Are you ready for UK income tax to go digital?
Higher earning landlords and sole traders will be affected from April — but many still have no idea the changes are coming
The way millions of people file their taxes in the UK is changing. Yet despite being the biggest administrative change for three decades, nearly half of those affected are still completely unaware that it is happening.
More than a decade after it was announced, Making Tax Digital for Income Tax, the government’s flagship modernisation programme, is finally on the horizon. From April 6, anyone who earned more than £50,000 in the 2024-25 tax year from self-employment or property income will need to use authorised software to keep digital records and send HM Revenue & Customs quarterly updates on their income and expenses.
While it starts with higher-earning landlords and sole traders — everyone from IT consultants and graphic designers to online vendors, personal trainers and book-keepers — the measures will affect growing numbers of people over the next three years, with people earning more than £30,000 a year brought into the reporting obligations from April 2027, and people earning more than £20,000 a year joining in April 2028.
The reforms are widely seen as the biggest change in a generation — since self-assessment was introduced in 1997. But there are lingering concerns among tax experts about how well the upcoming change has been communicated by HMRC and how well prepared affected people are.
A survey of sole traders conducted by the Association of Independent Professionals and the Self Employed (IPSE) and Sage, a provider of MTD software, late last year found that nearly 40 per cent had “never heard of” MTD and only a third had “true awareness” of what the policy was. The report also found that just one in 10 sole traders are already using cloud-based accounting software.
“Our biggest worry is that hundreds of thousands of sole traders will only find out about this whole MTD change when they come to submit their annual return,” says Josh Toovey, senior research and policy officer at IPSE.
People without accountants who complete their tax returns themselves are the most likely to be unaware of the changes or unclear about their MTD obligations, he warns.
“Raising awareness of MTD income tax has been, and continues to be, a huge challenge,” adds Stephen Relf, technical manager at the Institute of Chartered Accountants in England and Wales (ICAEW), a professional body.
HMRC has sent letters to affected taxpayers who filed their 2024-25 tax return by the end of November, asking them to sign up to MTD. A final letter from HMRC will be sent in mid-March to taxpayers who filed their 2024-25 tax return by January 31.
HMRC said: “We are writing to those who are due to join MTD in April to explain what they need to do. Thousands of sole traders and landlords are signing up every week and we urge customers to check out our guidance on gov.uk to find out more.”
However, the ICAEW warns that some taxpayers will not receive letters until April — the point at which they will need to start keeping digital accounting records. Even if they do not receive a letter, taxpayers who are required to use MTD from this year are being urged to sign up now.
In an indication that the government accepts there are likely to be teething problems as the system rolls out, HMRC has waived penalties for late submissions of quarterly reports during the 2026-27 tax year.
“This [MTD] project has had a bit of a tortured path to become a reality and the problem with that is that it has led people to the mindset that it would never happen,” says Emma Rawson, director of public policy at the Association of Taxation Technicians.
“The message we’re trying to give out to taxpayers is, it’s now time to get ready. There’s no need to panic. But it is time to do a bit of homework.”
Under the new rules, taxpayers will be required to keep digital records of self-employment and property income and expenses and submit summaries to HMRC every quarter. However, they will still need to pay any tax owed in the usual way — either by January 31, or twice a year, via the payments on account system.
Deadlines for quarterly submissions are August 7, November 7, February 7 and May 7. Individuals are also required to submit a final tax declaration by January 31 following the end of the tax year. This will replace the current annual self-assessment tax return for affected people.
You can apply for an exemption from MTD if you think you are digitally excluded — for example it is not reasonable or practical for you to use MTD-compatible software due to age, disability, remote location or religion. But you must apply to HMRC for these and other exemptions.
In order to prepare for the overhaul, HMRC urges affected taxpayers to take four key steps: work out your qualifying income; confirm you need to use MTD via the Revenue’s checking tool; get compatible software; and sign up for MTD.
This sounds relatively straightforward, but there are potential pitfalls.
Elsa Littlewood, tax partner at BDO, an accountancy firm, warns of two areas regarding qualifying income that might be confusing. First, people are eligible for MTD for income tax based on gross income (turnover) not on profits.
“If you think about property income, people often receive it through an agent, net of agency fees, so they might report their income net of the agency or other expenses, like repairs,” she says. Instead, individuals need to be “really focusing on the gross income”.
Another issue Littlewood says might catch people out and lead them wrongly to think they are not eligible for MTD this year, is if they only started receiving income from self-employment or property part way through 2024-25 or if their accounting period is longer or shorter than 12 months. HMRC’s guidance makes clear that in this scenario, individuals’ income will be adjusted to compare 12 months’ worth of income to the new £50,000 threshold.
