Making Tax Digital explained – 6 myths debunked

Making Tax Digital (MTD) for income tax will start rolling out from next month, but many landlords and sole traders are still unclear about what the changes involve.

Research by software firm Wolters Kluwer found that while two thirds of landlords say they are familiar with the new rules, almost half of sole traders admit they know very little about them.

To help clear up the confusion, Which? debunks some of the most common myths about MTD for income tax.

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Myth 1: 'MTD applies to all self-assessment taxpayers' 

This is incorrect. MTD will be phased in gradually over the next few years.

From April, only sole traders and landlords with combined income from self-employment and property of more than £50,000 will need to comply.

The threshold will fall to £30,000 from April 2027 and £20,000 from April 2028.

You are not required to comply until your qualifying income surpasses these limits, so if you earn under £20,000 after April 2028, you can continue submitting annual self-assessment returns as normal. There are no plans to lower the income bracket for MTD further. 

If your income from self-employment or property exceeds the threshold mid-year, you do not need to join immediately. 

All you’ll need to do is submit your January tax return as usual. HMRC will then notify you to move to MTD starting from the following tax year.

• Find out more: how to complete a self-assessment tax return

Myth 2: 'I’ll have a tax bill every few months'

MTD for income tax is changing how sole-traders and landlords report on their earnings. It is not changing the way the tax owed is paid. 

Under the current system, you submit your tax return as well as pay the tax owed by January 31 for the previous tax year, with payments on account due on 31 January 31 and 31 July where applicable.

Under MTD, taxpayers will need to digitally submit a tax return every three months (quarterly) over the April to March tax year. But you will still pay your tax bill by 31 January self-assessment deadline. Payment on account deadline dates will also remain in place.

The quarterly updates are due exactly one month and two days after the end of each three-month period. So the new deadlines are: 

• Quarter 1 (6 April – 5 July): Deadline 7 August
• Quarter 2 (6 July – 5 October): Deadline 7 November
• Quarter 3 (6 October – 5 January): Deadline 7 February
• Quarter 4 (6 January – 5 April): Deadline 7 May

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Myth 3: 'HMRC has free software for MTD'

You will need to use registered MTD-compatible software. This is currently offered by third-party companies, as HMRC does not provide its own software for taxpayers to use. 

The tax office believes that the private market can offer more advanced and better-supported solutions than a government-run service.

When choosing your software, you’ll need to make sure the product you choose can digitally record your transactions and connect directly to HMRC's systems via an Application Programming Interface (API). 

While you can still use spreadsheets for your bookkeeping, they must be linked to HMRC using ‘bridging software’ to meet the legal requirement for a ‘digital link’ under MTD.

HMRC has launched a tool on Gov.uk to help you find the most suitable MTD software for your needs. All you need to do is answer a few questions about you and your business. 

• Find out more: which Making Tax Digital software should you use?

Myth 4: 'It will be expensive'

HMRC has confirmed that MTD is likely to add extra costs for some businesses.

Government estimates suggest the transition could cost around £280 to £350 per business in the first year. This includes a one-off transitional cost, alongside ongoing annual costs of around £110 to £115 for software and administration.

However the actual cost will depend on your accounting needs and the software you choose.

There are free MTD-compatible software options available, but these are generally designed for those with straightforward tax affairs. Free versions often have limited functionality and may not include tools such as invoicing, bank feeds or automated expense tracking.

• Find out more: Making Tax Digital: 4 questions answered

Myth 5: 'You need an accountant for MTD'

You do not need to hire an accountant to comply with MTD.

As with the current self-assessment system, it comes down to how comfortable you feel managing your tax affairs.

Some taxpayers may be confident handling the new digital reporting requirements themselves. Others, particularly those with more complex finances, may still prefer the reassurance of working with an accountant.

Many MTD software providers offer guidance and support for sole traders and landlords managing their own tax returns. HMRC also publishes free advice and guidance on Gov.uk.

• Find out more:4 ways to prepare for Making Tax Digital for income tax

Myth 6: 'Dividend income pushes me into MTD'

Not all income counts towards the MTD threshold. 

Only income from self-employment and property is included when determining whether you need to join the scheme. Other income such as dividends, employment income, pensions, savings interest and capital gains is excluded. 

For example, if you earn £45,000 from employment and £6,000 from property, your total income is £51,000, but your ‘qualifying income’ for MTD is only £6,000, meaning you would not be required to join the scheme. 

If you are unsure how your various income streams are categorised or whether you meet the criteria, you can check on Gov.uk. 

• Find out more: dividend tax explained