Making Tax Digital for Self-Employed: What You Need to Know

If you're self-employed, you've likely heard about Making Tax Digital (MTD) and may be wondering what it means for you and your business. At Barnett & Co Accountants, we understand that navigating new tax requirements can feel overwhelming, which is why we've put together this comprehensive guide to help you understand everything you need to know about MTD for the self-employed.

What is Making Tax Digital?

Making Tax Digital is HMRC's initiative to transform the UK tax system into a more digital, efficient, and streamlined process. The programme aims to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. Rather than submitting annual tax returns with information that may be months out of date, MTD requires more frequent digital record-keeping and reporting.

The scheme has already been implemented for VAT-registered businesses, and now it's being extended to include income tax for self-employed individuals and landlords. This represents a significant change in how self-employed people will interact with HMRC and manage their tax obligations.

When Does MTD for Income Tax Start?

For self-employed individuals and landlords with gross income over £50,000 per year, Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is currently scheduled to begin in April 2026. This has been delayed from the original implementation dates to give taxpayers and their advisers more time to prepare.

If your gross business or property income is between £30,000 and £50,000, you'll have an additional year before MTD becomes mandatory for you, with implementation expected in April 2027. Those with income below £30,000 won't be required to join MTD for ITSA initially, though they may choose to opt in voluntarily if they wish.

It's worth noting that these dates and thresholds have changed several times as the government has refined its approach, so it's important to stay informed about any future updates. At Barnett & Co Accountants, we keep abreast of all the latest developments and will ensure our clients are ready well in advance of their deadline.

What Will Change for Self-Employed Individuals?

Under MTD for ITSA, the way you keep records and report your income to HMRC will change significantly. Here are the key changes you need to be aware of:

Digital Record-Keeping

You'll be required to maintain your business records digitally using MTD-compatible software. This means you can no longer rely solely on paper records, spreadsheets that aren't linked to MTD software, or manual bookkeeping methods. The software you use must be able to connect with HMRC's systems to submit your information.

Quarterly Updates

Instead of submitting just one Self Assessment tax return per year, you'll need to provide quarterly updates to HMRC about your income and expenses. These updates will be due by the following deadlines each year:

- 5th August (covering 6th April to 5th July)

- 5th November (covering 6th July to 5th October)

- 5th February (covering 6th October to 5th January)

- 5th May (covering 6th January to 5th April)

These quarterly submissions are essentially summaries of your business income and expenditure for each period. They won't calculate your actual tax liability, but they'll give HMRC a running total of your financial position throughout the year.

End of Period Statement and Final Declaration

After submitting your four quarterly updates, you'll still need to complete an End of Period Statement (EOPS), which finalises your business income and expenses for the tax year. Following this, you'll submit a Final Declaration, which is essentially the replacement for your Self Assessment tax return. This is when you'll declare any other income, claim allowances and reliefs, and find out how much tax you actually owe.

What Are the Benefits of MTD?

Whilst the changes may seem daunting at first, Making Tax Digital does offer several advantages for self-employed individuals:

Better Financial Oversight

By updating your records quarterly, you'll have a much clearer picture of your business finances throughout the year. This regular engagement with your accounts can help you spot trends, identify problems early, and make more informed business decisions. You won't be faced with the unpleasant surprise of a large tax bill that you haven't prepared for.

Reduced Errors

Digital record-keeping and automated submissions significantly reduce the risk of mathematical errors and transcription mistakes that can occur with manual processes. MTD-compatible software often includes built-in checks and validations that help ensure your submissions are accurate before they're sent to HMRC.

Avoid Penalties

When you're keeping on top of your records throughout the year, you're far less likely to miss deadlines or submit incorrect information. This means fewer penalties and less stress come tax time. The quarterly approach also means you're spreading the administrative burden across the year rather than facing one enormous task in January.

More Accurate Tax Estimates

With regular updates, you'll have a much better idea of your tax liability as the year progresses. This makes it easier to set aside the right amount of money for your tax bill and avoid cash flow problems when payment is due.

How Can You Prepare for MTD?

The key to a smooth transition to Making Tax Digital is preparation. Here's what you should be doing now to get ready:

Choose MTD-Compatible Software

Research and select accounting software that's compatible with MTD requirements. There are numerous options available, ranging from basic packages suitable for simple self-employed businesses to more comprehensive solutions for those with complex affairs. Some software is free for basic use, whilst others charge monthly or annual fees. Consider your budget, the complexity of your business, and what features you need.

