MTD for Income Tax Self Assessment - what it means for your business

In this article, Benjamin Dyer, CEO of Powered Now, looks at what is coming next from HMRC and the impact of Making Tax Digital for Income Tax Self Assessment (also known as MTD for ITSA) on trade businesses.

What is Making Tax Digital (MTD)?

Before diving into what will be the next stage of Making Tax Digital (MTD), it’s worth looking at the overall picture of the programme.

MTD is a massive years-long programme to make all things related to tax move into the digital age. This should eventually result in many improvements.

HMRC’s Making Tax Digital promises to transform tax administration to make it easier for taxpayers to get their tax right. 

MTD involves small businesses and self-employed getting their taxes right and keeping on top of their affairs by becoming paperless and digitalising their taxes.

A variety of reasons have been given by HMRC for the MTD project, but my guess is that these include: To collect tax that is currently being dodged; to reduce cost within HMRC; and to make life easier and more efficient for businesses and individual taxpayers.

MTD for VAT and IT

MTD for VAT was introduced some years ago for VAT-registered businesses with taxable turnover above the VAT threshold of £90,000. 

From April 2026, there is a rolling program of sole traders having to comply with HMRC’s Making Tax Digital for Income Tax Self Assessment. This means that they will need to keep digital records, submit digital quarterly returns of sales and costs and a final tax return, all using compatible software. See below for more details.

Powered Now fully supports MTD for VAT and MTD for IT is coming - book a free demo to get started!

Slowly but surely, computers have become a critical part of every aspect of life. MTD is pushing both businesses and individuals to keep computer records but also to communicate digitally with HMRC. It seems unlikely that it will ever be rolled back. During my lifetime, the march of computers has seemed inevitable and all businesses becoming computerised doesn’t look like an exception.

What is MTD ITSA (Income tax self assessment)?

MTD for income tax self assessment, also known as Making Tax Digital for ITSA or just MTD for IT, will require all self-employed people and landlords with sales of more than £50,000 per annum in the first year, over £30,000 in the second year and over £20,000 in the third year. That is businesses that aren't a limited liability company or equivalent must submit quarterly profit and loss returns electronically.

What do you need to submit for MTD for ITSA?

Businesses who join MTD for Income Tax need to, for each trading or property business they operate, submit a quarterly report to HMRC of income and expenses. 

They also have to submit a tax return in the January following the end of the tax year. This is similar to the existing tax return but compulsorily done through MTD compatible software and using the digital records used for the quarterly returns. Powered Now is complying with this.

HMRC will respond by providing an estimate of their year to date tax liability and the estimated tax liability can be viewed at any time. At the end of the year, after all of the quarterly returns, the EOPS adjusts the figures as necessary, then there is “finalisation”, replacing the old Self Assessment tax return.

This means that any sole trader making a living from their business will fall under the new rules. It embraces every little cottage industry. While MTD for VAT hit over a million businesses, MTD for ITSA will impact several million.

It is likely to lead to an explosion in the use of computers and the need for a vast amount of support. After all, VAT registered businesses with minimum sales over £85k can afford an accountant. Most of these smaller businesses impacted by MTD for ITSA can’t.

How do I sign up for MTD for ITSA?

You need to use your cloud-based software (MTD compatible software approved by HMRC) ready and then you sign up for MTD for IT using yoru own HMRC account. If you have any questions you can visit the HMRC's guidance on signing up. You can also ask your MTD software provider or accountant.

Wha are MTD for ITSA key dates and how to prepare

Unknown to most, there is already a pilot program of MTD for ITSA even though it won’t become compulsory for sole traders with more than £50,000 sales per annum until April 2026.

At first, MTD for ITSA will run alongside self assessment, but the end goal will be that all areas where money is earned (employment, investment and trusts and so on) will go onto MTD.

In summary

Computerising business records and tax returns has got to be good news if we want rising standards of living, which in turn depend on improving business efficiency.

However, there are a number of mountains to climb before everything is fully up and running.  You can rest assured that Powered Now will be here to help you succeed.

Additional useful information

• Making Tax Digital and the role of your accountant

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