From April 2026, how self-employed business owners and landlords report income to HMRC is changing.
Making Tax Digital has been talked about and advertised for years, and while it finally comes into force in three months time, there are still thousands of businesses which are not ready.
Who will be affected
HMRC will use figures from your most recent tax return to determine whether you need to comply, and eventually, every self-employed individual will need to file their accounts digitally.
The first phase has set the income threshold for everyone with an income of more than £50,000. This reduces to £30,000 from April 2027 with another likely reduction to £20,000 in 2028.
How it works
Digital records – Under the new rules, paper records will no longer be acceptable, and income and expenses must be recorded digitally using MTD-compatible software such as Xero or Sage.
However, some software will be a bit overkill for smaller or solo businesses – HMRC have a search tool which will recommend the level of software that you need – you can find it on their guidance pages.
Quarterly updates – You’ll need to send a summary of your income and expenses at the end of each quarter. Though it’s important to recognise that these are essentially progress reports and will not change when you pay your tax.
End-of-period statement – At the end of the tax year, you will need to finalise your income and allowable expenses for each business or property income.
Final declaration – You’ll also need to submit a final declaration – this replaces the traditional Self Assessment tax return.
What to do now
Those already using cloud accounting software are well prepared for the transition, though those relying on spreadsheets or paper records should prioritise moving to a digital system as soon as possible.
While the penalties for late submission are points-based (one point for each missed deadline with four resulting in a £200 fine), failing to keep proper records can result in penalties of up to £3,000 per year.
Getting used to the digital software now, before quarterly reporting becomes mandatory, will give you time to familiarise yourself without the initial pressure of a penalty deadline.
For businesses with multiple income streams, such as those who are both self-employed and landlords, most mainstream accounting software can manage different income sources through one subscription – but it can be tricky when you first start using it.
There are bookkeepers who can help you for a small fee each month – but this is only really necessary for businesses that are a little more complex, such as those VAT registered or with multiple incomes and expenses.
Better visibility
While the change can be frustrating for those who are used to more traditional ways of submitting their tax reports, the use of digital software is actually a great way to get a more rounded, data-driven view of your business.
You will easily be able to compare incomes and expenses, see where you are spending and earning, and generally get a better understanding of how the business is running.
Scott Harris is the director of Cwmbran-based Accountants & Tax Advisors, Green & Co, and an ACCA qualified accountant.
