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Sole traders and landlords earning more than £50,000 from their self-employment and property have until Friday to make their first quarterly report to HMRC under the new Making Tax Digital (MTD) for Income Tax regime.

The major tax shake-up is set to overhaul how hundreds of thousands of Britons report their income and expenses to His Majesty's Revenue and Customs.

In total, 864,000 sole traders and landlords are in scope for the first wave of MTD for Income Tax, according to HMRC estimates.

As of a month ago, it said that only 387,000 customers had signed up to the new format.

An HMRC spokesman said: 'Thousands of customers are signing up for Making Tax Digital every week, in line with our expectations.

'We've already written to two million customers and delivered more than 400 events and webinars.

'We encourage all customers required to join MTD this year to take that first step and sign up now.'

Those earning over £50,000 from self-employment or property income need to start making submissions every three months to the taxman.

MTD: The move to 'Making Tax Digital is expected to affect approximately 864,000 people in its first wave, with another 1,077,000 to follow from April 2027, with further expansion in 2028

The first submission deadline is 7 August for the current tax year and will mean recording income and expenses between 6 April and 5 July.

The income thresholds will then drop in 2027 and 2028 dragging hundreds of thousands more people into this new bureaucratic net.

It will affect a huge range of people - from electricians and plumbers, to landlords, personal trainers, photographers, hairdressers and consultants.

In total, over the next two years almost three million people will be affected, finding themselves having to choose between a confusing list of external software providers, some of which charge as much as £35 a month, to upload their income and expenses each quarter.

It is all part of HMRC's shift towards digital record-keeping - what it is calling Making Tax Digital (MTD) for Income Tax.

'Getting ready for MTD for Income Tax has been a bit of a headache for accounting firms – and taxpayers who are unrepresented may also find the process challenging at first,' said Elsa Littlewood, a private client services tax partner at BDO.

'The first reporting deadline comes at a rather inconvenient time when many people will be trying to enjoy their summer holiday.

'It will be interesting to see what proportion of the 864,000 taxpayers in scope actually meet the deadline, particularly if no penalties will apply in the first year.

'This could be key in determining whether HMRC is able to stick to its plan to extend the programme in 2027 and 2028.'

What is 'Making Tax Digital' for Income Tax?

Making Tax Digital for Income Tax (MTD) is a new way for sole traders and landlords to report their income and expenses to HMRC.

Under the new MTD rules, you will need to use approved digital systems to submit income and expenses updates every three months.

This will mean keeping digital records of your income and expenses and using compatible software to manage your tax affairs and submit updates to HMRC every quarter.

It is now a legal requirement and those taxpayers in scope should check they are signed up, that their software is compatible and their MTD summary is submitted on time.

Does it apply to you?

If you are someone who already submits a self assessment tax return and gets income from self-employment or property, or both, then this could well impact you.

The key to whether you need to use MTD to make submissions every three months will depend on your income.

First up, starting from 6 April this year, those earning over £50,000 from self-employment or property income will have to abide by the new rules.

Those earning between £30,000 and £50,000 will follow in April 2027, with further expansion to those earning more than £20,000 from 2028.

The income threshold is based on gross income, not profits - which means even those making modest earnings after expenses could still be caught by the new rules.

The government has set out plans to introduce legislation to lower the qualifying income threshold in the future so it may be that anyone earning income as a sole trader or earning rent as a landlord will need to use MTD in future, no matter how little they make.

HMRC says that partnerships will also need to use MTD for income tax in the future but that it will set out the timeline for this at a later date.

It's important to note that this won't apply to limited companies. Those accounts will continue to be filed through Companies House.

Making Tax Digital: Starting this April, landlords and sole traders face major changes in the way they report their income and spending to HMRC

What about income you make from savings or investments?

Don't worry, income from savings interest or dividends paid from stocks and shares, or income from pensions, for example, won't be included in this.

HMRC is clear that you only need to create digital records of your self-employment and property income and expenses and not other income sources.

However, you should choose software that will be able to report other income sources on your tax return, which will still need to be filed and paid for.

How do you figure out what income band you're in?

When you need to start using Making Tax Digital for Income Tax depends on your qualifying income within the 2024/25 tax year.

It's important to remember that you are taxed on turnover, not profit.

