Making Tax Digital for the self-employed

We explore everything sole traders and the self-employed need to know about Making Tax Digital for ITSA.

MTD for The Self Employed

Making Tax Digital (MTD) rules will be extended to income tax from 6 April 2024. If you’re one of the 4.2 million taxpayers earning above £10,000 from business and property, you’ll need to sign up ahead of the deadline. Some of the self-employed people who fall within this bracket are freelancers, construction workers, side hustlers, and landlords.

While some sole traders above the VAT threshold will already be familiar with Making Tax Digital rules, others will need to get cloud-based accounting software in place so that they can comply with MTD for ITSA.

What does Making Tax Digital mean for the self-employed?

Unincorporated businesses and landlords with an overall income above £10,000 need to have MTD for ITSA compatible software in place before 6 April 2024. This is when Making Tax Digital for Income Tax Self Assessment (ITSA) comes into effect.

Instead of using HMRC’s website to file returns, you’ll need to keep digital records and use compatible software. From 6 April 2024, you’ll need to submit quarterly updates to HMRC, as well as an End of Period Statement (EOPS) at the end of your fourth quarter, and a final declaration that includes all other taxable income by 31 January every year.

VAT registered sole traders will already be familiar with MTD rules. From April 2019, MTD rules became mandatory for all VAT-registered businesses earning above £85,000. From April 2022, all VAT registered businesses will need to keep digital records and submit VAT returns with MTD software.

When does MTD for ITSA start for the self-employed?

MTD for ITSA starts on 6 April 2024.

When is the deadline for MTD for ITSA?

Those who follow the tax year will have a digital start date of 6 April 2024. If you don’t follow the tax year, your digital start date is the day your accounting period begins, which will fall on or after 6 April 2024.

While the deadline might seem a little way off, you can sign up voluntarily to start getting used to MTD rules. Find out whether you’re eligible for early MTD ITSA registration here.

Do all self-employed people have to go digital?

If you meet the criteria then you have to comply with MTD for ITSA, unless you’re digitally exempt.

All self-employed people and landlords with a total income (from business or property) above £10,000 will need to follow MTD rules for ITSA from 6 April 2024. Sole traders earning below this threshold can continue to use the old HMRC system for filing their returns.

If you own multiple businesses, the income earned from all of them contributes to the £10,000 threshold.

How do I sign up for Making Tax Digital for ITSA?

Signing up for MTD for ITSA requires that you have compatible software in place first. That’s because you need to sign up to MTD ITSA through your cloud-based software, instead of on the HMRC website.

Make sure you have HMRC approved software in place and ask your software provider how to sign up for MTD ITSA. You’ll also need your business name, business start date, email address, national insurance number, accounting period, and accounting type to apply. Read HMRC’s guidance on signing up for more information.

What do I need to submit for MTD for ITSA?

From 6 April 2024, the self-employed will need to keep digital records of income and expenditure. There are three parts you’ll need to submit for MTD for ITSA:

  1. Quarterly updates. These should include all business income and expenditure.
  2. End of Period Statement (EOPS). You’ll need to submit one of these per year, for each source of income.
  3. Final declaration. This is where you’ll need to share details of all other taxable income, including investments and savings interest.

You can find out more about what you need to submit for MTD for ITSA on the gov.uk website.

Can an accountant sign a sole trader up for MTD for ITSA?

Yes. Speak to your accountant about signing up for MTD for ITSA early, so you have plenty of time to familiarise yourself with the system.

Your accountant can also submit your quarterly updates, EOPS and final declarations using your cloud-based accounting software.

How do I calculate income for MTD for ITSA?

All property and business income contributes to the £10,000 threshold. For example, if you’re a freelancer earning £8,000 per year from your business, and £3,000 per year from property, you’ll be above the threshold and will therefore need to comply with MTD for ITSA.

If you have multiple businesses or sources of property income, you need to add up the income from all of them to work out whether you’re above the threshold.

Can the self-employed opt-out of MTD for ITSA?

No. If you’re above the MTD ITSA threshold of £10,000, Making Tax Digital is not optional from 2024. However, people that are digitally exempt do not need to follow MTD rules. This could include people who are elderly, have a disability, or live in a remote location.

You can request to be made exempt from MTD ITSA on the gov.uk website.

MTD software for the self-employed

Using ITSA compatible software will enable sole traders and the self-employed to keep digital records of income and expenses and submit their quarterly updates and annual submissions directly from the platform.

The self-employed should also look for software with additional features that reduce the administrative burden of digital recordkeeping, like invoicing and expense capture.

Can the self-employed use spreadsheets for MTD?

You might have heard about bridging software. It was popular during the first phase of MTD for VAT because it allowed businesses to continue using their spreadsheets for VAT returns.

With MTD for ITSA, the self-employed will need to submit quarterly statements, EOPS and a final declaration, not just a single yearly return. This makes keeping all of the relevant records in a spreadsheet more difficult. And you’ll also need to keep to the digital linking rules.

There’s no risk of losing, deleting, or corrupting spreadsheet cells in cloud-based accounting software. HMRC recognised software acts as safe storage for all your financial records and will also help ensure compliance with MTD.

Do the self-employed need to sign up for MTD for VAT and MTD for ITSA separately?

Yes. The systems are separate, so you may need to sign up for both. Some sole traders will need to sign up for MTD for VAT and MTD for ITSA, whereas others will only need to sign up for MTD for ITSA. If you’re not sure if MTD for VAT applies to you, read this guide.

How should I prepare for MTD for ITSA?

Make sure you have MTD for Income Tax compatible software in place, and you’re signed up to MTD for ITSA before 6 April 2024.

Sign up early if you can, or talk to your accountant about signing up for MTD for ITSA. The more time you spend getting used to new digital tools, the easier you’ll find the transition to Making Tax Digital.

Want more information on Making Tax Digital? You can keep up to date with the latest on MTD by bookmarking our Making Tax Digital resource hub and MTD for ITSA page.

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