You may have heard of Making Tax Digital.
You might have also have heard that it means the end of Self Assessment.
As usual, the truth is a little more nuanced. But it isn’t complicated.
The facts are that, in April 2024, sole traders earning over £10,000 will have to switch to using Making Tax Digital (MTD) for their income tax. They’ll stop using traditional tax returns for their self-employment income.
However, those earning under the £10,000 threshold will continue to use the Self Assessment system.
Let’s take a look at the details, and at what’s changing.
Here’s what we cover in this article:
How Self Assessment works now
The Self Assessment system is built around a yearly tax return, by which you inform HMRC of your income, business-related allowable expenses and any adjustments or allowances required.
Using these figures, you can then arrive at your final tax and National Insurance bill.
Some people fill in their own Self Assessment form, while others have their accountant do it on their behalf.
Most people submit their Self Assessment online, in which case they have to submit it before midnight on 31 January following the end of the tax year.
But it’s also possible to fill in the paper SA100 and post it to HMRC, in which case it must arrive no later than 31 October following the end of the tax year.
Any outstanding tax and National Insurance amounts must be paid by January too.
If you pay tax on account, at this point you’ll also make your first payment on account for the most recent tax year (with the second due by 31 July).
How things will change with Making Tax Digital for Income Tax
If you earn over £10,000 as a sole trader or from rental income as a landlord, you’ll need to start following the rules of Making Tax Digital for Income Tax (also known as Making Tax Digital for Income Tax Self Assessment, or MTD for Income Tax, or MTD for ITSA) from April 2024.
General partnerships with income over £10,000 will need to start following the rules as of April 2025.
What does this mean?
Well, it means you’ll no longer need to fill in a Self Assessment return, at least not for your self-employment or rental income.
(It’s possible you may need to declare other income, such as savings interest, in which case you’ll need to complete a Self Assessment return in addition to following the MTD rules.)
Put simply, MTD for Income Tax means you’ll need to use software for your accounting relating to income tax, and to digitally keep your accounting records relating to income tax.
There are three further key requirements that you or your accountant must do:
- Provide periodic updates to HMRC, at least quarterly (that is, every three months). This must be via software. You’ll need to provide separate updates for each business you run (if more than one), as well as a separate one for all rental income you receive.
- Provide an End of Period Statement (EOPS) for each business and for rental income, too. This must be submitted no later than 31 January following the end of the tax year and summarises the income, allowances and adjustments for each business and rental income.
- Provide a final declaration, no later than 31 January following the end of the tax year. Unlike the periodic updates and the EOPS, the final declaration refers to your total income from self-employment across all your businesses. It should also include any rental income. Similar to the Self Assessment tax return, the final declaration is how you calculate your income tax and National Insurance contributions for the tax year just ended.
And that’s all that’s new.
It’s really important to know that MTD for Income Tax doesn’t change the rules of income tax.
That is to say, the rules around allowable expenses, personal tax allowances, National Insurance contributions, and so on, all remain exactly the same.
Similarly, you’ll continue to pay your tax and National Insurance in the same way, and the bill shouldn’t be any different had you done it via the Self Assessment system (assuming your accounting is correct).
All that changes with MTD for Income Tax are the requirements and processes around reporting all the information to HMRC.
Why Making Tax Digital can make life easier
Despite the initial challenge of these changes to processes, MTD for Income Tax isn’t that difficult.
The goal is to give you better insight into your taxes. And by extension, you get much better visibility into your business finances.
This includes your all-important cash flow.
Many of the additional processes required for MTD for Income Tax will be automated, provided you use good-quality, HMRC-recognised accounting software.
In other words, the periodic updates you must submit at least quarterly will not be a hassle. It’ll simply be a matter of clicking or tapping a button to prepare the report, then checking it briefly, before sending it off.
You should know there’s no legal requirement for the periodic updates to even be accurate—although it’s best if they are.
For the EOPS and final declaration, you’ll again click a button to prepare a report, then check the details to ensure everything is correct, before submitting.
There will be no hassle trying to get all the information together, provided you’ve made good use of your accounting software.
If you use an accountant, they can help with the periodic updates, EOPS and final declaration, just as they provide support with Self Assessment tax returns.
The level of financial insight provided by MTD for Income Tax can make planning for growth so much easier.
Want to save for some capital expenditure, such as getting a new van? This should become a lot more straightforward.
Similarly, it becomes a cinch to spot trends, so you can capitalise on things such as seasonal business movements.
Furthermore, because of the insight you gain into your cash flow, you can also spot problems before they arise.
Big expenditure coming soon, for which you might not have the finances in place? Now you can take remedial action before disaster strikes.
Of course, MTD for Income Tax means having a good idea throughout the year of your likely tax bill too.
Rather than setting aside a nebulous 25% to 30% of your income for the bill, you can set aside a more accurate amount.
Although until the final declaration is complete and any adjustments and allowances are accounted for, it will continue to be tricky to predict the precise amount you owe.
Self Assessment vs Making Tax Digital for Income Tax – what’s required?
For Self Assessment, the sole requirement is to complete and submit a Self Assessment tax return (and pay your tax and National Insurance bill, of course).
It’s good practice to keep accounting records, especially considering that HMRC could request to see them during an enquiry.
But how you do your accounting is up to you. You can record it using a paper notebook, or a spreadsheet, or you could use dedicated accounting software.
This all changes quite radically under MTD for Income Tax.
The core rules are that you must use software for your accounting relating to your income tax, and you must keep the accounting records digitally.
This is a point of law, and there’s no getting around it unless there’s a very good reason (e.g. you live in a remote location without an internet connection, or your religious beliefs mean you can’t use a computer).
