How does Making Tax Digital work?
Until now, those who are self-employed and landlords use the government website to submit their self assessment at the end of every tax year. The self assessment asks for your income and your expenses, and then calculates how much tax you owe. You weren’t asked to upload any evidence, or proof of your financial records unless you were audited. You could also keep spreadsheets or even written records if you wanted.
With Making Tax Digital, the majority of this will change. Instead of a single self-assessment, you’ll be required to submit quarterly updates across the tax year, and then a final declaration. The final declaration will take the place of the annual self assessment, where you will review and confirm the data that you have submitted across the year, and then agree with the tax bill that HMRC has calculated as a result.
The most important change for those who are self-employed or who receive income from property is that you must now use HMRC-recognised Making Tax Digital software to keep your financial records. You can opt to continue to use spreadsheets, rather than separate software. However, you’ll need to use bridging software to establish a digital link between the spreadsheet and HMRC, and the spreadsheet will need to use formulas.
What software should I use?
The government isn’t providing specific software for Making Tax Digital; you’ll need to use third party software that is HMRC-recognised and Making Tax Digital compliant. There are a few options that are free (such as this option for sole traders from Sage) but a lot of accounting software you’ll have to pay for (such as Xero and Quick Books).
You should choose your software based on the needs of your business. If your income and expenditure are relatively simple, a free service may be suitable. If your accounting is a little more complex, then paid software might be the better fit. Regardless of which software option you go for, the digital record for all your income and expenses needs to state the amount, the date and the tax category it falls into. These tax categories will be defined by HMRC.
When will Making Tax Digital affect me?
The government is rolling out Making Tax Digital in phases, and your previous income will dictate which phase you fall into:
- If you earned over £50,000 (qualifying income, not just profit) in the tax year 2024/2025, your start date was the 6th April 2026.
- If you earned over £30,000 in the tax year 2025/2026, your start date will be the 6th April 2027.
- If you earn over £20,000 in the tax year 2026/2027, your start date will be the 6th April 2028. Eventually, those who earn under £20,000 will also be expected to use Making Tax Digital.
