Making Tax Digital for ITSA

by | Jan 10, 2023 | Accounts Software, Bookkeeping, Personal Tax, Self-Assessment Tax

HMRC recently announced that Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) would be delayed for an additional two years, until April 2026. It is hoped that the delay will give small businesses and individuals more time to prepare during an already challenging period.

Despite the delay, if you think that you will eventually need to be MTD compliant then its worth taking the time to ensure that you understand the requirements and are well prepared ahead of the official deadline.


What is Making Tax Digital  

MTD is a transformative digital initiative from the government which aims to simplify the processes by which individuals and businesses manage their tax affairs and file their tax returns.

The programme uses digital record-keeping and tax data-reporting software and apps to more effectively manage tax reporting and minimise tax errors, which it is estimated to cost the government billions of pounds a year.

The introduction of the programme began in 2019 and has slowly been rolling out across various areas of tax reporting.  The most recent changes applied to VAT registered businesses from April 2022, with Income Tax Self-Assessment next on the agenda for 2026, and Corporation Tax compliance at some point after that.


Who will be affected by the MTD ITSA changes?

If you currently file a self-assessment income tax return and have business and/or property income of more than £50,000 per year, then you will be affected by the MTD ITSA changes when they come into force.

In certain cases, it may be possible to apply for a MTD ITSA exemption if it’s not practical for you to use software to keep digital records or submit them to HMRC digitally. This could be because of your age, disability, location (i.e. poor broadband connection) or another justifiable reason.


When are the MTD ITSA changes coming?

The timeline for the MTD ITSA changes will run as follows:

  • April 2026 – Individuals, businesses, and landlords with income over £50k will need to comply with MTD ITSA
  • April 2027 – Individuals, businesses, and landlords with income over £30k will need to comply with MTD ITSA

While the dates above indicate final the deadline for MTD ITSA compliance, it is also possible to sign up for MTD for ITSA voluntarily in advance.


The benefits of signing up early to MTD for ITSA

While the upcoming ITSA changes may feel overwhelming, there are various benefits for anyone who signs up to the scheme early.

  • Get a head start with the new system before it becomes a legal obligation – all businesses will need to maintain digital records in the future anyway
  • Resolve any problems you may face with the new system ahead of the April 2026 deadline
  • Benefit from real-time reporting of your expenses and in turn gain a better handle on your cash flow – allowing you to make better informed business decisions
  • Reduce your risk of mistakes by using MTD software which in turn saves time on errors which would have needed to be corrected in future
  • Prioritise you time on other key business activities, with the confidence that your business finances are more efficiently maintained

Your MTD ITSA responsibilities

Once you have signed up to MTD for ITSA there are number of things you must do and most importantly, you will need to keep detailed, regularly updated digital records for all your business income and expenses.

This must be completed using MTD-compatible third-party software which is also then used to report your tax data to HMRC every three months. The GOV.UK website lists third-party software that is compatible with Making Tax Digital for Income Tax. Even if you have software which you suspect is compatible, you should double check this and if you have been using a spreadsheet-based system, this definitely won’t be suitable, and you will need to find appropriate ‘bridging software’ (which is also listed by HMRC)

The quarterly summary reports which are generated by the software must be sent to HMRC, but they will also show how much tax you owe based on the information provided and this will help to budget for your end of year tax bill.

At the end of the tax year, you will need to electronically submit an EOPS (end of period statement) to HMRC, confirming that your figures are accurate, with any accounting adjustments made. You will also need to make a final declaration and pay your Income Tax bill by 31 January of the following year.

In the meantime, while you are not yet signed up to MTD ITSA, you will still need to submit two payments per year as usual.


Making Tax Digital Late Submission Penalties

In an effort to make the penalties for late submission and late payment fairer across all taxes, and as part of the MTD programme, the Government is introducing a new penalty points system.

From the perspective of MTD ITSA customers with business or property income over £50,000 per year, the changes will apply from the tax year beginning 6 April 2026. ITSA customers with business or property income over £30,000 will be affected by the new system from 6 April 2027. (A date has yet to be set for general partnerships, following postponement of the April 2025 deadline)

The new MTD penalty system operates by allocating points for late submission. For each missed deadline, one point is allocated and on reaching a certain threshold, a £200 fine will be issued. The thresholds are determined by submission frequency, with annual submissions attracting two points, quarterly submissions attracting four points and monthly submissions attracting five points.

If an individual continues to miss submission deadlines after reaching the points threshold (and a penalty has been charged) they will be subject to a further fixed penalty for each missed obligation.

Penalties will not be charged, or points recorded, where the taxpayer has a genuine excuse for not meeting the submission deadline. Additionally, any accrued points expire after 24 months where the taxpayer remains below the points threshold.


Further Guidance on MTD for ITSA

The GOV.UK website provides a range of supporting HMRC guidance on Making Tax Digital for ITSA, including:

Alternatively, feel free to call the Kingston Burrowes team for further advice regarding how you can prepare for the April 2026 MTD ITSA changes. We have extensive experience helping small businesses and individuals to identify the right accounting software for their needs and to make the transition from their existing systems.


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