Why Making Tax Digital for Income Tax will make life easier for your business

Making Tax Digital (MTD) for Income Tax comes into force from April 2026.

If you’re a sole trader or landlord who meets the criteria, the new requirements from HMRC will offer you a great opportunity to overhaul your accounting admin tasks for the better.

By choosing the best cloud accounting software, and following the MTD for Income Tax rules, you’ll spend less time on admin and more time developing your products and services, adding value for your customers and clients, and growing your business.

In this article, we reveal how MTD for Income Tax will benefit you and your business.

Here’s what we cover:

An overview of Making Tax Digital for Income Tax

Making Tax Digital (MTD) for Income Tax is a HMRC’s new tax system that will be launched across three phases, in April 2026, April 2027 and April 2028.

It affects sole traders and landlords that have income over £50,000 in the first phase, over £30,000 in the second phase, and over £20,000 in the third phase.

The new rules mean you’ll be required to manage your taxes by using functional compatible software for your accounting.

Across each year, you’ll need to provide four quarterly reports, then a final declaration by 31 January.

This might sound like a lot of additional work but that’s where the software will come into play.

Most tasks required to complete the various steps will be automated, and the data should be there ready and waiting when the time comes.

Below are five ways that MTD for Income Tax will make life easier for you and your business.

1. You’ll have more clarity of your financial position

Making Tax Digital for Income Tax can be so beneficial for your business.

Yes, you’re required to pay more attention to your accounting than you might be used to.

But this means you’re more likely to know your financial position at any given moment. You’ll know about the cash flowing in and out, and how much money you have to operate with.

Compare that to how some businesses are run, where the owner might only get this kind of insight once a year when they visit their accountant at tax return time.

Additionally, if you use mobile accounting apps, you can get this kind of insight at any time of the day.

You can always be connected to your business finances, reducing the amount of times that you need to sit down at a desk to work out and understand your numbers.

2. You’ll know how much tax you owe

One key benefit of MTD for Income Tax is that you’re able to keep on top of your tax liability across the year.

In short, it means you have the best possible idea of how much you’re likely to owe.

This benefits cash flow.

You might be used to setting aside a quarter or a third of your income for tax purposes. This is often more than enough to cover January’s tax bill, but the idea is that saving too much is better than saving too little.

But instead, you can set aside how much you’re actually likely to owe, based on the data shown in your quarterly reports.

This amount will still be an estimate, of course, and because of the potential need to make adjustments and reliefs in January it continues to be a good idea to be generous in your estimate.

But you can certainly avoid setting aside far too much each year.

As with any software, what you see in your accounting software for the quarterly reports is only going to be as accurate as the data you input.

But if you get the simple steps of MTD for Income Tax correct, the rest of your accounting should follow suit.

3. It will be easier to spot accounting mistakes and amend them

Making mistakes with your accounting can not only give you a false idea of your cash flow position, it can also attract penalties from HMRC.

Similarly, late submissions can attract penalties, too.

To accompany MTD for VAT and MTD for Income Tax, a new points-based penalty system has been introduced by HMRC that will mean automatic £200 fines are applied if a certain number of points is exceeded in a time frame.

This came into force on 1 January 2023 for MTD for VAT customers, and will apply as soon as taxpayers become mandated for MTD for Income Tax in either 2026, 2027 or 2028, depending on their income.

But fines and points are just one of your worries.

Accounting mistakes also eat your time when they must be corrected. And you don’t want yet more admin tasks on top of what you’re already doing.

MTD for Income Tax makes it harder to make mistakes and easier to spot any you do make because of the requirement to send quarterly updates to HMRC. Essentially, you’re checking your accounting data every three months.

Perhaps surprisingly, there’s no legal requirement for the quarterly reports to be correct. But it’s obviously a good idea to be as accurate as you can be.

And while your accounting software can only be as accurate as the data you input, MTD-compatible accounting software will automate much of the work required to create the quarterly reports.

In many cases, it’ll simply be a matter of checking the report and then opting to submit it.

4. Working with your accountant could become more effective

Good-quality MTD for Income Tax software will be cloud-enabled and will offer an option to connect to your accountant’s systems.

This means the accountant can see the same financial data as you do, so can help with the periodic reporting requirements of Making Tax Digital.

And depending on your needs, this insight means they can evolve into more of a business partner.

After all, they have the knowledge to examine financial data and vast amounts of experience in businesses of all kinds due to their work with other clients.

Your accountant will be able to spot any problems that might arise long before they actually become a problem. And they can spot opportunities for you too.

If nothing else, connecting your accounting system to theirs makes it much easier each January when you need to make the final declaration(s) for your business(es) or property income, and pay your tax.

And that means you can say goodbye to the days of visiting them with a big box full of paperwork and receipts.

5. You’ll bring new tech into your business and work more efficiently

Choosing good-quality MTD for Income Tax-compatible software is an opportunity to get the most from technology for the benefit of your business.

It would certainly be a mistake to assume that all software solutions are essentially the same. In fact, being able to handle your accounting is just the very basic level for the best accounting software.

Key developments in recent years include artificial intelligence in the form of machine learning. This can make bank reconciliation much quicker, for example, by automatically matching incoming payments against invoices.

Similarly, taking a snapshot of a receipt using your phone can mean the data is captured and inserted automatically into your accounting.

All this means you’ll save time that can be used for other tasks and opportunities, such as freeing up your staff, adding value to your customers, growing your business. and getting your weekends back.

Final thoughts

Adapting to MTD for Income Tax provides you with an opportunity to truly get to grips with your business accounting.

It’d be wrong to assume this means spending more time on the task.

Quite the opposite is true.

If you’re really managing your business accounting well, you should find the time you spend doing it is reduced.

Additionally, the amount of vital information you learn about your business will increase.

This will allow you to be more agile in your decision making, and means more opportunities can be harnessed, which leads to a stronger business and faster growth.

Editor’s note: This article was first published in September 2021 and has been updated for relevance.