Making Tax Digital - Guide for Income Tax
Orignal Article: Making Tax Digital for Income Tax
Making Tax Digital: What’s All the Buzz About?
The UK tax system is undergoing a significant digital transformation. HM Revenue & Customs (HMRC) has launched the Making Tax Digital (MTD) initiative to modernise how businesses and individuals manage their tax affairs. This programme moves the process away from the traditional annual Self-Assessment tax return towards a more efficient, streamlined, and digital method.
The goal is straightforward: to help everyone get their tax right first time, reduce errors, and provide a clearer, real-time view of their financial position. While MTD for VAT has been in effect since April 2019, a new phase is arriving that will significantly affect sole traders, landlords, and CIS subcontractors. This next stage is known as Making Tax Digital for Income Tax (MTD for ITSA), and understanding its implications is essential.
What is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax is HM Revenue & Customs' (HMRC) new method for reporting business and property income. It replaces the single yearly Self-Assessment tax return with a digital-first approach, based on quarterly updates.
Here’s what this means for you:
- Digital Record-Keeping: You must maintain your income and expense records digitally using HMRC-recognised software.
- Quarterly Updates: Instead of one annual filing, you will submit a summary of your income and expenses to HMRC every three months.
- Final Declarations: After the tax year ends, you will finalise your affairs by submitting an End of Period Statement (EOPS) for each business and a Final Declaration.
The core benefit of this new process is proactive tax management. By updating regularly, you can avoid the annual scramble, distribute admin tasks throughout the year, and gain invaluable real-time insight into your upcoming tax liability.
Who Will Be Affected and When? The Key Deadlines.
The introduction of Making Tax Digital for Income Tax by HM Revenue & Customs will be implemented in phases, determined by total annual business and property income. Participation is voluntary until it becomes mandatory according to the following timeline:
- April 2026: Mandatory for sole traders and landlords earning more than £50,000.
- April 2027: Mandatory for those earning more than £30,000.
- April 2028: Mandatory for those earning more than £20,000 (pending a final government review).
If your income places you in one of these categories, now is the perfect time to prepare. Adopting digital practices early can make the transition smooth and stress-free.
How Does MTD for Income Tax Work? The New Process
Adopting Making Tax Digital is simpler than it seems. The process is designed around four logical steps:
- Step 1: Go Digital - Transition to using HMRC-recognised software to maintain all your business transaction records digitally, as paper-based records will no longer meet compliance requirements.
- Step 2: Submit Quarterly Updates - From your software, you will send a summary of your income and expenses to HMRC every quarter (every three months).
- Step 3: Finalise Each Business with an EOPS - Once the tax year concludes, you will finalise the accounts for each of your businesses or properties and submit an End of Period Statement (EOPS) for each one.
- Step 4: Complete Your Final Declaration - This replaces your annual Self-Assessment return. In this final step, you declare all your income (including non-business sources like investments), claim applicable reliefs, and finalise your total tax position for the year.
Ortenz & Co.: Making Your MTD Transition Simple and Hassle-Free
You excel at running your business; let us excel at managing your accounts. Ortenz & Co. exists to simplify your financial admin and ensure seamless compliance with Making Tax Digital.
We remove the technical burden of MTD for you. While the mandate requires digital software, we guide you to the perfect HMRC-recognised solution for your needs. Your only task is to share your records with us. We handle all the digital record-keeping, quarterly filings, and submissions.
Reclaim your time and focus on your business goals, confident that your accounts are in expert hands.
The MTD Penalty System: What Happens If You Don't Comply?
Understanding the consequences of non-compliance is a key part of preparing for Making Tax Digital. HMRC has moved away from the old system of automatic fixed fines to a new, fairer points-based penalty system designed to distinguish between occasional mistakes and persistent failure. The system applies to both MTD for VAT and the upcoming MTD for Income Tax.
How the Points-Based Penalty System Works
HMRC uses a points-based penalty system. For each compliance failure, you receive a point. It is crucial to understand that points are not fines. They are markers of non-compliance. Financial penalties are only triggered once the total number of points reaches a specific threshold for your filing frequency.The process is broken down into three clear steps:
- 1. You Earn Points for Each Failure
For every submission you miss or every requirement you fail to meet, HMRC will issue one point. The type of failure is categorized as follows:
- A Submission Deadline: Missing the deadline for a quarterly update, an End of Period Statement (EOPS), or a Final Declaration.
- A Record-Keeping Requirement: Failing to keep digital records as required by MTD rules.
