The entire world seems to be going digital.
Going digital – digitisation – is the process of replacing physical, manual, or analogue systems with digital alternatives, centred on computers, the internet and increasingly your mobile.
Letters have been replaced by email. Paper maps have been eclipsed by GPS and phone apps. Cameras, music, news, the list goes on.
It was inevitable that tax would go digital too. VAT is already digital. Now digitisation is coming to income tax.
Making Tax Digital - MTD
MTD, or Making Tax Digital, is a UK government initiative aimed at transforming the tax system to keep up with the changes to financial technology. Its stated purpose is to make the tax system more efficient, and easier for taxpayers to manage their tax affairs – although there is less said about its other goal, which is to increase revenues by eliminating the kind of ‘errors’ that can occur with paper returns.
If you are employed, MTD may not affect you – although if you are called on to submit a tax return, you will be encouraged to do it online. But it will have some important impacts if you are running a business, are self-employed or a landlord.
The next phase of MTD is coming, with income tax for the self-employed and landlords.
What will you need to do?
Currently, involvement in the scheme is voluntary, but from April 6, 2026, anyone who is self employed or a landlord with an income of over £50,000 will be required to submit their tax digitally. Those with qualifying income above £30,000 will also be required to use MTD for Income Tax from 2027. The threshold will then decrease again to £20,000 from April 2028.
There are two new responsibilities.
- Digital Record Keeping: Under MTD, businesses, self-employed individuals, and landlords will be required to keep digital records of their income and expenses using compatible software. This means using software that can connect directly to HM Revenue and Customs systems.
- Quarterly Reporting: Instead of annual tax returns, MTD requires businesses to submit summary updates to HMRC quarterly. This will be handled by the accounting software. You will also need to submit a declaration that your returns are accurate at year- end and of course, pay what you owe.
According to HMRC, MTD for Income Tax will make it easier for self-employed people and landlords to stay on top of their tax affairs and help ensure they pay the right amount of tax.
What do you need to do?
Making Tax Digital for Income Tax is currently voluntary, but it will be phased in as compulsory from the beginning of the next tax year, 2025/26.
You might want to get to grips with the change now. The government website: Sign up for Making Tax Digital for Income Tax - GOV.UK can explain who is or isn’t currently able to set up for digital tax.
You’ll need to get software that works with Making Tax Digital for Income Tax. There are several to choose from.
Having to use software to deal with your finances may seem an imposition if you are used to traditional paper systems, but to be fair, it does bring the advantages of digitalisation – the elimination of time-consuming form filling, calculations, paperwork and hunting through envelopes full of receipts.
But will it mean paying more tax?
At Continuum we have always believed in paying the right amount of tax, and MTD will make that easier.
While we’re committed to paying the right amount of tax, we certainly don’t believe in paying more than necessary. That’s why understanding the latest tax rules, allowances, and strategies to reduce your tax liability is more important than ever.
With tax going digital from next year, it’s essential to be prepared. To ensure you’re ready for the new system —and not paying more than you should— you might want to call on our expertise today.
Find out if and when you need to use Making Tax Digital for Income Tax - GOV.UK
Digital record-keeping notice for Making Tax Digital for Income Tax - GOV.UK
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate taxation advice.