If you earned more than £50,000 during that tax year as sole trader or from rental income, then you'll need to start MTD from this April.

If your income is below £50,000 in the 2024/25 tax year, then you'll need to next work out what your income is during the 2025/26 tax year. If it's over £30,000, then you'll need to start MTD from April 2027.

Those earning under £30,000 in the 2025/26 tax year will then need to check their 2026/27 tax return. If they earn more than £20,000, they will need to start MTD from April 2028.

Widening net: Those earning between £30,000 and £50,000 will have to start reporting their expenses in April 2027, with further expansion to those earning £20,000 or more from 2028.

How many people will it impact?

The move is expected to affect approximately 864,000 people in its first wave, with another 1,077,000 to follow from April 2027.

A further 975,000 with a qualifying income of £20,000.01 to £30,000 will join MTD in April 2028.

It means the number of landlords or self-employed sole traders that will be impacted could total around 2.9million.

Why is it happening?

It's part of the government's goal to modernise the tax system and close the tax gap – the difference between what tax should be paid and what people actually pay.

The change is also designed to improve accuracy, reduce errors, and save time, according to HMRC.

They believe the digital transition will help taxpayers stay on top of their obligations while offering a clearer picture of their tax position year-round.

Beware of fines: Penalty points will be awarded if filings are late, according to HMRC, although this will only begin next year

Will you pay tax every three months?

The first filing is due this week on 7 August, that will include income and expenses between 6 April and 5 July.

Then the next filing date will be 7 November, then 7 February and so on.

However, it's important to note that these quarterly updates are not tax returns and you won't need to make payments every three months.

They are just summaries of how your business is doing pulled from your records. HMRC advises you to update the software as you go along to make the quarterly updates as seamless as possible.

It says you'll be able to see an estimate of your tax bill after sending each update.

What if I miss a submission deadline?

No penalties will be issued for late quarterly updates during the first year of MTD for Income Tax.

However, from the second year onwards, points-based penalties will apply where taxpayers miss a deadline. This is similar to how penalty points work on a driving licence.

Taxpayers will receive one penalty point for each missed quarterly deadline. Once a taxpayer accumulates four points, a £200 fixed penalty will apply.

Under the new MTD rules, they will need to use approved digital systems to submit income and expenses updates every three months

What MTD software do you use and is it FREE?

Either you, or an accountant acting on your behalf, will need to use commercial software that works with MTD.

This will allow you to create, store and correct digital records of your self-employment or property income and expenses as well as send your quarterly updates.

The quarterly reporting must be done using 'compliant software' or bridging software that picks up the financial information from an excel spreadsheet. You can also just manually input the figures.

HMRC does not offer its own MTD software. Instead it is working with different software providers.

To find the right provider for your situation, it would be worth using its software finder tool.

Many providers do charge a fee. However, there are also some fee free options, so you won't necessarily have to pay.

In terms of choosing what type of software best suits you. You can either opt for software that creates digital records or a provider offering software that connects to your records (bridging software).

Software that creates digital records lets you create your self-employment and property digital records by either linking to your business bank account to import transactions automatically, scanning receipts and invoices, or manually entering your income and expenses.

Alternatively, bridging software will connect to your existing records kept in spreadsheets or other accounting tools.

This might be right for you if you want to keep using your current software and adapt your record keeping for MTD.

For example, if you use spreadsheets to record income and expenses, bridging software can connect to them and make your submissions to HMRC.

What are the fines?

New late submission penalties are points based.

For each quarterly update (for tax years after 2026 to 2027) or tax return deadline missed, you’ll get a penalty point.

The penalty point threshold is four points. If you reach this, you’ll get a £200 penalty and then subsequently face a £200 penalty each time you miss another submission deadline.

You can only get one penalty point per deadline. This applies even if you have more than one business and send more than one quarterly update late (for tax years after 2026 to 2027).

Can I get an exemption from using MTD?

You can apply for an exemption if you think you're digitally excluded. This means it is not reasonable for you to use the software to keep digital records or submit them.

There are different reasons why this might apply to your circumstances but this could be because your age, disability, health condition or location stops you from using a computer, tablet or smartphone.

It could also be because you're a practicing member of a religious society or order, whose beliefs are incompatible with using digital communications or keeping digital records.

Have you had problems with MTD? Get in touch: editor@thisismoney.co.uk