As the UK government advances its initiative to digitise the tax system, it’s essential for self-employed individuals and landlords to understand the upcoming changes under Making Tax Digital for Income Tax (MTD for IT).
This guide outlines what MTD for IT entails, the implementation timelines, necessary preparations for clients, and why Xero stands out as an optimal solution for compliance.
Understanding Making Tax Digital for Income Tax
MTD for IT requires certain taxpayers to keep digital records of their income and expenses and submit updates to HMRC using MTD-compatible software. Instead of an annual tax return, taxpayers will need to send quarterly updates throughout the year, providing a snapshot of their earnings and expenses. At the end of the tax year, they will submit a final declaration, confirming their income and tax owed.
MTD for IT is a government initiative aimed at modernising the UK tax system by requiring taxpayers to maintain digital records and submit updates to HMRC using compatible software. The goal is to make tax administration more effective, efficient, and easier for taxpayers to get their tax right.
Implementation Timelines
The rollout of MTD for IT will occur in phases:
- April 2026: Sole traders and landlords with an annual gross income exceeding £50,000 will be mandated to comply.
- April 2027: The threshold lowers, requiring Sole traders and landlords with an annual gross income of £30,000 to join.
- April 2028: The threshold lowers further, requiring Sole traders and landlords with an annual gross income £20,000 to join.
Please note that the above thresholds cover total income combined, so if you earn £30,000 from your self-employment and £30,000 from property then you will be required to comply with MTD from April 2026 because your total income is above £50,000.
Steps Taxpayers Need to Take
From the date they are required to comply with MTD for IT, taxpayers must submit quarterly updates to HMRC using compatible software. We highly recommend that individuals implement the software well in advance of their first required submission. This will allow them to familiarise themselves with the system, resolve any initial challenges, and ensure they are fully confident in using the software when the time comes.
Why Choose Xero for MTD Compliance?
Xero offers a comprehensive solution tailored to meet the needs of self-employed individuals and landlords preparing for MTD for IT:
- HMRC-Recognised Software: Xero’s platform is compatible with MTD requirements, ensuring seamless submission of quarterly updates and final declarations.
- User-Friendly Interface: Designed with simplicity in mind, Xero makes it easy to track income, expenses, and manage tax obligations.
- Scalable Solutions: Whether managing a single property or multiple income streams, Xero adapts to varying business needs.
- Expert Support: As certified Xero partners, we are well-equipped to assist you in implementing the software and providing ongoing guidance to ensure you make the most of its features.
How the Orenda Collective Can Help
At The Orenda Collective, we are staying up to date with the latest MTD rules and guidance to help our clients navigate this significant transition as smoothly as possible.
After preparing clients’ 2024/25 tax returns, we will notify those that fall under MTD for IT and when they will need to comply.
We will be offering a quarterly reporting and final declaration service in place of an annual Self Assessment return, ensuring client’s obligations are fully managed. Further details will be provided to affected clients in due course.
Conclusion
The transition to Making Tax Digital for Income Tax represents a significant shift in how self-employed individuals and landlords manage their tax affairs. By understanding the requirements, preparing in advance, and leveraging software solutions like Xero, you can ensure compliance and benefit from a more streamlined, efficient tax process.
Frequently Asked Questions: MTD for Income Tax
1. Do I still need to file a Self Assessment tax return under MTD?
Not in the traditional sense. Instead of a single annual tax return, you’ll submit:
- Quarterly updates of income and expenses
- A Final Declaration that replaces the current Self Assessment return
2. How do I know if I need to comply with MTD for Income Tax?
You must comply if:
- You are self-employed and/or a landlord
- Your total gross income from these sources is over £50,000 (from April 2026), or over £30,000 (from April 2027), or over £20,000 (from April 2028)
Gross income means before expenses, and the total is combined across all qualifying income sources.
3. What if I have more than one property or business?
You will need to:
- Keep separate digital records for each source of income
- Submit separate quarterly updates for each
However, you’ll only send one Final Declaration to HMRC each tax year.
4. What happens if I don’t comply?
HMRC has confirmed that penalties will apply for failure to comply with MTD requirements once you’re mandated. There will be a points-based system for late submissions, with financial penalties triggered after reaching certain thresholds.
5. Will I need to pay tax more frequently under MTD?
No. MTD changes how you report your income, but not when tax is paid. Payment deadlines remain the same—usually 31 January and 31 July for payments on account.
6. How will The Orenda Collective support me?
We will:
- Identify if and when you need to comply with MTD
- Offer quarterly reporting and Final Declaration services
- Help set up and manage Xero
- Keep you informed about any changes in MTD legislation
7. What period of income determines whether I need to comply with MTD for the 2025/26 tax year?
HMRC will use your income reported on the 2024/25 tax return to determine if you need to comply with MTD for Income Tax from 6 April 2026.
If your total gross income from self-employment and/or property is over £50,000 in that tax year (before expenses), you’ll be mandated into MTD from April 2026.
💡 Example:
If your tax return for 2024/25 shows £30,000 from self-employment and £25,000 from rental income, your combined total is £55,000. This means you’ll fall within scope for MTD from April 2026.