Tom Walker, partner at Wellers, the SME accountants, discusses the UK Government’s changes to the Income Tax Self Assessment and what self-employed workers need to be aware of to avoid potential penalties from HMRC
KEEPING on top of the finances is crucial for any business. But when you’re self-employed, as many in the construction industry are, this single admin task can feel like a full-time job. Now, the way self-employed individuals report their income in the UK is changing, potentially making the process even more time-consuming.
What’s changing?
HMRC is expanding its Making Tax Digital (MTD) scheme to Income Tax Self Assessment. This is the latest phase of HMRC’s plan to modernise the UK’s tax system, with the long-term goal of phasing out the traditional annual tax return altogether in favour of real-time reporting.
Before that can happen, however, MTD will require self-employed people to submit quarterly updates using compatible software. In theory, submitting quarterly tax returns will minimise mistakes and help business owners manage their finances better, as they will have more up-to-date insights into their financial performance. The changes also apply to landlord income, so if you rent out any properties, you must declare this income through the MTD scheme as well.
Who does MTD apply to?
The new rules will apply to anyone who files a Self Assessment tax return and earns £50,000 or more annually. This threshold will be reduced in stages over the next few years.
If your gross income is less than £50,000, everything remains the same for you in the short term and you can continue using the existing Self Assessment process. However, you can also choose to opt-in early.
When do the changes take place?
HMRC is introducing the MTD scheme in stages, based on your most recent tax return.
• From 6th April 2026, MTD will apply to individuals (including self-employed business owners) whose total qualifying income exceeds £50,000 per year
• Then, the following year, the threshold will drop to £30,000
• In 2028, the threshold will reduce again to £20,000
• After that, HMRC will continue to lower the threshold but has not announced a timeline for this yet.
How does the process work?
There are three key areas of change:
1. Record keeping. You must keep digital records of all your income and allowable expenses. To do this, you’ll need to use HMRC-approved and MTD-compatible software to record transactions as they happen. The software should record sales, receipts, purchases, and payments. Examples include Xero and Quickfile.
2. Quarterly returns. Instead of submitting one tax return per year in January, you will need to submit four quarterly returns through your chosen accounting software. You won’t be required to pay tax during these quarterly submissions, but you will see an estimated tax calculation.
3. End of year tax return. Also called the final declaration or End of Period Statement, this will confirm and finalise your annual earnings. You’ll also need to declare any additional personal income at this point, such as savings or dividends. The final tax owed will then be calculated, and you should follow the payment on account process as usual.
How should I prepare?
Preparing early will ensure a smooth transition and help you remain compliant. Here’s a step-by-step guide:
1. Assess your eligibility
2. Choose and transition to a suitable accounting software
3. Review your current record-keeping and migrate any manual records to your new software
4. Train yourself on how to use the software
5. Establish a process for quarterly reporting to ensure you don’t forget
6. Speak to your tax advisor to clarify roles and responsibilities
Penalties for late submissions
HMRC is also introducing a penalty scheme. The points-based system will award a penalty point for each quarterly or annual submission you miss.
Once you accumulate a certain number of points, HMRC will issue a financial penalty. So, it’s wise to prepare early to prevent delays submitting quarterly returns.
Remember, if you’re unsure of the MTD process or how it will affect you, make sure you speak to your tax advisor for advice and reassurance before the changes take place.
