After years of waiting, Making Tax Digital for Income Tax Self Assessment (MTD ITSA) has finally arrived.
This means that some self-employed individuals and landlords need to finish off their preparations before April.
If you have received a letter from HMRC, that means you are first in line for MTD ITSA.
Who is impacted by MTD ITSA?
From April 2026, sole traders and landlords with a gross income from those sources exceeding £50,000 in the year ended 5 April 2025 will be required to comply with MTD ITSA.
The gross income threshold will drop to £30,000 in 2027 and £20,000 in 2028.
For now, only those affected from April 2026 will have received a letter from HMRC.
Partnerships are not currently required to comply with MTD ITSA. Partners will therefore only need to file quarterly ITSA updates to HMRC if they have other sole trade income and/or property income over the above thresholds, and they would not report any partnership income on these.
How can I prepare for MTD ITSA?
MTD ITSA is the biggest overhaul to tax in decades and is being viewed with concern and dread by many, requiring you to keep a digital record of all income and expense transactions, and make quarterly updates to HMRC.
This means that there will be four extra filing deadlines that go alongside the annual submission that is a typical part of reporting income to HMRC.
While you might think that your well-refined Excel spreadsheet is up to the job, it will no longer suffice without the use of bridging software to connect to HMRC and make it MTD-compliant for the quarterly submissions.
Many of the existing cloud accounting platforms are compliant with MTD ITSA, but if you use these to record your self-employment income, and also have property income or an additional sole trade, you will need to make separate quarterly ITSA reports for this and therefore may need an additional solution, as not all cloud accounting platforms support multiple quarterly submissions in one subscription.
If you don’t currently record your transactions digitally, and you are instead accustomed to keeping a box full of receipts set aside for preparation of your Tax Return, then you will have to act now to start using MTD-compliant software.
You do not need to report any other sources of income on your MTD ITSA quarterly updates. Other sources of income, such as employment income, pensions, dividends, and interest, will still be reported on the end-of-year Tax Return-style document, as normal. The end-of-year return, which is still due by 31 January following the end of the tax year, will also include any adjustments, claims to tax reliefs, capital allowances, etc. and calculate your tax liabilities.
Does MTD ITSA bring new penalties?
If you noticed your HMRC letter warning of penalties, you might be nervous about the year ahead.
It should be noted that the penalties for MTD will not take effect until April 2027, however, this is not an excuse to ignore your MTD ITSA obligations this year if you are in the first wave of taxpayers that are required to comply.
MTD ITSA penalties operate on a point-based system, with every missed deadline netting you a penalty point.
A £200 penalty will be enforced after you get two points for annual filings and/or four points for quarterly filings.
Any further missed annual filings will also face a £200 fine.
Points reset when outstanding submissions are filed and after 12 months of compliance with quarterly filings and 24 months for annual ones.
If you want to start strong with your MTD ITSA readiness, then it is best to seek professional support now.
We can help you understand when and how MTD will affect you, help you to select a suitable software solution or file these on your behalf, and ensure that you are not at risk of penalties.
