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MTD for self assessment

Making Tax Digital (MTD) for Income Tax and the concept of "DAEs" (Digital Accounting Entries) are intertwined as the former necessitates the latter for compliance. Let's break down each aspect:

Making Tax Digital (MTD) for Income Tax Rules

Making Tax Digital is a government initiative aimed at digitalizing the tax system in the UK. For Income Tax, it introduces new rules for how certain individuals and businesses record and report their income and expenses to HM Revenue and Customs (HMRC). Here's a comprehensive explanation of the rules:

1. Who is Affected and When?

MTD for Income Tax will be rolled out in phases based on income levels:

  • From 6 April 2026: Individuals with a gross income from self-employment and/or property exceeding £50,000 per year.
  • From 6 April 2027: Individuals with a gross income from self-employment and/or property exceeding £30,000 per year.
  • From 6 April 2028: Individuals with a gross income from self-employment and/or property exceeding £20,000 per year.

These thresholds are based on the total turnover/gross income from all self-employment and property income sources. HMRC will look at specific boxes on the Self Assessment return to determine if these thresholds are met (e.g., SA103F box 15, SA105 box 20).

2. Key Requirements:

Once mandated, affected taxpayers will need to:

  • Maintain Digital Records: Keep records of income and expenses digitally using MTD-compatible software or spreadsheets linked with bridging software. Paper records will no longer be sufficient.
  • Submit Quarterly Updates: Provide HMRC with a summary of their business income and expenses at least every three months using their chosen MTD-compatible software. The deadlines for these quarterly updates are typically:
    • 6 April to 5 July: Deadline 7 August
    • 6 July to 5 October: Deadline 7 November
    • 6 October to 5 January: Deadline 7 February
    • 6 January to 5 April: Deadline 7 May
  • Submit a Final Declaration: At the end of the tax year (by 31 January following the tax year-end), a final declaration must be submitted. This replaces the traditional Self Assessment tax return for self-employment and property income. It allows for confirming the accuracy of the quarterly updates and including details of other income and tax reliefs.

3. What Needs to be Recorded Digitally?

The regulations require functional compatible software to:

  • Maintain digital records of all business transactions.
  • Preserve those digital records.
  • Provide a quarterly update to HMRC based on these records.
  • Provide corrections to digital records when necessary.

While spreadsheets can be used, they must be digitally linked if data is moved between them. Manually copying and pasting data is generally not permitted under MTD rules.

4. Exemptions:

Certain individuals and entities are currently exempt from MTD for Income Tax, although some of these exemptions may be reviewed in the future:

    • Partnerships (expected to be included later, date not yet announced).
    • Trusts, estates, trustees of registered pension schemes, and non-resident companies.
    • Taxpayers with a Power of Attorney.
  • Non-UK resident foreign entertainers and sportspeople 1 with no other qualifying UK income.