MTD for Income Tax: What accountants and clients need to do

Making Tax Digital (MTD) is part of the government’s ongoing plan to ensure all taxpayers use software for accounting and reporting that relates to tax.

MTD for Income Tax follows the successful introduction of MTD for VAT in April 2019 and is the next step in the Making Tax Digital roadmap.

In this article, we’ve gathered details from what’s been announced so far by the Government and from the MTD for Income Tax pilot scheme.

Read on to find out what the team at your accountancy practice needs to know about Making Tax Digital for Income Tax and how you can support your clients in the best way.

Here’s what we cover:

Making Tax Digital for Income Tax: An overview

The government has said MTD for Income Tax will be mandated in at least two phases.

It will affect sole traders and landlords (or individuals who are both) that have a total self-employment income above £50,000 from April 2026, and those with an income above £30,000 from April 2027.

The 2024 Autumn Budget from the Labour Government also suggested an extension to this to a £20,000 threshold but it hasn’t confirmed the expected start date, which is expected to be before the end of its term, in 2029.

As happened with MTD for VAT, clients will turn to accountants for advice and guidance.

More than this, the government is again likely to rely at least partially on accountants to educate their clients about the requirements.

Making Tax Digital for Income Tax provides opportunities:

• Clients can modernise their accounting processes, to get the benefits of reduced admin and a closer, more active relationship with their accountant.
• Accountants have an opportunity to grow their service offerings via increased client touchpoints through quarterly updates, final declarations and tax returns—not to mention initial guidance on signing up, adjusting admin processes, and helping with software choices.

Although 2026 feels a long time away, if your practice has  income tax clients that fall under the scope of MTD for Income Tax, you need to start planning today.

What is the MTD for Income Tax digital start date for my client’s business?

Most businesses within the scope will be required to follow MTD for Income Tax rules in their first full accounting period starting on or after 6 April 2026, if their self-employment yearly gross income is above £50,000, or 6 April 2027 it it’s above £30,000.

Their first day under MTD for Income Tax will be known as the digital start date.

If a client has several businesses with different accounting start and end dates, they may find themselves with several different digital start dates to contend with.

As such, you may wish to help your clients align their accounting periods in advance of MTD for Income Tax, as the basis period reform transition completed in the 2023/24 tax year.

All sole traders or partnership basis periods must now align with the tax year (6 April to 5 April), significantly simplifying MTD for Income Tax accounting.

Notably, landlords within scope of MTD for Income Tax will always have digital start dates of 6 April 2026 and 2027 depending on their earnings.

For accounting periods prior to their digital start date, those within scope will continue to use the Self Assessment system for the business.

In other words, even after signing up for MTD for Income Tax, your clients will still need to submit a Self Assessment return for the 2024/25 tax year by 31 January 2026, or 30 December 2025 if they want HMRC to collect taxes due from wages and pensions via PAYE (although if they’ve already signed up for the MTD for Income Tax pilot, this will not be required).

Self Assessment will still be required for individuals outside of the scope of MTD for Income Tax, and for other types of declarations for some of those within scope—for example, for claiming certain tax reliefs of benefits, or making charity donations outside of salaried employment.

Which clients will be affected by MTD for Income Tax—and how?

In the respective phases, the majority of businesses and landlords with business or property income above £50,000 (from April 2026) and £30,000 (from April 2027) will be required to sign up for MTD for Income Tax, and then use functional compatible software for their income tax accounting for the first full accounting period starting on or after 6 April that year.

MTD for Income Tax will affect those who would normally declare more than £50,000/£30,000 in the self-employment or property boxes of the Self Assessment tax return.

To fall under the MTD for Income Tax scope, all of the £50,000/£30,000+ income will have to come from either self-employed businesses or property rents or a combination of both.

For example, should one of your clients have just £49,000 from property rental to declare for income tax, and £2,000 from savings interest income, that won’t require them to sign up for MTD for Income Tax.

What are MTD for Income Tax accounting quarterly updates and final declaration?

