Sole traders and landlords in the United Kingdom who earn more than £50,000 annually from their self-employment or property income must submit their first quarterly report to His Majesty's Revenue and Customs (HMRC) by Friday. This marks a significant shift under the new 'Making Tax Digital' (MTD) for Income Tax regime, which aims to overhaul how hundreds of thousands of Britons report their earnings and expenses.

HMRC estimates that 864,000 sole traders and landlords are included in the first phase of MTD for Income Tax. As of a month prior to the deadline, approximately 387,000 individuals had signed up for the new system. An HMRC spokesperson indicated that thousands of customers are registering weekly and encouraged all those required to join MTD this year to do so promptly.

The requirement for quarterly submissions applies to those earning over £50,000 from self-employment or property. The initial reporting period covers income and expenses from April 6 to July 5, with the deadline falling on August 7. This change will gradually expand, with income thresholds lowering in April 2027 and April 2028, bringing more individuals into the digital reporting system.

This new system will affect a wide range of professions, including electricians, plumbers, landlords, personal trainers, photographers, hairdressers, and consultants. Over the next two years, an estimated 2.9 million individuals could be impacted, necessitating the use of external software, some of which can cost up to £35 per month, to manage quarterly income and expense reporting.

What is Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax is a new framework for sole traders and landlords to report their financial activities to HMRC. Under these rules, individuals must use approved digital systems for quarterly income and expense updates. This involves maintaining digital records and utilizing compatible software for tax management. It is now a legal requirement for those within its scope to ensure they are registered, their software is compatible, and their MTD summaries are submitted on time.

The system is designed to modernize the tax system, reduce errors, and improve accuracy, according to HMRC. The goal is to help taxpayers manage their obligations more effectively and gain a clearer, year-round view of their tax position.

Who is Affected?

The MTD for Income Tax primarily impacts individuals who already file self-assessment tax returns and receive income from self-employment or property. The applicability depends on income levels:

  • £50,000 or more: Required to use MTD from April 2024.
  • £30,000 to £50,000: Will be required to use MTD from April 2027.
  • £20,000 to £30,000: Will be required to use MTD from April 2028.

It is important to note that these thresholds are based on gross income, not profit. This means individuals with modest profits after expenses could still be subject to the new rules. HMRC also plans to introduce MTD for income tax for partnerships, with the timeline to be announced later. Limited companies are not affected by this change and will continue to file accounts through Companies House.

Income from sources such as savings interest, dividends, or pensions is not included in the MTD for Income Tax reporting requirements. Individuals are only required to create digital records for self-employment and property income and expenses.

Reporting and Penalties

The quarterly updates are summaries of business activity, not full tax returns, and do not require tax payments every three months. HMRC advises regular updates to the software to streamline the quarterly submissions. An estimated tax bill can be viewed after each update is sent.

During the first year of MTD for Income Tax, no penalties will be issued for late quarterly updates. However, starting from the second year, a points-based penalty system will be implemented. Taxpayers will receive one penalty point for each missed quarterly deadline. Accumulating four points will result in a £200 fixed penalty, with subsequent missed deadlines also incurring a £200 penalty. Only one penalty point can be assigned per deadline, even if multiple businesses are involved.

Software and Exemptions

Participants must use commercial software compatible with MTD, or bridging software that can import data from sources like Excel spreadsheets. HMRC does not provide its own software but offers a finder tool to help individuals select a provider. While many software options charge a fee, some free alternatives are available. Individuals can choose between software that creates digital records directly or bridging software that connects to existing record-keeping methods.

Exemptions from using MTD software can be applied for if an individual is considered digitally excluded, meaning it is not reasonable for them to use the required digital tools. Reasons for such exclusion can include age, disability, health conditions, location, or religious beliefs incompatible with digital communication.