Making Tax Digital Guide
Whether you’re running your own business on a full or part-time basis, any changes to the UK tax system can have a major impact on your livelihood, so stay up-to-date with IPSE's Making Tax Digital Guide.
There are some benefits to the new system, along with potential downsides, so it’s important to understand what’s happening.
Who is impacted by Making Tax Digital?
The introduction of MTD for VAT mainly impacted businesses which were required to register by being around or above the threshold for VAT registration of £85,000.
Making Tax Digital for Income Tax Self-Assessment applies to UK taxpayers who have a business or property income over £50,000 per year from April 2026, and over £30,000 from April 2027, including landlords, sole traders and partnerships.
To sign up, you’ll need to be registered for Self-Assessment, and it applies to both UK and non-UK residents who have a business or property income meeting the threshold. This can be done by individuals, or agents (such as an accountant) on your behalf.
It’s possible to apply for an exemption from using MTD for ITSA if you consider that you are ‘digitally excluded’. The criteria include if it’s not practical for you to use software to keep digital records or submit them, which could be due to your age, disability, location (for example, if you’re in a remote area) or if you’re a practising member of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records.
At the moment, the mechanism for applying for exemptions hasn’t yet been made available.
The threshold applies to all self-assessed income. So, from April 2026 it will be a requirement if you’re a freelancer with a turnover of £50,000 or more. Or if you’ve made £45,000 from self-employment, and also have an income of £10,000 from renting out property, for example.
If your sales or income is under £50,000 (or £30,000 from April 2027) from self-employment, then you won’t be required to take part, although you’re free to opt-in if you want to have everything in order from the start of your freelancing, for example.
Making Tax Digital Penalties
With the rollout of a new system for approximately 4.2 million people, there’s inevitably going to be some issues. And along with changing how information is submitted, there will also be new sanctions for late submissions and payments. Working on a points system, similar to driving licences, can be a little complicated at first.
The current system will continue to apply for any one-off tax submissions. For MTD for VAT, the new penalty system will come into effect for customers with accounting periods beginning on or after 1 January 2023.
However, for self-assessment, the new penalty system will come into effect for taxpayers once they are mandated to join MTD for ITSA.
Every time you miss a deadline, you’ll receive a penalty point. And when you reach a set limit, you’ll be issued with a £200 fine.
- Monthly submissions: 5-point penalty limit
- Quarterly submissions: 4-point penalty limit
- Annual submissions: 2-point penalty limit
There’s a separate point total for each tax submission obligation. So, if you were late with both your MTD VAT and MTD ITSA returns, you would get a mark against each, rather than having them both combined into one penalty figure.
And if you make two or more failures relating to the same submission in one month, you’ll generally only receive a single point, with some exceptions.
Points won’t expire and reset when you hit a penalty limit but do have a lifetime of two years. If you want to go back to zero after being issued with a fine, you’ll need to meet a period of compliance and submit everything which was due within the preceding 24 months.
There are also time limits for HMRC to issue points for failures. And HMRC has the discretion to not deliver points or penalties, along with a review and appeals process if you wish to challenge decisions. You can find more details on the Making Tax Digital penalty points system in the policy paper.
HMRC have said they will initially apply a light touch to penalties and fines as people adjust to the new system, but you shouldn’t rely on this to mean you’ll get away with late submissions or payments.
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