- A Requirement to Provide Digital Records: Failing to provide digital records to HMRC upon request.
- 2. A Financial Penalty is Triggered at the Threshold
The threshold—the number of points that triggers a fine—is not a single number. It depends on how frequently you are required to submit. This is designed to be fair to all businesses, whether they file monthly or annually.
Your Submission Frequency & Points Threshold Before a Fine:
- Annually (e.g., Final Declaration) 2 points.
- Quarterly (e.g., MTD updates) 4 points
- Monthly (e.g., VAT for some) 5 points
Example: A sole trader under MTD for Income Tax who must submit quarterly updates has a threshold of 4 points. If they miss four separate quarterly deadlines, they will receive a £200 penalty for their fifth failure.
- 3. Points Expire If You Stay Compliant
This is the "fair" part of the system. Points are not permanent. If you have points on your record but then meet all your obligations for a period of time, the points will expire and be removed.
- The compliance period is typically 24 months for those submitting quarterly or annually.
- For monthly filers, the compliance period is 6 months.
This means you have a clear incentive to get back on track. Once your points expire, your "slate is wiped clean," and the process resets.
What Are the Financial Penalties?
The financial penalties are fixed amounts. The fine is issued for each subsequent failure after you have reached your points threshold.
- Late Submission: The penalty is £200 for each submission that is late after you have reached your points threshold.
- Late Payment: This is a separate system. Penalties for late tax payments are based on how late the payment is:
- Day 1 - 15: No penalty if you pay within 15 days of the due date.
- Day 16 - 30: First penalty (2% of the tax owed at day 15) + 2% of the tax owed at day 30.
- Day 31+: Further penalties may apply, along with interest charges.
How Ortenz & Co. Protects You from MTD Penalties
While HMRC's new points-based system is designed to be fair, it adds a significant layer of complexity to your administrative burden. The simplest way to avoid points and penalties is flawless, on-time compliance. This is where we provide immense value.
When you partner with Ortenz & Co., you gain a dedicated team of digital tax experts. We manage the entire MTD process on your behalf, transforming a potential source of anxiety into a seamless part of your business operations.
Here’s how we ensure you remain fully compliant and penalty-free:
- End-to-End Digital Management: You simply share your financial data (invoices, receipts, bank statements), and we handle all the digital record-keeping within HMRC-recognised software, ensuring you meet every technical requirement.
- Complete Filing Service: We prepare and submit everything for you: all quarterly updates, End of Period Statements (EOPS), and the Final Declaration, directly to HMRC.
- Proactive Deadline Management: Our experts own your compliance calendar. We treat your deadlines as our priority, guaranteeing all submissions are accurate and early, never late.
- Real-Time Financial Insight: With regular quarterly updates prepared by us, you gain a clearer, ongoing picture of your profitability and estimated tax liability, eliminating year-end surprises and aiding cash flow planning.
In essence, we provide more than just compliance; we provide peace of mind. You can focus entirely on running your business, confident that a dedicated team is protecting you from penalties and ensuring your MTD journey is smooth and stress-free.
Addressing Your Common Questions
No. Under MTD for ITSA, the traditional Self Assessment return is replaced by your quarterly updates and the final End of Period Statement and Final Declaration, which we will handle for you.
The process requires separate digital records for each income source. You will submit a separate EOPS for each business or property. Then, a single Final Declaration combines all your income streams to calculate your overall tax liability. We manage this entire process for you.
HMRC will implement a points-based penalty system. You’ll receive a point for every missed deadline. Once you reach a threshold (e.g., 4 points), a financial penalty will be ssued. Points expire after a period of good compliance. Using our service ensures you avoid these pitfalls entirely.
While it's a significant change, with Ortenz & Co. by your side, it becomes simpler. We turn a new administrative requirement into an opportunity for you to have better financial insight and less year-end tax stress.
The MTD deadlines may seem distant, but preparation is key to a smooth transition. The best thing you can do now is to partner with an accountant who understands the change inside and out.
Let Ortenz & Co. guide you. We will help you:
Adopting Making Tax Digital is simpler than it seems. The process is designed around four logical steps:
- Understand how the rules specifically apply to your business.
- Select and set up the right simple software for your needs.
- Transition your record-keeping into a digital format.
- Ensure you are fully compliant well before your deadline arrives.
- Don't wait for the mandate to cause a panic. Take control of your tax reporting today.
Contact Ortenz & Co. for a consultation, and let’s make your digital tax journey quick, simple, and trouble-free.