tax position throughout the year, helping to avoid “January surprises”.
- Improving Productivity and Efficiency: Digital record-keeping encourages better financial organisation, saving time for businesses and agents that might otherwise be spent on last-minute paperwork and corrections.
- Better-informed Decisions: Access to real-time financial information helps businesses with cash flow management, budgeting, and making more informed financial decisions.
Read our guide on Making Tax Digital here.
Key Impacts for Self-Employed Universal Credit Claimants
- Increased Reporting Frequency: Under Making Tax Digital (MTD), you will need to submit quarterly updates of your business income and expenses to HMRC using MTD-compatible software, plus a final end-of-year declaration. This is in addition to the existing requirement to report your business income and expenses to the Department for Work and Pensions (DWP) every month for Universal Credit.
- Different Reporting Rules: The figures for income and expenses you report for tax purposes under MTD may not align with those required for Universal Credit calculations. For example, the DWP applies a “reasonably incurred” test to expenses which is different from HMRC’s “wholly and exclusively” test. This means you may need to keep two sets of records or carefully manage the data from your MTD software for your monthly UC reports.
- Potential for Payment Fluctuations: Universal Credit payments are calculated based on your actual earnings in each monthly assessment period, which may vary. The quarterly updates for MTD are unlikely to directly impact your monthly UC payments in real-time, but the final tax position at year-end may have implications if any adjustments are needed and reported late.
- Minimum Income Floor (MIF): If the DWP applies the Minimum Income Floor (MIF) to your claim, your UC payment is worked out based on an assumed level of earnings, regardless of your actual profits reported through MTD, unless you earn more than the MIF. MTD does not change the MIF rules.
- Mandatory Digital Tools: You must use MTD-compatible software to keep digital records and submit your quarterly updates. While some free software is available, there may be costs involved.
- Timeline: MTD for ITSA is being introduced in phases, starting from April 2026 for those with annual gross income over £50,000, and later for those with lower incomes.
In summary, MTD will not directly change how your Universal Credit is calculated, but it will add an extra layer of administrative work and complexity in managing and reporting your self-employed income to two different government departments with differing rules. You must continue to meet your existing Universal Credit reporting requirements every month.
Read more about MTD in our Making Tax Digital Guide.