Popular options include QuickBooks, Xero, FreeAgent, Sage, and many others. HMRC maintains a list of compatible software on their website, which is regularly updated as new products are approved.

Start Digital Record-Keeping Now

Even if MTD doesn't apply to you yet, it's wise to start keeping digital records as soon as possible. This gives you time to get comfortable with the software and establish good habits before the requirements become mandatory. You'll also benefit from better financial oversight immediately.

Make sure you're recording all your business income and expenses promptly and accurately. Keep digital copies of receipts and invoices, and reconcile your accounts regularly to ensure everything is up to date.

Understand Your Obligations

Make sure you know when MTD will apply to your business based on your income level, and mark the important dates in your diary. Familiarise yourself with what information you'll need to provide in your quarterly updates and what records you need to keep.

Get Professional Help

Working with a qualified accountant can make the transition to MTD much smoother and less stressful. At Barnett & Co Accountants, we can help you choose the right software for your needs, set up your digital records correctly, and ensure you're meeting all your obligations under the new system. We can also handle your quarterly submissions and final declarations, giving you peace of mind that everything is being done correctly and on time.

Common Concerns About MTD

Many self-employed individuals have concerns about Making Tax Digital, and we'd like to address some of the most common ones:

I'm Not Good with Technology

You don't need to be a technology expert to use MTD-compatible software. Most modern accounting packages are designed to be user-friendly and intuitive, even for those who aren't particularly tech-savvy. Many providers offer tutorials, support resources, and helplines to assist you. Additionally, your accountant can help you get set up and provide training on how to use the software effectively.

It Sounds Like More Work

Whilst MTD does require more frequent engagement with your records, many people find that spreading the work across the year is actually less burdensome than facing one massive task in January. Regular, small updates are often easier to manage than trying to reconstruct a whole year's worth of finances in one go. Plus, once you're in a routine, the quarterly updates typically take much less time than you might expect.

"What If I Make a Mistake?"

MTD-compatible software includes various checks and validations to help prevent errors. If you do notice a mistake after submitting a quarterly update, you can correct it in your next submission or in your End of Period Statement. HMRC understands that the transition to a new system may involve a learning curve, and they've committed to taking a supportive approach, particularly in the early stages of implementation.

"Will It Cost Me Money?"

There may be some costs involved in purchasing accounting software and potentially getting professional help with the transition. However, these costs need to be weighed against the benefits of better financial management, reduced risk of penalties, and the time you'll save in the long run. Many software packages offer competitive pricing, and some even have free versions for very simple businesses. Professional fees for accounting support are also tax-deductible business expenses.

How Barnett & Co Accountants Can Help

At Barnett & Co Accountants, we're here to support you through every stage of your MTD journey. Our services include:

Software Selection and Setup: We'll help you choose the most appropriate MTD-compatible software for your business and assist with setting it up correctly from the start.

Training and Support: We can provide training on how to use your chosen software effectively and offer ongoing support whenever you need help.

Quarterly Submissions: We can handle your quarterly updates to HMRC, ensuring they're accurate and submitted on time, so you can focus on running your business.

Year-End Compliance: We'll prepare your End of Period Statement and Final Declaration, making sure you're claiming all the allowances and reliefs you're entitled to and that your tax liability is correctly calculated.

Ongoing Advice: We'll keep you informed about any changes to MTD requirements and provide proactive advice on how to optimise your tax position under the new system.

Peace of Mind: Perhaps most importantly, working with us gives you the confidence that your tax affairs are being handled by experienced professionals who understand both the technical requirements of MTD and the practical realities of running a self-employed business.

Take Action Now

Even if Making Tax Digital doesn't apply to your business for another year or two, now is the time to start preparing. The businesses that fare best with any regulatory change are those that plan ahead rather than waiting until the last minute.

We encourage you to get in touch with us at Barnett & Co Accountants to discuss your specific situation and how we can help you prepare for MTD. Whether you need comprehensive support with every aspect of the transition or just some initial guidance to point you in the right direction, we're here to help.

You can reach us by phone on 0345 646 1516, or by email at info@barnettandco.uk. Alternatively, visit our website at www.barnettandco.uk to learn more about our services or to book a consultation.

Don't let Making Tax Digital catch you unprepared. With the right support and planning, you can embrace this change with confidence and even discover that it improves the way you manage your business finances. We look forward to helping you navigate this important transition and ensuring your continued success as a self-employed individual.

Barnett & Co Accountants

NG9 Electra House, Electra Way, Crewe, CW1 6GL

Phone: 0345 646 1516

Email: info@barnettandco.uk