Making Tax Digital (MTD) for income tax is being extended to sole trades and landlords with qualifying income of more than £20,000 from April 2028. The Government also announced further changes to MTD as set out in the technical note “Modernising the tax system through Making Tax Digital”, details of which are provided below.
The Institute has been engaging extensively with HMRC, together with the other professional bodies, to raise the impact of this major change to income tax reporting on individuals and their agents and the challenges that this will present. There is now just over a year to the first tranche of mandation of MTD for income tax which will commence from April 2026 for those with gross income of over £50,000 and from April 2027 for those with gross income over £30,000. Even more worryingly, the government has also said that it will continue to explore ‘how it can best bring the benefits of digitalisation to more of the around four million taxpayers who have income below the £20,000 threshold’.
We will be discussing the MTD for income tax Spring Statement measures and announcements with HMRC via various stakeholder forum meetings in the coming weeks and months. Despite our reservations about MTD, the Institute will continue to work with HMRC on MTD readiness and is developing a cross-department MTD strategy to assist members in their preparations. We will also continue to represent members views as we approach April 2026 and will be conducting a short survey on MTD for income tax in next week’s Tax News.
End-of-year tax reporting for MTD
Some users of MTD for income tax will have other sources of income that need to be reported in Self-Assessment (SA). These additional income sources must be reported at the end of the tax year, alongside any necessary adjustments to their business income and expenses.
Previously, users would have been able to use HMRC’s online filing service to submit their final tax return. HMRC has now announced that its online filing service will not be available to do so and that MTD taxpayers must file their tax return through their MTD software. The government will adopt this change and introduce legislation ahead of April 2026.
One or more MTD-compatible software products will therefore be needed to meet SA filing obligations which makes the choice of software used by the agent/taxpayer of extreme importance.
Exempting/deferring certain groups from MTD
The government believes that some taxpayer groups will face disproportionate barriers to operating MTD and should be exempt. The following groups will therefore not be required to use MTD for income tax, (subject to notifying and satisfying HMRC that they are exempt):
- taxpayers who have a power of attorney,
- ·non-UK tax resident foreign entertainers/sportspeople who have no other income sources that count as qualifying income for MTD, and
- taxpayers for whom HMRC cannot provide a digital service.
The following groups will also not be required to join MTD for income tax over the course of this Parliament:
- ministers of religion,
- Lloyd’s Underwriters,
- recipients of the married couples’ allowance, and
- recipients of the blind persons’ allowance.
Additionally, individuals will not be required to use MTD until April 2027 if they have information that they would need to submit using the SA109 schedule. HMRC will work with stakeholders to finalise the design of a one-year deferral for these groups to allow time to incorporate into MTD the government’s changes to the taxation of non-UK domiciled individuals.
Legislation will therefore be introduced to defer/exempt these groups and the criteria for deferrals/exemptions will be set out in guidance once the legislation is finalised.
Finalising the policy framework for MTD and penalty reform
The government has announced several further changes to the design of MTD and penalty reform. These include:
- changes to enable taxpayers with an accounting date of 31 March to start their MTD obligations on 1 April in the first year of operating MTD which will avoid the need for burdensome manual adjustments at the end of the tax year, and
- a power for HMRC to cancel/reset late submission penalty points and to cancel associated financial penalties; this enables HMRC to cancel penalty points, for instance, in periods prior to insolvency, so that penalty reform reflects HMRC’s general approach to insolvent taxpayers.
HMRC will continue to engage stakeholders on these changes before legislation is introduced ahead of April 2026.
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