Income Tax

Understanding MTD for Income Tax starting April 2026

These are brief notes on a very new concept in the UK and are not totally comprehensive.

If you’re navigating these updates, your local Hackney Accountant can help ensure your approach remains tax-efficient.

Who is included

People who have gross income from sole tradership and property
Exceeding the threshold £50k to begin with if not excluded
Note non-residents and partnerships are not included
Note foreign property income is included in MTD for UK residents

Exemptions

Partnerships

(Note this means partnerships, not husband and wife jointly owning a property and filing separate tax returns).
Trusts, estates and non-resident companies
Taxpayers with powers of Attorney
Non-UK resident foreign entertainers and sportspeople who have no other income sources that count as qualifying income for MTD income tax
Do not have a UK NINO
Claiming Qualifying care relief for that source of income only
Lloyds underwriters, ministers of religion

Digital exemption

Note. Applications are now open
Automatically exempt if already have exemption for MTD for VAT
Not practical to use internet due to:

• Age
• Disability
• Location
• Religious reasons

Turnover

Based on the Turnover for which the filing deadline has just passed
Where activity is not for a full year this will be annualised

It will therefore be calculated on the 24/25 tax return due 31/1/26
CIS is covered by this as there are no special rules

In the first year the turnover threshold is £50,000
Year 2 is £30,000
Year 3 is £20,000

Turnover combines trade and rental but are submitted separately
Turnover is before expenses, i.e. total income.
Salary is not included

Income not on a tax return for calculation:

Rent a room relief is not taken into account but then it is included in the MTD return.

New Businesses

Will have to comply from the start of their third tax return.
I.e. Start 25/26 complies 28/29

When to stop complying

Where the turnover falls below the threshold for three years
Theoretically If not trading taxpayer needs to comply for three years.
(However, it is not the HMRC intention to enforce the three-year lock).
If no qualifying income, then taxpayer does not have to comply.
If the income falls below the threshold, then taxpayer cannot automatically opt out. However, if there is no tax to pay then the exception is the digital exclusion route as the costs of complying will be the excuse.
HMRC have indicted that if all qualifying trade has ceased then taxpayer does not have to register.

Digital records

Recording records must be using software
Excel spreadsheets are acceptable but will need bridging software.
There are no requirements to keep digital invoices
Individual requirements to record transactions digitally.
Taxpayer can make a daily summery rather than individual transactions
Ther is no requirements to keep in real time. HMRC acknowledges that record keeping will be done at the time of the quarterly return.
There is no free software produced by government.

Timings

There is no change in the time limits
Keep digital records 5 years
Need to ensure continuity if change in software.

Record the following:

• Transaction
• Amount
• Date of transaction
• Category into which the transaction falls

What’s needed

Submit Quarterly update for each source of money i.e. rental income, income from trade
HMRC might not use these records
Each return is cumulative

Finaly submit a finalisation statement
Returns need to be a mirror of the tax return

Information to be included

For 3 line accounts the return would be:

• Total income X
• Less finance costs X
• Less other expenses X
• Net Profit X

Cannot be penalised if the return is incorrect.

Penalties

There are late filing penalties
The Time limit is one month from end of each quarter (run from 1th April) i.e. 7th of the month

Quarters

Normal returns are 6 April to 5 July
However, an election can be made to start at beginning of the month i.e. 1st April to 30th June (calendar quarters) This election must be made prior to first quarter filing

Estimates

Estimates could be used theoretically but should not be possible unless there is a delay in getting information. However, this would indicate that you are not keeping digital records
Cannot present information that is incorrect or misleading. To avoid this, take a pragmatic risk-based approach, Ie is person competent do a sanity check to see all is as expected.

Theory notes

All returns submitted automatically by pressing a button
Will depend on how confident people are.
Must finalise records before submission.
If error found after 4 qtr. report, then it will need to be resubmitted.

Finalisation return:

Deadline 31st January following the end of the year.
Can be corrected by HMRC
Take 4th quarter figures and then make accounting a tax adjustment. (capital allowances etc, private use)
If accounts production software used, then will need to be linked to the returns.

Stage one

Adjustments to self employed and property income

Stage 2

HMRC will prepopulate the return.
Then bring in other income and grants Dividends, Capital gains, foreign income Interest, students loans etc

Stage 3

Information is submitted to HMRC

After this HMRC will produce a tax calculation which is done quickly.
This can be adjusted but if the adjusted figure is wrong then customer support team needs to be contacted to resubmitted.
Can use a different software package to file finalisation return.
Will not be able to use HMRC software to file it but it must talk to quarterly return software.

Stage 4

One taxpayer is happy with figures these can be filed

Penalty

Assumed that there will be a soft-landing, but this is not certain
Late submission will attract a penalty point.
After 4th late return £200 penalty.
Points reset to nil when 12 months have passed with returns submitted on time.
Late payment penalties – payment dates not changing but penalty will. 15 days late 3% after 30 another 3% then 10%. So, if a year and 30 days penalty will be 16%.

Can be done individually

Can be done by agent on behalf of taxpayer. As soon as threshold is reached.

Must have an agent’s services account. Can use government gateway to add to services but to set up must be done individually.

There can be Multiple agents but there must be a main agent.

If you’re unsure how these updates affect your tax savings, get in touch with Hackney Accountant. A qualified Accountant in Hackney can help you assess your options and stay fully compliant while maximising your take-home income. The right strategy now can save you hundreds — if not thousands — over the year ahead.