Meanwhile, some individuals, particularly if they learn of the requirements late, could end up picking the wrong software for their needs, Toovey says.
Taxpayers reporting via MTD must choose from a government-approved list of software providers. Some providers offer a free service, however these may only be suitable for those with the most basic tax affairs. As a result, many people will need to pay for software — a condition some may not be aware of. The IPSE survey found that of sole traders aware of MTD, 45 per cent cited software cost as a key concern — it is not yet clear whether some or all of these costs will be deductible for tax purposes.
Relf of the ICAEW says that for many people it will be their first time using commercial accounting software. “There could be a steep learning curve for many people, and errors may be made. It is important that taxpayers choose software wisely or risk having to change at a later date, further complicating matters.”
Chris Norris, chief policy officer at the National Residential Landlords Association, also raises concerns about the reform coming in at the same time as several other changes affecting residential landlords this year.
“We’re a bit worried about the cumulative load and whether this will lead to people making mistakes. We’re anticipating it’s going to be a disruptive year, which could create a few problems,” he says.
Sean Hill, senior manager at Menzies, an accountancy firm, warns landlords who sell a property to be aware of different reporting requirements for paying capital gains tax. Any CGT will not be included in the MTD reporting and will instead need to be reported to HMRC separately within 60 days of the property sale having being completed.
The deadlines around quarterly reporting are a concern for some. Adrian Ashton, who works as a consultant, says he is worried that individuals would have only one month in which to report their quarterly submission after the quarter ends.
He adds that the additional burden of MTD could prove difficult for many sole traders, who are often juggling other priorities.
“I will comply with it but I think it’s going to put many businesses under a lot of pressure,” he says.
When MTD was first announced in 2015, George Osborne, the then chancellor, heralded the measure as the “death of the tax return”. According to the government, it will improve efficiency, boost economic growth and make it easier for people to complete their tax returns. Making Tax Digital for VAT has been mandatory for all VAT-registered businesses since 2022.
Craig Ogilvie, HMRC’s director of Making Tax Digital, says the new system will help reduce errors. “[It] will make it easier for sole traders and landlords to stay on top of their tax affairs and help ensure everyone pays the right amount of tax.”
Errors currently account for nearly 50 per cent of the UK’s tax gap — the shortfall between the amount of tax theoretically owed and what is actually collected. According to the latest figures, in 2023-24 this was worth £46.8bn.
But tax experts that FT Money spoke to are divided as to whether the changes will benefit taxpayers.
Some think the new system could help sole traders and landlords stay on top of their tax affairs throughout the year. “There are an awful lot of landlords who are tax compliant but leave it all to the last minute, so MTD might be quite good for them,” says Norris.
Hill agrees: “In the long run, having a system that works in the background will reduce taxpayers’ administrative burden,” giving people more time to work on their businesses.
Some sole traders who already use accountancy software report benefits from doing so and feel MTD for income tax will be a useful tool. Libby Austin, a marketing consultant, who gets access to FreeAgent as part of her Mettle NatWest business bank account, says using the software has made her tax return “very straightforward”.
“It is really efficient when you set it up and you probably have less risk of mistakes than if, for example, your formula is wrong in your spreadsheet,” she says. “It’s made my tax return very straightforward and I can do it very quickly.”
But not everyone is convinced. Mike Lewis, director at TaxWatch, a think-tank, said the new system for income is “by no means a panacea” for reducing the tax gap, particularly as it will not tackle people who do not report their income in the first place.
Others argue the costs and disruption of MTD for income tax might outweigh the benefits.
“We support digital record keeping as this should increase the likelihood of business records being kept in a timely fashion, reducing errors,” Relf of the ICAEW said. “However, we do not believe that the case has been made for quarterly updates, where the additional administrative burden and costs for taxpayers and agents will outweigh any benefits.” According to an ICAEW study, 65 per cent of those surveyed agree with him.
Seb Maley, chief executive of tax insurance provider Qdos, is among them. MTD is “seen as a bit of a pain for most people with no obvious benefits,” he says. He adds: “The general consensus is it’s more for HMRC’s benefit rather than small businesses.”
“It’s hard to see how someone with a turnover of £20,000 would benefit from MTD, but that’s coming down the track,” says Claire Roberts, tax partner at accountancy firm Moore Kingston Smith.
Nevertheless, others take the view that a change to a more digital system is long overdue and once the initial teething problems are addressed, people will get used to it.
“Nobody relishes the prospect of doing their tax return, people find it overwhelming and the thought of having to think about it five times a year rather than just once is not going to fill people with glee and happiness,” says Littlewood of BDO.
“But the fear of this is going to be far worse than the reality.”
