In response to the ongoing economic challenges, In December 2022, the UK government made an announcement regarding a significant change to the rollout of Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA).
In this guide, we’ll be explaining all you need to know about the update and what it means for you.
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MTD for ITSA Implementation Timeline Extended by Two Years
Previously, individuals responsible for submitting their Self-Assessment Tax returns were anticipated to transition to the MTD service starting in April 2024, provided they had earnings exceeding £10,000 from self-employment in a given tax year. However, this mandatory transition will now not take effect until April 2026.
This extension provides self-employed individuals, including landlords, with a more generous timeframe to prepare for the shift to MTD for ITSA. Below, you’ll find a concise overview of the latest developments regarding MTD and other noteworthy adjustments prompted by this postponement.
MTD for ITSA Explained
Making Tax Digital (MTD) represents the government’s initiative aimed at transitioning self-employed individuals and small businesses away from traditional paper-based tax returns. The primary goal is to enhance the efficiency of the Self-Assessment Tax system by shifting to a digital platform accessible online.
MTD for VAT was introduced in stages, commencing in 2019 and eventually mandating all VAT-registered businesses to electronically submit their VAT returns by 2022.
The rollout of MTD for Income Tax was originally scheduled for this year but was deferred to 2024 due to disruptions caused by the COVID-19 pandemic. Furthermore, it has now been postponed again, with implementation slated for 2026.
Under the MTD framework, rather than filing an annual Self-Assessment Tax return, businesses are required to provide quarterly updates via compatible software. This transition allows for the calculation of estimated tax liabilities ahead of the tax year’s end, facilitating more accurate income reporting and proactive tax planning.
The final tax bill, as opposed to estimates, will be received after submitting a conclusive report by the familiar 31st January deadline following the relevant tax year (this deadline remains unchanged).
The government envisions that this approach will serve to reduce instances of both fraud and inadvertent errors, ultimately boosting revenue collection for HMRC while streamlining business operations for all participants utilising MTD.
What to Know About Income Reporting Thresholds
Notably, the deadline for the implementation of MTD for ITSA has been extended by a duration of two years. Additionally, the government has introduced adjustments to the income thresholds necessitating digital reporting via MTD.
Commencing in April 2026, the requirement to register for and employ Making Tax Digital will be applicable to individuals with annual earnings exceeding £50,000. Those falling below this income level will not be compelled to engage in quarterly reporting for their Self-Assessment returns.
Moving forward to April 2027, individuals with incomes ranging from £30,000 to £50,000 annually will be mandated to embrace the digital platform for reporting.
For those earning less than £30,000 a year, no specific deadline currently exists. The government intends to conduct further evaluations to address the unique requirements of smaller businesses within this income bracket.
It’s worth noting that individuals have the option to voluntarily join Making Tax Digital before the mandated rollout date if they wish. For UK residents who choose to register before April 6th, 2025, both domestic and foreign earnings must be declared. However, individuals residing abroad will only need to report earnings earned within the UK.
The delay in implementation and the revision of income thresholds represent positive developments for many self-employed individuals. The phased rollout will impact fewer taxpayers at each stage, affording them additional time to ensure their tax matters are in proper order.
ITSA for General Partnerships
General partnerships, where two or more individuals jointly operate a business and share both profits and liabilities, were originally slated to commence submitting reports through MTD for ITSA in April 2025. However, this implementation has been placed on hold, and no specific deadline has been established for general partnerships to transition to MTD.
However, non-general partnerships, which involve a corporate partner alongside individual partners, as well as limited liability partnerships, were excluded from the initial deadline. It is likely that these exclusions will persist when the government ultimately announces a revised timeline.
In the event that the implementation date extends beyond 2027, self-employed individuals may explore the possibility of avoiding earlier MTD requirements by converting to a general partnership, potentially with a family member as a partner, such as a spouse or another relative.
Regarding Making Tax Digital for Corporation Tax, there is presently no available information. Although a consultation on this matter concluded in 2021, it is improbable that this will be mandated before 2026.
Prepare for Making Tax Digital
At present, Making Tax Digital is primarily mandatory for VAT reporting, with this status anticipated for up to an additional two years. Nonetheless, it is advisable to consider early registration before the 2026 MTD for ITSA deadline to facilitate a stress-free setup.
It is crucial to note that, while the postponement means that a new system of Self-Assessment Tax late penalties will not take effect until 2026, VAT late penalties were already enforced starting in January 2023 and remain unaffected by the ITSA delays.
Furthermore, the basis period reforms remain unaffected. These reforms aim to align accounting periods with the tax year, spanning from April 6th to April 5th, and will continue as planned for the year 2023-2024. These changes will impact businesses with varying accounting periods, often due to seasonal fluctuations or alternative tax management strategies.
For self-employed individuals, landlords, or small business owners affected by the information presented in this article, seeking professional assistance is recommended.
Making Tax Digital with Ryans
Our team of expert accountants at Ryans in Bolton is well-versed in tax management and cloud accounting software and are ready to assist you in navigating the transition to Making Tax Digital.