The introduction of Making Tax Digital (MTD) has been one of the most significant changes to the UK tax system in recent years. Designed to modernise tax administration, MTD aims to make tax reporting more efficient and reduce errors.
While MTD for VAT has been in place since 2022 for all VAT registered businesses, MTD for Income Tax (MTD for IT) is set to affect self-employed individuals and landlords throughout Worcester and surrounding areas with a qualifying annual income over £20,000. The scheme will be phased in depending on how much an individual earns each year, details of which are contained in this blog.
The new rules may initially seem daunting for self-employed people and landlords, but complying with MTD for IT can be straightforward with the proper preparation and a simple bookkeeping process.
This blog looks at the effects of MTD for Income Tax and the self-employed and how effective bookkeeping can ease the transition.
Under MTD for IT, self-employed individuals and landlords will need to:
As the above breakdown shows, the process for calculating and submitting your Self-Assessment tax return is about to become more complicated.
The rollout of MTD for IT has been delayed several times, but in their 2024 Autumn Budget documents, the Labour Government confirmed the timeframe for rolling out MTD for IT will be as follows:
The term ‘qualifying income’ applies to gross income or turnover, i.e. income received during the tax year from self-employment, income from UK or overseas property, or both, before any expenses are deducted. It does not include other income from PAYE employment, dividends or savings; however, these items must be stated in the final declaration document.
The shift from an annual tax return to quarterly updates and additional submissions means an increase in administrative tasks. This will require self-employed people to stay on top of their finances throughout the year rather than scrambling to organise everything at the last minute.
With the requirement to maintain digital records and use HMRC recognised MTD-compatible software, self-employed individuals who have relied on manual bookkeeping will need to adapt to new technology.
Depending on the complexity of an individual’s income, bookkeeping and accounting software like Xero may be required. However, those with simpler bookkeeping needs can use spreadsheets to document their income and expenditure, providing they use HMRC-approved MTD for IT bridging software, which will digitally link their spreadsheet to HMRC’s MTD for IT platform.
Transitioning to MTD for IT for the self-employed doesn’t have to be overwhelming, especially if you have a reliable bookkeeping process. Here’s how good bookkeeping can help:
Regularly updating financial records ensures that quarterly updates can be submitted accurately and on time. Delays or missing data can lead to penalties or errors in tax calculations.
Accurate records minimise the risk of mistakes, which could lead to HMRC investigations or incorrect tax calculations. A robust bookkeeping system helps track every income and expense, reducing the chance of omissions.
Good bookkeeping ensures that all your financial data is already organised in a format compatible with MTD software. This makes it easy to submit your updates and reports with minimal effort.
Beyond compliance, maintaining regular and accurate records helps self-employed individuals better understand their financial position. This can be invaluable for budgeting, forecasting, and making business decisions.
MTD for Income Tax and the self-employed represents a significant change for self-employed individuals, but it also offers an opportunity to improve financial management and reduce errors in tax reporting. Adopting effective bookkeeping practices can ensure compliance with the new rules and avoid unnecessary stress and penalties.
Preparing early, choosing the right software, and staying organised are key to a smooth transition to MTD for IT.
If you’d like to learn more about MTD for Income Tax and the self-employed, please get in touch. We would be happy to explain what you need to do and how we can help.
