Significant changes are coming to the tax system, affecting millions of sole traders and landlords. Starting on April 6, 2026, the Making Tax Digital for Income Tax Self Assessment (MTD ITSA) initiative will be implemented for individuals whose combined gross income exceeds £50,000 annually. This new system requires taxpayers to maintain digital records and use compatible software for submitting quarterly updates and an annual final declaration to HMRC.
Overview of MTD ITSA Implementation
The transition to MTD ITSA aims to modernize the tax system and reduce the tax gap. However, it has faced criticism due to inadequate communication from HMRC, raising concerns about potential costs and time commitments for freelancers and landlords.
Who Will Be Affected?
- Sole traders and landlords earning over £50,000 in the 2024/25 tax year.
- Thresholds will change: £30,000 from April 2027 and £20,000 from April 2028.
- VAT-registered businesses have already begun using MTD.
Obligations for Sole Traders
From April 2026, compliant taxpayers will need to file quarterly digital submissions to HMRC, summarizing income and expenses for each quarter. These submissions have deadlines on the 7th of each month following the quarter’s end. While no tax payment is required during this stage, it is essential for accurate reporting.
The final declaration is due by January 31 of the following year. This will replicate the current self-assessment form but will include pre-populated data from the quarterly submissions.
Required Software for MTD Compliance
All submissions must be made using MTD-compatible software. Taxpayers can choose between two types:
- Bridging software: Facilitates data submission from spreadsheets.
- Full MTD-compatible software: Handles all accounting processes seamlessly.
There is a range of options available, both free and paid, from providers like Coconut, FreeAgent, and Xero. Many users opt for software due to its ability to streamline record-keeping and ensure audit readiness.
Readiness for the New Tax System
A survey by FreeAgent revealed a concerning lack of awareness regarding MTD; about 39% of respondents were unfamiliar with the upcoming changes. Feedback indicates that many are seeking assistance from accountants and software providers, yet nearly 60% feel under-informed about the requirements.
Penalties for Non-Compliance
Starting from April 2026, HMRC will implement a points-based penalty system for late submissions. Each late submission incurs one penalty point, with four points resulting in a £200 fine. Points will expire after 24 months if compliance is improved.
This system offers a degree of leniency for occasional errors, yet could lead to significant penalties for those who frequently miss deadlines.
Preparation for Change
Landlords and sole traders can now enroll in a pilot program through HMRC to better understand the new MTD ITSA framework. Preparing in advance will facilitate a smoother transition to the new digital tax system.