For those signed up to MTD for Income Tax, there will no longer be a need to send a Self Assessment tax return with regard to income for the tax years occurring after their digital start date.

Instead, periodic updates will be made to HMRC using functional compatible software, as follows:

Quarterly updates:

• Defined as: “An electronic submission of summary totals for specified categories from the digital records of each business on a quarterly basis (obligation period) from the software to HMRC.”
• Updates can be submitted at any time, however, to close the obligation periods, an update must be submitted between 10 days before the quarter end (if all the information is known) and up to one month after the quarter end date.
• The update doesn’t need to include a statement that the data is complete and accurate —no tax is paid at this point.
• HMRC returns a calculation of the estimated tax liability based on the information sent. This should be discussed with clients, with potential inaccuracies notified (such as pending later adjustments).
• Amendments to previously submitted updates can be made by resending the update for that period in the following period.
• Filing deadlines for quarterly updates are typically one month after the quarter-end (for example, 7 August for the first quarter ending 5 July)

A final declaration (crystallisation):

• A separate Business Source Adjustable Summary (BSAS) needs to be generated for each business for each client. Property is a separate business to self-employment. 
• The BSAS will be generated by the MTD for Income Tax software retrieving the totals from the final quarterly update submission from HMRC systems.
• A BSAS is required for each client’s different businesses.
• Any adjustments can then be made, including disallowing expenditure that can’t be claimed for income tax purposes. However, if a correction is needed to the digital records, this must be reflected in the same software as the digital records are stored in.
• The final declaration is to be completed and submitted at the end of the tax period or any point after this date and up to the following 31 January.
• Process to confirm the taxable profit or allowable loss for any one source of business, or combined property income, is accurate.
• After all business level adjustments have been made, a separate final declaration is needed for each client. This will include any adjustments applicable to the client as an individual and not linked to their businesses, for example other sources of income such as from dividends.
• The submission is a declaration that the information is complete and correct.
• Once submitted, HMRC returns a tax calculation.

It effectively replaces the SA100 tax return. Additionally:

• 31 January continues to be the deadline for filing.
• Any income tax liability must also be paid by 31 January.
• HMRC will provide a submission interface to allow filing without the need for software.
• If any information that needs to be included in the final declaration isn’t supported via software submission, then the client will also need to complete a Self Assessment tax return.

What information will clients submit for MTD for Income Tax?

The following are non-exhaustive lists and subject to change and confirmation by HMRC.

For a self-employment business, the data required is likely to include:

• Business income (e.g. turnover)
• Business expenses (total and disallowable by type of expense, such as travel costs)
• Tax allowances for vehicles and equipment (e.g. capital allowances)
• Adjustments (e.g. basis adjustment)
• Balancing charges
• Goods and services for client’s own use.

For a property business, the data required is likely to include the following:

• UK and foreign property business income
• UK and foreign property business expenses (e.g. premises running costs)
• Allowances for property (e.g. annual investment allowance)
• Adjustments on property letting (e.g. loss brought forward)
• Balancing charges.

For the final declaration, the individual is likely to be required to include the following among other things:

• Total UK dividend income for a tax year
• Taxed UK savings interest
• Untaxed UK savings interest
• Other income sources
• Any claims or elections.

Can clients opt out of MTD for Income Tax?

As with MTD for VAT, it won’t be possible for most clients to opt out of MTD for Income Tax if they fall within its scope.

However, if they joined voluntarily in the public beta, they can opt out.

And that’s also the case if they’re in specific categories that are automatically exempt, including:

• Trustees
• Personal representatives
• Foster carers
• Non-resident companies.

It’s likely that those who fall under the digital exclusion rules as defined by MTD for VAT will be able to apply to HMRC to be exempted from MTD for Income Tax.

This includes people whose disabilities mean they can’t use software, for example, for people whose remote location means internet access is impossible.

Additionally, your clients will be exempt from Making Tax Digital if their qualifying income falls below £30,000 for three consecutive tax years.

