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Benefits of Making Tax Digital

Published 6 December 2024

The government is introducing new requirements on the way some sole traders and landlords report income and expenses to HMRC. If you’re a sole trader or landlord with income over the qualifying threshold, you’ll need to:

• use compatible software to keep up to date digital records
• send updates of income and expenses to HMRC each quarter

This will help you stay on top of your tax affairs and business planning to grow your business. It will also help to make sure everyone pays the right tax, so more money is available to fund public services, like schools, the NHS and police, and to support growth across the UK.

Create and store digital records

Using Making Tax Digital for Income Tax will enable you to replace paper-based systems, or upgrade your record-keeping, so you can:

• store all your records digitally and securely
• reduce risk of errors
• create digital records using your bank feed
• transfer data easily between systems
• save time by not having to re-enter information
• avoid losing paper receipts and invoices

We’re working closely with software providers to help ensure the software they’re developing meets the needs of small businesses and landlords.

Some software will give tailored feedback and helpful prompts. This will help identify possible errors early, so you can check and correct them before sending your tax return. It will also tell you about any tax reliefs and allowances you may be able to claim, supporting your business growth.

Closer to real-time view

Updating records and making full use of software features such as helpful prompts, where available, will reduce the chance of errors. This means less time spent on record-keeping and tax administration, and more time for growing your business.

Making Tax Digital for Income Tax helps you to:

• see an in-year estimate of how much tax you owe
• understand your cash flow better
• make more informed financial decisions for your business
• reduce the risk of under or over paying tax

This also means HMRC can take better informed actions, including tailoring payments on account to current circumstances. It allows us to check for errors more regularly, to ensure everyone pays the right amount of tax at the right time.

Making Tax Digital for VAT has already had an impact, with 48% of businesses saying it’s made them feel more in control of their finances.

New penalties

We’re introducing a new penalty regime to support Making Tax Digital for Income Tax.

The new penalties for late submissions will work on a points-based system — one penalty point will be given for each late return. A points-based system for late submissions means you will not get a financial penalty for the occasional slip up.

New late payment penalties are more proportionate to the amount of tax you owe, and how long it takes you to pay it.

We believe this strikes the right balance between supporting taxpayers who are leading busy lives and dealing with intentional non-compliance.

Join testing voluntarily

HMRC is fully testing the service with volunteers to make sure it meets the needs of all users. This helps us improve and allows users to get started and shape the service.

If you sign up for testing now, you’ll build your understanding of and confidence in using the new systems and processes early. In testing, you’ll have access to HMRC’s dedicated Customer Support Team to help you with any questions about the service.

If you’re an agent, by volunteering to test Making Tax Digital for Income Tax, you’ll:

• be able to influence what the service is like in future
• be ready to support clients when the service must be used
• become familiar with the software you’ll use with your clients
• stay up to date with competitors using the service, or start using it before them

Find out if and when you need to use Making Tax Digital for Income Tax

More information

Find out more about:

• using Making Tax Digital for Income Tax
• how businesses have benefitted from Making Tax Digital for VAT