Making Tax Digital for Income Tax: what's changing?

By now, you might have figured out that you'll be legally required to use Making Tax Digital (MTD) in the coming years. The next step is to get to know exactly what you’ll need to do differently.  

This guide covers the practical changes to your tax process as well as the bits that will stay the same. You'll see that while the method of reporting tax is changing, the core principles and payment deadlines are not. 

This guide won’t give you financial or tax advice, though. That’s not something we can do. If that’s the kind of thing you need, speak to a professional adviser or HMRC.

What's changing: digital records and software

The first thing you need to know is that you’ll need to keep digital records of your income and spending. You’ll need to use HMRC-approved software to send your records to them. This replaces the old manual process of filing a Self Assessment tax return through the HMRC website.

You can help yourself out by turning paper receipts into digital copies as soon as you get them and issuing invoices digitally. Although it’s totally up to you at what point you create digital records, as long as it’s in time for the quarterly update for that period.

What's changing: quarterly updates

The single annual Self Assessment tax return is being replaced by more frequent, smaller updates and a final ‘MTD return’. You'll now need to send a summary of your business income and expenses to HMRC every three months using HMRC-approved software. 

These quarterly updates are designed to give better insights into your tax affairs and estimate the amount of income tax HMRC can expect to be paid to them for the year.

You’ll need to update HMRC on basic details of your incomings and outgoings, but not things like adjustments and charges, unless you want to. So don’t think of it as submitting four separate tax returns. 

The quarterly updates are cumulative, meaning you can correct any of the numbers from earlier in the tax year in your next update, if you need to. After the tax year ends, you'll still submit a final return to confirm your income and expenses for the whole year are correct. This return will be due by the usual 31 January electronic self-assessment deadline and will include income from non-MTD sources (e.g. capital gains or PAYE income).

What's staying the same: tax payment deadlines

Making Tax Digital only changes how you report your income, not when you pay your tax.

Your tax payment deadlines will stay exactly the same. For most sole traders, this means you’ll still make two ‘payments on account’ each year, one in January and one in July. The quarterly updates don’t mean you have to pay tax four times a year.

You’ll still need to send a final update to HMRC by January 31 after the tax year. At this point you need to make end-of-year adjustments and add other types of income like interest income, dividends and capital gains. 

What's staying the same: your ways of working

It’s up to you how you handle the admin side, as long as you’re keeping digital records.

Like before, you can choose to do it yourself or get an accountant or tax agent on board to do it for you. They can use the necessary HMRC-approved software to send your quarterly updates and final declaration for you (once you’ve checked over the numbers). 

Questions? Answers.

Do I have to pay tax every quarter under MTD?

No. Making Tax Digital only changes how you report your income, not when you pay your tax. The existing tax payment deadlines stay the same.

What is HMRC-approved software?

You must use software that is compatible with MTD. There are plenty of options to choose from. The best place to start is with HMRC’s guidance on choosing the right software. 

What happens if I miss a quarterly update deadline?

The government has introduced a points-based penalty system for MTD. You’ll get a penalty point for every quarterly submission you miss. If you get 4 points, you’ll have to pay a financial penalty of £200. For annual submissions, the penalty is applied at 2 points. HMRC will notify you about every point and penalty. Read more about HMRC’s penalties for late submission.

HMRC also has powers to issue other penalties, for example if you pay tax late or don’t keep adequate records. 

Can I use a spreadsheet for MTD?

Yes, but you’ll need software that connects to existing records kept in spreadsheets. These are known as ‘bridging software’.

Features vary by plan. Lite is free, Pro is £9 a month and Team is £25 a month. Only sole traders or limited company directors in the UK can apply . Ts&Cs apply.