What software do clients require for MTD for Income Tax?

HMRC says free software will be made available for clients. Notably, it adds that this will be for “the simplest tax affairs”.

Existing cloud accounting software will be updated in time, although this might not necessarily be true for desktop accounting software. You or your clients may need to consult the software vendor to ensure updates and patches are installed in time.

Older software packages that are no longer supported may not be updated, so might require the client migrate their accounting to a different package.

It will be possible to use spreadsheets for MTD for Income Tax accounting through the use of either bridging software, or special spreadsheets/worksheets that facilitate digital linking with cloud services.

Remember that the digital linking rules say that copying and pasting is not allowed, and all transfer of MTD for Income Tax data must be both digital and automated.

Because of this and other issues, using a spreadsheet is unlikely to be the most user-friendly solution.

Additionally, MTD-compatible software must be able to:

• Create and store digital records
• Send quarterly updates
• Submit the final declaration
• Receive information from HMRC.

Do clients signed up for MTD for VAT need to sign up for MTD for Income Tax?

The two Making Tax Digital schemes for VAT and Income Tax operate independently, with their own sign up criteria.

It isn’t the case that MTD for Income Tax applies only to those already using MTD for VAT—although many businesses already using MTD for VAT will find themselves having to sign up for MTD for Income Tax too.

What does MTD for Income Tax means for accountants?

It’s hard to overstate the changes MTD for Income Tax will bring for you.

Here are two things to be aware of:

1. Your clients will have to use software

Your clients will be required to use compatible software to record their business and property income and expenditure and send five updates/reports every year to HMRC.

There’s likely to be automation for each of these steps, minimising the administrative impact. But your clients still need to be aware of the requirements expected of them.

This will require a substantial change in attitude from your clients in how they approach their accounting.

It’s certainly the case that the “shoebox” client who dumps receipts on their accountant’s desk in January each year will have to change their ways.

It’s your role to communicate this need for change, and to encourage it to happen.

In return, you’ re given significant privilege to guide your clients towards the best solution for their needs—and to bring positive changes to their clients’ businesses.

This presents additional opportunities.

Not partnering with a software vendor to sell solutions to your clients, for example, is to discard a potentially large income source.

Needless to say, an MTD for Income Tax-compatible cloud accounting solution that ties into your own systems is best for both you and your client.

You can offer training in the software, perhaps as part of the sales package, or as a separate service offering.

At the very least, every UK accountant will need to be proficient in the free software package the government will probably offer, because accountants will be facing client enquiries about this on a very regular basis.

2. You have the opportunity to offer additional advisory services

Although MTD for Income Tax should mean clients are more aware of their accounting, it doesn’t mean your fundamental role will change.

You’ll still be required to help your clients be compliant, and to support them with fundamentals such as making deductions and calculating a final income tax bill.

While it’s possible some small business owners may have an epiphany moment when they get to grips with accounting software and realise the power it delivers, the fundamental fact that many people hate dealing with figures and the ensuing admin burden isn’t going to change.

You have nothing to fear from technology and, in fact, lots to gain.

But this is only scratching the surface of the potential that MTD for Income Tax will deliver.

You’ll go from having a single point of contact each year to potentially having at least five situations where your clients may need help with their accounting when they make those quarterly reports and the final declaration.

These situations can be used to forge stronger relationships where you’re not viewed as just a number cruncher but more of a business partner.

Using cloud software that ties in with your clients’ accounting gives you the ability to monitor for problems or opportunities, and to provide advice based on this.

Final thoughts on MTD for Income Tax

If your practice dealt with the implementation of MTD for VAT ahead of it being mandated in April 2019, you’ll be well aware that starting early with preparations will put you and your clients in good stead.

If it didn’t, the best advice is to start now.

Look at your processes, start talking to your clients, and take the steps now to not only meet the requirements for MTD for Income Tax but to use it as an opportunity to help your practice and your clients really flourish.

Editor’s note: This article was first published in October 2020 and has been updated for relevance.