MoneyMagpie Editor and financial expert Vicky Parry warns self-employed workers and freelancers about the pitfalls of ignoring Making Tax Digital changes
Making Tax Digital (MTD) has been slow to roll out, but it’s nearing the end. And most freelancers and self-employed people have no idea what that means for them. This guide helps you understand what you need to know to avoid huge fines from HMRC.
What is Making Tax Digital for income tax?
HMRC reporting systems are outdated and unwieldy. Making Tax Digital is supposed to cut through the archaic system to help companies and freelancers manage their taxes more easily and accurately.
The scheme has already rolled out for companies and sole traders registered for VAT. Making Tax Digital for Income Tax is the next stage in a years-long roll out of the new system. Rather than annual reporting with a deadline nine months after the end of the previous tax year, which is the current Self Assessment system, people will be required to submit quarterly assessments and the final, fifth, full report.
The system is supposed to help freelancers and sole traders budget their taxes better. However, it does also add administrative burden to companies and freelance workers – and there is a requirement to use third-party software to submit, too.
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Who does it impact?
By April 2028, all self-employed traders who earn over £20,000 a year will be part of MTD Income Tax. This will be rolled out in stages.
For those earning above £50,000 a year, they will need to be registered for and using MTD for April 2026 – the next tax year from the one we’re currently in. That means there are only ten months to get everything set up.
Those earning £30,000 or above will need to comply by April 2027, and those earning £20,000 will be part of the scheme by April 2028.
Landlords: You need to register too
If you earn above the threshold amounts for any roll-out year of MTF for Income Tax from property rental income, you will need to register.
If your property income is through the Rent a Room scheme, you won’t need to register (unless your combined self-employed income also takes you over the threshold). You can ensure the tax-free portion of Rent a Room is managed on your final end of year full tax return.
MTD for income tax exemptions
There are some situations where you could be exempt from MTD for Income Tax. The first is if you know you will only use simplified expenses .
Other exemptions include where HMRC cannot provide a digital service due to remote location, or a person cannot use a digital service due to age, disability, or location (i.e., it is too remote). You also do not need to register if you are under an insolvency procedure or your business is solely run by people of a religious order where electronic communication does not comply with religious beliefs.
You may also withdraw from MTD for Income Tax if your business has received under the threshold income for three consecutive years, or your business is in a winding down procedure.
Check the details of these and further possible exemptions on the Making Tax Digital Government pages .
Self assessment and payments on account
You will still need to complete an annual Self Assessment as well as file your quarterly reports. The Self Assessment is more detailed and will enable you to adjust for non-business income and other details. You’re not penalised for adjustments between quarterly reports and your final Self Assessment.
Payments on Account will still apply, too. This is where, if your tax bill is over £1000 for the year, you will need to pay the full tax bill plus 50% by January 31st, and the remaining 50% in July. PoA is supposed to estimate a regular annual income, so if you have an exceptional year – such as receiving an unusually large contract – you can apply to reduce these payments. However, if you apply to reduce the payment and then do manage to earn similar in the following tax year, interest can be applied on the difference in payments.
Penalty points for late filing
Late filing will still come with penalties, as with the usual Self Assessment process. However, in the trial years if you signed up to test the system early filing penalties will not apply.
There is a new points-based penalty system for MTD Income Tax. You will not pay a fine for the first late filing, but cumulative errors will apply over ongoing tax years. Points will be applied for each late filing of quarterly and final reports, with a maximum fine of £200 for 4 points. The points will only reset when all filings are met to current dates. Points will expire after two years if you do not meet the threshold of 4 points.
Penalties for late payments will also be changing under the new system. If you pay within 15 days of the due date, there is no fine. Within 16-30 days inclusive, the fine is 3% of the tax outstanding on the 15th day, and over 30 days the fine is 3% of the tax on the 15th day, plus 3% of the tax on the 30th day, and an extra 10% per annum charge until the payment is made. Interest will also be accrued daily.
Standard fines for not maintaining accurate records, or for broken links in compatible software, will result in fines up to £3000.
Choosing a third party software
One of the rules of MTD for Income Tax is the use of third-party approved software. You can check which software is approved by HMRC here . You will need this software for your records even if you have an accountant filing on your behalf.
While you can still keep spreadsheet records for your business, your filing must be done via one of these software platforms. Many business bank accounts now offer free access to integrated approved software, which could reduce the financial burden of your quarterly returns as well as make them faster as the software will have real-time information about your income and expenses.
Sign up to free HMRC webinars
While not widely advertised, HMRC does have some resources for freelancers and self-employed workers on their website. This includes a section about Making Tax Digital for Income Tax, including a recorded webinar or the ability to register for the next live webinar.
It is strongly advised that freelancers, sole traders, and self-employed workers register for email updates from HMRC about Making Tax Digital, in case changes are implemented as the scheme rolls out through the trial phase.
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