The ultimate MTD Income Tax guide for sole traders

If you are a contractor, self-employed or running your own limited company, MTD, short for ‘Making Tax Digital’ is going to become more and more important in the coming months. In this article, you’ll learn what it is, how it will affect you and how to register for MTD. 

What is MTD?

MTD is HMRC’s initiative for small businesses and self-employed people to keep digital records and report quarterly Income Tax updates. By introducing MTD, HMRC aims to make it easier for people to be compliant with their taxes.

Does MTD apply to me? MTD deadlines from HMRC

  • For VAT-registered businesses with a taxable income over the VAT threshold of £85,000, MTD for VAT begun on 1 April 2019.
  • VAT-registered businesses with a taxable income below £85,000 need to comply with MTD for VAT from April 2022. 
  • Self Assessment ‘taxpayers’ for business or property income of more than £10,000 a year need to comply with MTD for Income Tax from April 2023. 

In other words, most sole traders will need to follow MTD for Income Tax rules starting with the tax year 2023/24, and all subsequent trading years. This will involve:

  1. Digital record keeping
  2. Submitting quarterly updates about your business income and expenses
  3. An End of Period Statement
  4. A Final Declaration. 

Let’s dive into each step in a bit more detail:

1. Digital record-keeping

To comply with MTD for Income Tax, you will to need to keep your business financial records in digital format. This will likely include information about all sales invoices / rental agreements, purchase invoices, and other income and expenses.

2. Quarterly updates

Although submitting returns every three months may seem like an extra headache, choosing a suitable accounting software will automate the admin for you – and you’ll find yourself spending less time on your tax returns than before. More on this below.

3. End of Period Statement (EOPS)

At the end of your business tax year, you will need to submit an EOPS. This involves informing HMRC of your final income and expenses, and is similar to the details needed for the SA103 and SA105 forms. You will need to submit a separate EOPS for each business you operate as well as for income you receive from property rental.

4. Final declaration

At the end of your accounting period, you’ll need to use your MTD-compatible accounting software to send HMRC a final declaration. This will involve confirming the details of all the income, expenses and allowances you previously submitted. Next, you must legally declare that you have provided HMRC with all the details requested, and that you agree with its tax calculation.

The Final Declaration applies to individuals, rather than to each business owned and property income, meaning you only need to submit one each year.

Important: Once you have signed up for MTD for Income Tax, you must still submit your last Self Assessment tax return for the 2022/23 tax year by 31 January 2024.

Key dates for MTD Income Tax

If your business accounting period aligns with the tax year, here are the dates you need to work towards:

  • First report: June/July 2023.
  • Second report: Sept/Oct 2023.
  • Third report: Dec 2023/Jan 2024.
  • Fourth report: March/April 2024
  • Final declaration: January 2024 for first year

MTD penalties

  • There won’t be late filing penalties for at least the first year of the transition to MTD Income Tax. After that penalties will be instated.
  • Penalties apply for errors in returns or documents.
  • Late payment interest applies.

How to register for MTD Income Tax

To sign up, you will need your:

  • Government Gateway user ID and password
  • National Insurance number
  • business start dates and registered addresses
  • business accounting year information

You can sign up for MTD Income Tax here.

Make sure you have accounting software that’s compatible with Making Tax Digital for Income Tax before you sign up. The Countingup business account with free inbuilt accounting software makes MTD simple. The app automates bookkeeping admin to save small business owners time and money. We will be releasing our MTD update this year so that you’ll have everything you need to keep onto of your business finances.