The introduction of Making Tax Digital for Income Tax Self Assessment (MTD ITSA) represents a major shift in how self-employed individuals and landlords report their income to HMRC. If you’re a sole trader or property owner, here’s what you need to know, in plain English.
MTD ITSA is HMRC’s initiative to digitise tax reporting for sole traders, freelancers, and landlords. Instead of a single Self Assessment tax return each year, you’ll send quarterly digital updates plus a final annual summary through MTD-compatible software.
Key requirements:
MTD ITSA applies based on your combined gross annual income from sole trading and property rental. It doesn’t include income from PAYE jobs, pensions, or savings.
Rollout Timeline:
Note: If your combined income stays below £20,000, you are currently exempt under present legislation. HMRC has indicated they may extend MTD ITSA to lower income thresholds in the future, but this is the confirmed position for now.
Transitioning to digital tax doesn’t have to be overwhelming. Start with these:
What specific types of income count towards the MTD ITSA threshold?
The threshold is based on your combined gross annual income from all your sole trading activities (turnover) and all your UK and foreign property businesses (gross rental income). It does not include income from PAYE employment, pensions, dividends, or other investment income.
Can I still use spreadsheets for my records under MTD ITSA?
Yes, but only if you use bridging software to submit the data digitally to HMRC. Plain spreadsheets alone are not compliant with MTD requirements.
What MTD-compatible software do I need?
You must use software recognised by HMRC as MTD-compatible. This software enables you to digitally record income and expenses and submit quarterly updates directly to HMRC. Popular options include Xero, FreeAgent, and QuickBooks.
Will MTD for ITSA increase my admin workload or costs?
There might be initial costs for MTD-compliant software or professional support. While MTD requires more frequent submissions, many self-employed individuals find that digital record-keeping can streamline processes, improve financial oversight, and support better tax planning, potentially reducing errors and stress in the long run.
Will MTD ITSA change when my tax payments are due?
No, MTD for ITSA changes how you report your income, but not the deadlines for paying your tax. Your tax payments (including Payments on Account) will continue to be due by the existing Self Assessment deadlines (e.g., 31 January and 31 July).
What are the penalties for not complying with MTD ITSA?
HMRC is introducing a points-based penalty system for MTD for ITSA. You will accrue penalty points for each missed quarterly update or final declaration. Once a certain points threshold is reached, a financial penalty will be charged. Separate penalties also apply for late payments and for failing to keep adequate digital records or using incompatible software.
Can I be exempt from MTD for ITSA?
Most individuals meeting the income thresholds must comply. However, exemptions may apply for digital exclusion (e.g., age, disability, remote location, or religious beliefs). You must apply to HMRC for an exemption.
What happens if my income drops below the threshold after I've joined MTD ITSA?
Generally, once you are mandated into MTD ITSA, you remain within the scheme even if your income subsequently falls below the threshold. You can only leave the scheme if your qualifying income stays below the threshold for three consecutive tax years, or if HMRC explicitly instructs otherwise.
Do I need to do anything to prepare for MTD ITSA now?
Yes. Even if your requirement to join MTD is still a few years away, it's highly recommended to start keeping digital records, get familiar with MTD-compatible software, and consult an accountant. Early preparation ensures a smooth transition and better financial management.
As a landlord, when do I have to follow MTD for Self Assessment?
You might not need to do MTD for Income Tax until 2028, depending on your income. If your rental and sole trader income is under the current thresholds, you could be exempt for now.
Does MTD for ITSA apply to partnerships?
Not yet. MTD for ITSA will apply to partnerships at a later date, after it has been rolled out to individual taxpayers.
MTD ITSA is here to stay and it’s time to future-proof your tax process. By preparing now, embracing digital tools, and seeking the right advice, you can stay compliant, avoid penalties, and even simplify your financial admin.
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