To drive awareness about Making Tax Digital for Income Tax, HMRC is writing to hundreds of thousands of taxpayers with income over £50,000 falling under reporting net.
From April 2026, landlords and self-employed and sole traders with income in excess of £50,000 from earnings, rental income and investments, will have to report quarterly under MTD for Income Tax.
HMRC is starting to send letters out to a selected group of taxpayers to advise them to prepare for the changes. It estimates that nearly 900,000 taxpayers will be subject to the first phase of MTD, and has issued a notice to accountants and tax advisers to expect an increase in questions from clients in the next four weeks as the latest letters land.
The letter is being sent to individual taxpayers who have already submitted a 2024/2025 tax return by August of this year, and informs them that based on their disclosed income reported in their self-assessment tax returns, they will have to report under MTD from April 2026.
Each letter outlines how to prepare for MTD and contains a QR code linking to relevant HMRC guidance, to help taxpayers understand the new reporting requirements, which are the biggest overhaul in individual income tax reporting since the introduction of self-assessment nearly in 1997.
The letter also advises taxpayers to 'speak to their tax agent, if they have one, for further support'.
For taxpayers, the new rules mean they have to create, store and correct digital records of their self-employment and property income and expenses, send quarterly updates to HMRC split between the different types of income so earnings and property rentals are separate, and then also submit their tax return and pay tax due by 31 January the following year.
HMRC will not provide any free software to do MTD for Income Tax so all taxpayers will have to buy their own commercial software, or use an accountant or tax agent who will have the necessary software to file the five quarterly and annual submissions.
While MTD is racing down the track, it is important to note that the first actual quarterly return will not be required by HMRC until 7 August 2026. But the record keeping will have to start from April 2026 to prepare the first quarterly return.
This is not HMRC's first communications with affected taxpayers, but is a more focused campaign. Earlier in the year, HMRC wrote to 864,000 identified landlords, self-employed and sole traders advising them that they would have to file under MTD from April next year.
This is a major overhaul of the current self-assessment tax return system, which will see all affected taxpayers forced to use digital reporting software to report their quarterly earnings to HMRC. Then at year end, they will have to file a final in-year update, which can include adjusted numbers. It is essential to be prepared for this major change as penalties will be in place for non-compliance and HMRC has not indicated that it will take a lenient approach in year one.
Colin French & Peter Nichols – Tax Directors BFN Accounts & Tax
http://www.bfnaccounts.com