Tradespeople: Get ready for Digital Tax

What is Making Tax Digital for ITSA?

Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) is a government initiative aimed at modernising the tax system by requiring sole traders and landlords to maintain digital records and submit tax information to HMRC using MTD-compatible software.

This replaces the current annual Self Assessment tax return for those who fall under the rules.

The key changes for sole traders are:

• Digital Record Keeping: You must keep all your business income and expenditure records digitally, using MTD-compatible software. Paper records and manual spreadsheets alone will no longer meet the legal requirements.
• Quarterly Updates: Instead of one annual return, you'll need to send a summary of your business's income and expenses to HMRC every three months.
• End of Period Statement (EOPS) and Final Declaration: You'll submit an EOPS after the end of the tax year, and a Final Declaration (by January 31st) to pull all your income and allowances together, similar to the current Self Assessment, but pre-populated with your quarterly data.

When Does This Affect You?

The introduction of MTD for ITSA is being phased in based on your total annual gross income from self-employment and/or property:

• Annual Gross Income: Over £50,000, mandatory start date: April 2026 relating to the 2024/25 tax year.
• Annual Gross Income: Over £30,000, mandatory start date: April 2027 relating to the 2025/26 tax year.
• Annual Gross Income: Over £20,000, mandatory start date: April 2028 relating to the 2026/27 tax year.

Export to sheets

If your qualifying income is below £20,000, you are currently not required to join MTD for ITSA, but you may choose to do so voluntarily. HMRC will notify those who need to comply following the submission of their relevant tax returns.

What does it mean for deadlines?

While the final payment deadline remains January 31st following the end of the tax year, the reporting requirements are changing dramatically.

You'll have four quarterly submission deadlines per tax year, due on the 7th of the month after the quarter ends. For a standard tax year (April 6th to April 5th), the deadlines will be approximately:

• 7th August
• 7th November
• 7th February
• 7th May

These quarterly updates are summaries of your income and expenses; no tax is calculated or paid at this stage. HMRC will use this data to provide you with an estimated tax bill, which they say should help sole traders budget and avoid a single large bill shock in January.

Your action checklist to get ready

The transition to MTD is a significant change, and BIFIS advises sole traders to start preparing now, especially those with income over £50,000:

1. Assess Your Income: Check your gross income from self-employment and property for the 2024/25 tax year to determine your mandatory start date.
2. Choose Compatible Software: Research and select MTD-compatible accounting software. This is a non-negotiable requirement. While some "bridging software" can link spreadsheets to HMRC's system, a full accounting package may offer greater ease of use and error reduction.
3. Digitalise Records: Begin keeping all your income and expenses digitally. This means getting into the habit of logging transactions immediately using your chosen software.
4. Consider a Pilot: HMRC offers a voluntary pilot scheme. Joining this can be an excellent way to test the new process and software before the mandatory deadline.

Don't wait! MTD for ITSA is the future of sole trader tax. Early preparation will ensure a smooth transition and help you benefit from the promised advantage of a clearer, real-time view of your tax liabilities.

Other resources:

• HMRC Making Tax Digital Campaign
• Choose the right software
• Benefits of Digital Tax