Strategy, Legal & Operations

Making Tax Digital: Why MTD for Income Tax will make life easier for your business

Dealing with new legislation can be challenging. Here, we cover how MTD for Income Tax will help your business and improve how you do things.

Making Tax Digital (MTD) for Income Tax is a new tax system that will be launched across two phases, in April 2026 and April 2027, although it’s possible to sign up to a pilot scheme right now.

It affects sole traders and/or landlords that have income over £50,000 in the first phase, and over £30,000 in the second phase.

The new rules mean you’ll be required to manage your taxes by using software for your accounting.

Across each year, you’ll need to provide four quarterly reports, plus an end of period statement and then a final declaration by 31 January.

This might sound like a lot of additional work but that’s where the software will come into play.

Most tasks required to complete the various steps will be automated, and the data should be there ready and waiting when the time comes.

MTD for Income Tax offers a once-in-a-lifetime opportunity for you to overhaul your accounting admin tasks by choosing the best cloud accounting software, and really getting the most out of it.

This can mean less admin, and therefore more time to invest in doing the things you love – such as developing your products and services, adding value for your customers and clients, and aiming for growth in your business.

In this article, we feature a series of ways that MTD for Income Tax can make life easier in your business.

Here’s what we cover:

Always know your financial position

Know how much you owe

Fewer mistakes and late submissions

Hooking in with your accountant

Bringing new technology into your business

The threshold of a new world

A guide to Making Tax Digital for Income Tax

Need help to get your business ready for Making Tax Digital? Download this free guide to learn about MTD for Income Tax and get prepared now.

Download your free guide

Making Tax Digital for Income Tax can be so beneficial for your business.

Yes, you’re required to pay more attention to your accounting that you might be used to.

But this means that you’re much more likely to know your financial position at any given moment. You’ll know about the cash flowing in, the cash flowing out, and how much money you have to operate with.

Compare that to how some businesses are run, where the owner might only get this kind of insight once a year when they visit their accountant at tax time.

If you use mobile accounting apps then you can get this kind of insight at any time of the day.

You can always be connected to your business finances, reducing the number of times that you need to sit down at a desk to find out this kind of thing.

And, of course, the whole point of MTD for Income Tax is that you’re able to keep on top of your tax liability across the year.

In short, it means you have the best possible idea of how much you’re likely to owe.

This benefits cash flow.

You might be used to setting aside a quarter or a third of your income for tax purposes. This is often more than enough to cover January’s tax bill, but the idea is that saving too much is better than saving too little.

But now you can set aside how much you’re actually likely to owe, based on the data shown in your quarterly reports.

This amount will still be an estimate, of course, and because of the potential need to make adjustments and reliefs in January it continues to be a good idea to be generous in your estimate.

But you can certainly avoid setting aside far too much each year.

As with any software, what you see in your accounting software for the quarterly reports is only going to be as accurate as the data you input. But if you get the simple steps of MTD for Income Tax correct, such as the quarterly reports, then the rest of your accounting should follow suit.

Making mistakes with your accounting can not only give you a false idea of your cash flow position. It can attract penalties from HMRC.

Similarly, late submissions can also attract penalties.

To accompany MTD for VAT and MTD for Income Tax, a new points-based penalty system has been introduced by HMRC that will mean automatic £200 fines are applied if a certain number of points is exceeded in a time frame.

This came into force on 1 January 2023 for VAT customers, and will apply as soon as taxpayers become mandated for Income Tax in either 2026 or 2027, depending on their income.

But fines and points are just one of your worries.

Accounting mistakes also eat your time when they must be corrected. And you don’t want  yet more admin tasks on top of what you’re already doing.

MTD for Income Tax makes it harder to make mistakes and easier to spot any you make because of the requirement to send quarterly updates to HMRC. Essentially, you’re checking your accounting data every three months.

Perhaps surprisingly, there’s no legal requirement for the quarterly reports to be correct. But it’s obviously a good idea to be as accurate as you can be.

And while your accounting software can only be as accurate as data you input, MTD-compatible accounting software will automate much of the work required to create the quarterly reports. In many cases, it’ll simply be a matter of checking the report and then opting to submit it.

Good-quality MTD for Income Tax software will be cloud-enabled and will offer an option to connect to your accountant’s systems.

This means the accountant can see the same financial data as you do, so can help with the periodic reporting requirements of MTD.

And depending on your needs, this insight means they can evolve into more of a business partner. After all, they have the knowledge to examine financial data and vast amounts of experience in businesses of all kinds thanks to their work with other clients. They’re able to spot any problems that might arise long before they actually become a problem. Similarly, they’re able to spot opportunities.

If nothing else, connecting your accounting system to theirs makes it much easier each January when you need to make the final declaration(s) for your business(es) or property income, and pay your tax. There’s less need to visit their office with a big box full of paperwork, for example.

Choosing good-quality MTD for Income Tax-compatible software is an opportunity to get the most from technology for the benefit of your business.

It would certainly be a mistake to assume that all accounting software solutions are essentially the same. In fact, being able to handle your accounting is just the very basic level for the best accounting software.

Key developments in recent years include artificial intelligence in the form of machine learning. This can make bank reconciliation much quicker, for example, by automatically matching incoming payments against invoices. Similarly, taking a snapshot of a receipt using your phone can mean the data is captured and inserted automatically into your accounting.

All this means you save time that can be used for other tasks and opportunities – freeing up your staff, or getting your weekends back. It means more time to spend with your family, or time to delight your customers and grow your business, that’s not all.

Adapting to MTD for Income Tax provides a chance to truly get to grips with your business accounting.

It’d be wrong to assume this means spending more time on the task. Quite the opposite is true, in fact – if you’re really bossing your business accounting then you should find the time you spend doing it is reduced.

At the same time, the amount of vital information you learn about your business will increase. This allows you to be more agile in your decision making. This in turn means that more opportunities can be harnessed, which leads to a stronger business and faster growth.

Editor’s note: This article was first published in September 2021 and has been updated for relevance, following the delay to Making Tax Digital for Income Tax.

A guide to Making Tax Digital for Income Tax

Need help to get your business ready for Making Tax Digital? Download this free guide to learn about MTD for Income Tax and get prepared now.

Download your free guide