Making Tax Digital for Income Tax: What Is It and How Does It Affect Self-Employed People?
Making Tax Digital
December 2021

Making Tax Digital for Income Tax: What Is It and How Does It Affect Self-Employed People?

As part of HMRC’s Making Tax Digital, self-employed people operating as sole traders will soon be required to complete four tax submissions per year instead of one.

Jamie Trowell
Jamie Trowell
Accounting Lead at Coconut
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What is Making Tax Digital?

Making Tax Digital (MTD) is a government-led initiative, designed—in theory—to make tax admin simpler for taxpayers. They started with VAT in 2019 and they’re now moving on to Income Tax.

It marks the end of the annual tax return as we currently know it, and in its simplest form, is a new way of reporting your earnings to HMRC on a more regular basis.

Practically though, it means a lot more work for sole traders—as you’ll now need to submit details of your income and expenses to HMRC four times a year, instead of one

That’s a lot.

But here at Coconut, we’re dedicated to making the transition as painless as possible, and to supporting self-employed people through this change.

And maybe even making bookkeeping enjoyable along the way!

Who does it apply to?

This change applies to sole traders*, a partnership or make income from property, and your income is over £10,000 (before tax).

*aka self-employed people, freelancers, tradespeople, sellers and makers...anyone that runs a business but doesn’t have a limited company.

What does it mean for me, a self-employed person?

You’ll have to use a digital product to track your income and expenses

Whilst many choose to do this already, it will become a requirement to keep digital records of all your business income and expenses from April 2024.

You can’t just use any old software though; it needs to be HMRC approved, and compatible with MTD. We’re working on this now and will be ready in plenty of time. So if you’re already using Coconut, you’re one step ahead!

You’ll have to submit your income and expenses four times per year, instead of one

Every three months, you’ll need to send a summary of your business income and expenses to HMRC. Coconut will help you keep on top of this and let you know when it’s time for another update.

After you’ve sent an update, you’ll then be able to see a year to date calculation of how much tax you owe based on the information you provide.

You’ll also need to submit a final declaration at the end of the year

This is where you finalise your total business income and expenses for the year as a whole—essentially confirming that the quarterly updates you sent throughout the year are correct. It also gives you an opportunity to make any adjustments if you need to, and make HMRC aware of any personal income you have or reliefs you want to claim.

When does Making Tax Digital for Income Tax come into effect?

Making Tax Digital for Income Tax was originally scheduled to come into effect in April 2023. But in September 2021, the government announced that, in light of the pandemic, the rollout for sole traders would be delayed by 12 months to April 2024. Meaning self-employed people now have a little extra time to get prepped.

When do I need to start preparing?

Although April 2024 might seem like a long way away, you do need to start planning for it now. It’s a big change and it will take some getting used to.

If you already use a specialist freelancer bookkeeping tool like Coconut, then you’re off to a good start. But if you’re working from home-made spreadsheets or straight up pen and paper, then you might want to start testing the waters.

The sooner you start getting into the right habits around digital bookkeeping, the more comfortable and familiar you’ll be with it when the time comes.

Try Coconut for free

Do I need to do anything right now?

Aside from starting to use a digital bookkeeping tool to get into the swing of things (if you aren’t already)—no, not yet.

You will eventually need to sign up for MTD for Income Tax via HMRC, but there’s plenty of time and we’ll share more information on that as it becomes available.


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