You do have some flexibility in how you use software to keep your accounting.
It’s possible to use a spreadsheet, for example, along with bridging software that will gather together the details from the various cells on the spreadsheet and then prepare your periodic updates, EOPS, and final declaration, as each is required.
This would be legally compliant but, as you might’ve realised, it would barely be more than a makeshift solution.
Furthermore, using a spreadsheet runs the risk of breaking the rules around digital linking, which is to say, MTD requires the movement of data must be both digital and automated. Manually copying and pasting from one place to another is prohibited most of the time.
Due to issues like this, most people will simply use MTD-recognised accounting software.
Since using it encourages basic accounting practices, such as using the software to submit invoices and record payments, creating and submitting your final declaration, EOPS and final declaration will be simple.
The data will already be in the system, and up to date.
HMRC envisions that there will be free software available for basic sole traders that will help them be ready for MTD for Income Tax.
However, it’s not yet clear what form this will take, or what features it will have.
If you already have a cloud accounting software subscription, it’s very likely it will be ready for MTD for Income Tax.
And it’s unlikely you’ll have to do much more than being aware of the new MTD requirements, and ensure you submit your periodic updates, EOPS and final declaration as required.
What sole traders can do now to prepare for 2024
While the introduction of Making Tax Digital for Income Tax sounds like it’s a long way away, the reality is that it’ll be here in no time. It’s definitely worth getting prepared now.
Here are some ways you can do that.
Basis period reforms
All businesses have accounting dates, at which point they draw up their accounting, and accounting periods, which is the 12 months until that date.
This is known as the basis period.
The majority of sole traders use the tax year (6 April to 5 April) as their basis period, in which case they’re already set to go for MTD for Income Tax.
However, if you use a different basis period—such as 1 January to 31 December—you’ll need to switch to using the tax year as your basis period.
This is a legal requirement, and it runs predates the introduction of MTD for Income Tax.
The transition has to happen across the tax year 2023/24, and will mean you temporarily extend your basis period for that year to take into account the extra time until the new tax year starts in April.
Implementing these changes can be complicated, and it’s a very good idea to speak to an accountant to learn how it should be done.
Start using accounting software and keeping digital records
This is the basic legal requirement of Making Tax Digital. If you’re not doing so already, you should be looking to switch to using some kind of software for your accounting.
As mentioned earlier, this could be using a spreadsheet to create a makeshift ledger to log your incoming and outgoing.
But one thing you can’t do is keep a paper-based ledger.
Many sole traders simply rely upon accounting software. This means they can issue invoices with ease, reconcile their bank statements against their outgoings, and more. It means they have perfect visibility into their cash flow.
Accounting software also grows with your business and helps you cope with more complex finances.
Becoming VAT registered? That feature will be right there (and will ensure you’re ready for Making Tax Digital for VAT, too, if that applies to you).
Employing people and need to run a payroll? That feature can be added-in with ease, and will integrate perfectly with your existing accounting.
Above all, however, accounting software means your accounting is always kept in a legally compliant digital way—and for the required period (usually five years). You just don’t have to worry.
Whenever you spend money for your business, you need to record that information in your accounting as soon as possible.
This is a requirement for basic good accounting, but recording it digitally is a requirement of Making Tax Digital.
As they say, there’s an app for that.
AutoEntry, for example, lets you use your phone or a PC and scanner to grab an image of the receipt. The information is then automatically extracted and can be sent straight to your accounting software.
If you buy something in a shop and are handed a paper receipt, you can take a snap of it using your phone.
The information such as the retailer details, amount, date, VAT amount, and so on, will be extracted automatically.
Where to get support with the tax return changes
It’s a good idea to get help when implementing Making Tax Digital for Income Tax.
Luckily, this kind of help is available on every high street in the form of accountants and tax advisers.
These people have amazing experience of every aspect of tax and running a business, and can advise you on how to both start the MTD ball rolling in your business and then ensure you’re ready in time for the April 2024 deadline.
As mentioned earlier, you can hand off a lot of the workload around MTD to your accountant once MTD for Income Tax is up and running. But you still need to use software to keep your accounting, and keep your accounting records digitally.
In other words, you can’t just ask your accountant to take care of all of it for you and then forget about it.
But your accountant will be able to advise the best way forward, and how best you can work with them.
Contact your software vendor too. They’ll have a massive amount of experience with both tax and, unsurprisingly, accounting software.
As MTD for Income Tax approaches, many will have dedicated support where you can learn if the software you use is MTD-ready—and what you’ll have to do to make use of the MTD features.
Many will also walk you through what MTD means for you, too.
Final thoughts on the end of Self Assessment
To paraphrase Mark Twain, reports of the death of the Self Assessment tax return are perhaps premature.
It will remain a legal requirement for many following the start of Making Tax Digital for Income Tax in April 2024.
But for many of those required to switch to MTD for Income Tax, and who have no other kind of income, it won’t be required for tax years following April 2024 (although you’ll still need to submit your final Self Assessment return, for 2023/24, by 31 January after MTD for Income Tax has begun).
If you’re someone who hates poring over their Self Assessment tax return each January, the arrival of MTD for Income Tax will surely be welcome.
By creating periodic reports, and then an EOPS, you’ll find the data you require is already present and correct because you’ve been updating it across the year.
Therefore, submitting your final declaration on 31 January will be much easier compared to how things are now.
Pretty soon, the Self Assessment tax return will become a forgotten memory—while you reap the benefits of better accounting that reduces admin and frees up time to do more of what you love.
Taking care of tax if you’re self-employed
Getting your taxes right is vital. Read this guide for support with Self Assessment, and learn how Making Tax Digital will change how you manage your tax returns from April 2024.
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