What is Making Tax Digital?

Making Tax Digital (MTD) is a new initiative from HMRC that requires businesses and self-employed people to keep digital records of their income and expenses.

The aim of MTD is to make it easier for taxpayers, especially those who have complex tax affairs. It will also help the government identify those who are not paying their fair share of taxes.

How Does MTD Apply to Income Tax and Self Assessment?

HMRC recently released record-keeping rules relating to Making Tax Digital for Income Tax Self Assessment (MTD ITSA). These rules apply from the tax year of 2024/25 to those who receive income greater than £10,000 per year from self-employment or rental income from land or buildings.

Under MTD ITSA you will either have to use HMRC-approved software to keep your day-to-day business/rental income and expenses records, or use a spreadsheet plus so-called bridging software to collate the data and make MTD reports to HMRC.

Your reports must summarise income and outgoings from your records into the categories currently used for your annual self-assessment tax return. However, you will no longer be required to make adjustments for non-tax deductible items on the quarterly report. Instead these will only be required on the annual summary report.

Reporting will be more straightforward if you choose to use HMRC-approved software as the income and expenses categories will be already set up. If you use bridging software you’ll need to digitally link your records to fit the software.