Note: this post was last updated on 7th March 2025

HMRC have been working on their Making Tax Digital (MTD) program for several years. It has been implemented for VAT returns and they are looking to implement it for Income Tax Self Assessment (IT) next, with partnerships and Corporation Tax being further down the road.

The current implementation date for the first tranche of MTD for IT (this was previously called MTD for ITSA) is April 2026 – this was pushed back by 2 years in December 2022.

It is important to start thinking about whether you will be affected by MTD for IT it will affect you now, and how to prepare for it.

Does it apply to me?

If you currently have to submit a personal tax return to HMRC annually, and your turnover is at least £30,000 from either self-employment or renting properties, then the answer is most likely to be that yes, it does apply to you.

If your annual turnover (income prior to expenses) outside of PAYE exceeds £50,000 then you will have to comply with the MTD rules from April 2026. If your annual turnover is between £30,000 and £50,000 then you will need to comply from April 2027.

If your income is below £30,000, then you don’t have to comply, however I would recommend monitoring whether your annual income is going to exceed this because there will be penalties for non-compliance. It might be that you decide to comply voluntarily to avoid any risk of penalties, or for any other benefits that I discuss below.

What is changing?

Anyone within the MTD for IT scheme will need to send quarterly summaries of their business income and expenses to HMRC using software. HMRC will then provide estimated tax calculations which may help you to budget for the tax due at the end of the year.  On top of this, there will be an end of year finalisation of their tax affairs (again using software) which will effectively be the current annual self-assessment tax return.  You will therefore be reporting to HMRC five times a year instead of once a year as has been the requirement previously.

Will I incur additional expense?

If you complete the returns yourself, then the main additional expense will be your own time. I would also recommend using software (see below) which may be an additional expense.

Asking clients to accept a price increase is something that we try to avoid, however to get an accountant to submit five pieces of work to HMRC annually rather than one is obviously a lot more work. We will be in contact with all of our clients in the year prior to the MTD for IT implementation to the time to discuss these fees. We will be able to keep any increase in fees as minimal as possible if you help us work in advance to get everything in place for you.

One way to be prepared will be to start using accounting software well in advance of the changeover so that you are familiar with the workings of it. When the time to changeover to MTD comes, most accountants are likely to be extremely busy and so it will be very beneficial to you to already have everything in place.

What software should I use?

Whilst it will be possible to use spreadsheets, it looks like you will then need to have your data run through software to get the information to HMRC which is likely to be an additional cost.

It may therefore be worthwhile investing in accounting software as it can provide other benefits, many of which I have already written about here.

It may be possible to get free software to help you with MTD, although often the free software available is not as intuitive or as user friendly as the paid software. With this sort of thing, I do really think it is worth considering paying for software and it is possible to get some for under £150 annually.

At Anderson Accounts, we recommend Xero and we have a partnership with them which may enable you to get a discount on their advertised prices. We will obviously try to work with whatever software you choose to use, as long as it is compatible with the MTD system implemented by HMRC.

Additional benefits

There could be additional benefits to you for having to comply with MTD for ITSA.

The quarterly reporting get you to look at your business’ performance more regularly than you currently do which may mean you can make more immediate business decisions where you think you are underperforming or where you see opportunities for growth. 

Many people leave their tax returns until close to the deadline and under MTD you will have had to keep up with quarterly reporting over the year, meaning that all of the information to finalise your tax return should be available nice and early. Not only will this keep your accountant happy, but it will give you significant advance warning of what your tax bill will be enabling you to ensure you have funds available much in advance of the payment deadline.

As you will be reviewing your data more regularly, there is more chance you will remember what all of your transactions relate to. Under the current system, when doing a tax return, some of the transactions could be from more than 20 months ago which could mean frantically searching through piles of invoices (even if they are virtual invoices) trying to find the backup for the cost when you attempt to work out whether it is a claimable expense.

What should I do now?

The first thing is to ensure that you are not panicking about these changes. You have a lot of time to prepare now.

Please speak to your accountant about any concerns that you may have and try to do so as early as possible. The last thing any accountant will want is clients to be rushing to comply with the requirements at the last minute.

The best thing you can do now would be to start looking at accounting software if you don’t currently use it, or if you do to ensure that the developers are working on making it MTD compliant for ITSA. If you are using software then the transition will be much easier when the time comes.