The way sole traders and landlords report their income is about to change in a big way, with Making Tax Digital (MTD) for Income Tax being just on the horizon. In this article we explain what exactly is changing, and how this could affect your side-hustle business.
What is MTD for Income Tax?
MTD for Income Tax is part of the Government’s scheme to gradually digitise the process of submitting tax returns.
It basically means that some people will no longer submit the usual Self Assessment tax returns, and will instead be required to keep their income tax records digitally and submit updates to HMRC on a more regular basis.
Who’s affected?
MTD Income Tax (IT) is rolling out in phases depending on your ‘qualifying income’. You’ll need to comply with MTD rules if your self-employed and/or property income is:
- Over £50,000 in the 2024 to 2025 tax year
- Over £30,000 for the 2025 to 2026
- Over £20,000 for the 2026 to 2027 tax year
What counts as qualifying income?
Qualifying income is made up of the sole trader and property income you reported in the previous year’s Self Assessment tax return. Other sources of income (e.g. dividends, wages from an employer, etc.) don’t count towards your qualifying income, even if they appear on your Self Assessment.
For example, let’s say you have multiple streams of income; dividends, earnings from a side hustle arts and crafts store on Etsy, and you also get income from renting out your spare room.
HMRC uses the total of your side-hustle and rental earnings recorded in your tax return to determine whether or not you need to join Making Tax Digital.
How often do I need to send MTD Income Tax updates to HMRC?
Once you’re registered for MTD for Income Tax, you’ll need to send HMRC quarterly updates to report your income and expenses relating to any self-employed or property income from that period.
Then, after your final quarterly update, you’ll need to submit your MTD Income Tax return. This should include your self-employed and/or landlord income, as well as any other income you might have. For example, any dividends or capital gains from the time period covered by the return.
This is called a ‘final declaration’ and will replace Self Assessment if you’re now using Making Tax Digital. The deadline will still be 31st January following the end of the tax year it relates to (which makes it easier to remember!).
Do I need to keep separate records for each side hustle business?
Yes, because you’ll need to submit a separate quarterly update for each business – just like you’d report your multiple side hustles using different sections on your Self Assessment tax return.
Keeping separate records for each source of income will help to avoid confusion, making it easier to submit quarterly updates and, ultimately, your MTD Income Tax return.
Separating your digital income and expense records for each business is strongly recommended even if you don’t need to follow the MTD rules just yet. Having separate records makes it much simpler to review and understand how each business is performing individually.
At some point down the line, everyone will be registered for MTD, so why not get ahead of the curve and start digitising your records now?
Do I need an accountant to help me with MTD IT?
It’s not a requirement, so you can go it alone or you can hire an accountant to help you with Making Tax Digital (and your tax reporting in general).
Either way, an accountant can break it all down for you and simplify the process of submitting quarterly updates, as well as a final tax return. They’ll also help make sure you’re operating in the most tax-efficient way possible!
Find more help in our online accounting hub, and learn more about how to find the right accountant for your business.
