How Self Assessment Tax Returns are changing: MTD for ITSA

HMRC has announced changes to the way the self-employed and landlords do their self assessment for income tax.

Hands typing on laptop running Making Tax Digital software in office setting

What is Making Tax Digital for ITSA?

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) forms part of the government’s plan to digitalise the UK tax system. MTD for ITSA will come into effect in April 2024, and it will change the way landlords and self-employed people submit their income tax returns.

To comply with the new MTD for ITSA rules, landlords and self-employed people earning above £10,000 will need to send HMRC quarterly updates, an End of Period Statement (EOPS) and a Final Declaration using MTD-compatible software. This replaces the current yearly self-assessment.

When is Self Assessment going digital?

Self Assessment goes digital from April 2024. All landlords and self-employed people earning above £10,000 will need to have compatible software in place by this date.

How does Self Assessment tax work now?

Currently, landlords and self-employed people submit one yearly Self Assessment using the HMRC online portal, postal mail, or software. This might happen via their accountant or bookkeeper, if they use one. In order to pull together the figures for the return, digital or paper records are kept throughout the tax year. The deadline for paper (postal) filings is 31st October and it’s 31st January for online submissions (through the HMRC portal, or software).

How MTD for Income Tax will change Self Assessment

From April 2024, you’ll need to use MTD-compatible software to keep digital records and submit updates to HMRC for MTD for ITSA. You’ll no longer be able to use the online HMRC portal, or the paper (mail) filing system if you're a landlord or self-employed person earning above £10,000. In the space of one tax year, you’ll need to send:

  • Four quarterly updates, using your MTD-compatible software
  • One End of Period Statement, at the end of the fourth quarter
  • One Final Declaration, by January 31st

Quarterly updates

Your quarterly updates should include details of your income and expenditure for each quarterly period. These updates can be quickly pulled together in your cloud-based accounting software, providing you keep your digital records up to date.

End of Period Statement (EOPS)

You should make final adjustments to your accounting and claim any reliefs in your End of Period Statement (EOPS). You also need to confirm the information you submit is complete and accurate. HMRC-recognised software like Xero can pull your EOPS together for you.

Final Declaration

You’ll need to disclose any additional sources of income, such as savings and investment, in your Final Declaration. You can also submit claims for reliefs.

Digital record keeping

Keeping digital records is a breeze with cloud-based accounting software like Xero. By connecting your bank account, you can automatically import your transactions and see where your finances stand at a glance. With the handy Xero app, you can reconcile transactions complete with receipts from your phone.

Why is Self Assessment changing under MTD?

Making Tax Digital for Income Tax forms part of HMRC’s wider vision to digitise the tax system, and make it easier to get your tax right. With a digitised system that’s easier for taxpayers to use, HMRC aims to reduce the margin of error and close the tax gap that currently stands.

As more people rely on digital tools to run their businesses, HMRC hopes to bring the tax system in line with the modern, digital economy.

Are there any benefits to the changes in Self Assessment under MTD for ITSA?

Once you’re past the initial learning curve of MTD-compatible software, quarterly updates don’t take as long to compile. You’re only submitting a quarter’s worth of information, which is automatically compiled by your software based on your digital records, and can be submitted directly to HMRC.

This is instead of the old system where you would report income and expenditure for the whole tax year in one return, manually calculating your figures from a year’s worth of paper or Excel records. This means you can spend more time focusing on your business, and less time snowed under with admin.

Your quarterly updates also provide a near-real-time view of your finances, so HMRC can send an estimation of how much tax you owe. This estimate can help you prepare for your tax bill ahead of time. According to HMRC, MTD for VAT users say the new system makes it easier to prepare and submit returns.

When it comes to accounting software, the benefits don’t stop at MTD. Using a platform such as Xero, you get real-time insights into the financial health of your business. Features such as invoicing and receipt capture mean you can manage multiple financial admin tasks from one platform.

Prepare for Self Assessment changes today

Self Assessment is changing, but cloud-based accounting software can help you make a smooth transition to the new system. Learn more about how Xero can help you comply with MTD for ITSA, or sign up for a free trial.

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