Making Tax Digital for Income Tax: Frequently asked questions

Making Tax Digital for Income Tax (MTD for IT) has become mandatory for sole traders and landlords with annual self-employment or property income exceeding £50,000 for the tax year 2024–2025.

Before this, MTD for VAT began as a pilot program by HMRC to digitize tax. Now, it’s mandatory that all VAT-registered businesses must follow.

MTD for IT, which will start in April 2026, aims to change how sole traders report their income. While MTD for IT will transform the way sole traders manage their tax obligations, we will help you by answering some frequently asked questions on Making Tax Digital for Income Tax.

What are the components involved in MTD for Income Tax for sole traders?

MTD for IT involves four main components:

• Digital record-keeping

• Quarterly submissions

• End-of-period statements

• Year-end declarations

Is MTD for IT compulsory?

Yes, MTD for IT will become mandatory in phases starting from April 2026, beginning with income over £50,000 in the first phase, followed by other income brackets in the later phases. You check your eligibility here.

When and how do I register as a sole trader?

You must register as a sole trader if any of the following apply:

• Your income exceeds £1,000 in a tax year.

• You need proof of self-employment.

• You want to register as a share fisher.

• You need to register as a subcontractor under the Construction Industry Scheme (CIS).

• You intend to make voluntary Class 2 National Insurance payments.

You can register as a sole trader by signing up for self-assessment using the HMRC registration tool.

Does MTD apply for partnerships?

Partnerships can also adopt MTD for IT voluntarily, but it will become mandatory in the future. Until then, they will report their earnings annually along with other non-MTD income.

How does MTD work for jointly owned property?

In the case of jointly owned properties, only your share of qualifying income will be taken into account. For instance, two business partners jointly own a rental property that earns £30,000 annually; each partner's qualifying income would be £15,000 per year. You can read more on the official website.

How do I sign up for MTD for IT as a sole trader?

You can log in using the online service with the user ID and password you received while signing up for the self-assessment. You are expected to confirm your identity either by:

• Using an app to match you to your photo ID.

Answer questions about your information held in the system.

Can I still use a spreadsheet?

Yes, you can still use a spreadsheet for recording digital transactions. However, you will need accounting software to file the records generated by the spreadsheet. Therefore, we strongly recommend using accounting software for secure bookkeeping and a seamless filing process.

Can I volunteer for MTD for IT?

Yes, anyone can voluntarily register for MTD for IT while HMRC is still in the testing phase. However, it becomes mandatory for those who fall under the criteria mentioned by the government.

You can check the eligibility criteria here.

What are the penalties for non-compliance?

• There is no penalty for late payments for the first 15 days.

• If the payment is made between the 16th and 30th day, a 2% penalty will be charged.

• If the payment is delayed beyond the 30th day, another 2% penalty will be added to the previous amount due.

• A second late penalty is charged at 4% per annum, calculated on a daily basis on total unpaid tax incurred from the 31st day.

To understand more about the penalties, visit the official website.

Will MTD for IT change how taxes are filed?

Yes, until now, sole traders have filed taxes once a year. Under MTD for IT, they will be required to maintain digital records, submit quarterly updates, provide end-of-period statements, and complete year-end declarations.

Will there be any changes in how to pay the tax?

No, MTD for IT does not change the existing tax payment rules. Sole traders must still make their payments by the end of the tax year. The initiative focuses solely on digital record-keeping and tax filing.

Is it necessary to use software to be MTD compliant?

Yes, starting in April 2026, you must use MTD-compliant software if your revenue meets the £50,000 threshold to comply with government requirements.

How will accounting software help me with MTD?

MTD-compliant accounting software like Zoho Books helps you maintain digital records and submit quarterly filings in line with MTD requirements effectively and affordably.

What is the SA103F Report?

If your income does not exceed the £50,000 threshold for the 2024–25 tax year, you can generate the SA103F report directly from Zoho Books. This report helps you accurately calculate your self-assessment returns and submit them to HMRC online.

How do I select the right software for MTD for IT?

Before choosing the right software for MTD for IT, check to see if the software:

• Helps you keep digital records.

• Connects with your existing business bank accounts.

• Is MTD-compliant and helps you file quarterly income tax returns.

• Supports your accounting period.

Do I still need an accountant to help me file income tax returns?

Accounting software like Zoho Books has an intuitive user interface and helps you handle the accounting process without any guidance. But if your business is a little more complex, you can use accounting software and still have an accountant help you with the MTD obligations.

We also offer a practice management solution for bookkeepers and accounting firms through Zoho Practice, which seamlessly integrates with the Zoho Books accounting platform. This integration makes it easier to capture your clients’ financial insights directly within your practice dashboard and manage them efficiently from a single place. Become a partner to discover additional benefits for your company and clients.