Alongside the Spring Statement on 26 March 2025, HMRC published a technical note, Modernising the tax system through Making Tax Digital, setting out a number of practical changes to the rollout of MTD for Income Tax (MTD ITSA) which will impact certain sole-traders and landlords from April 2026 onwards. MTD was also mentioned as part of the Government’s plans to close the tax gap, alongside a consultation on making better use of third-party data. This article discusses the implications of these updates for the individuals affected.
MTD technical note
MTD ITSA is being introduced via a phased timeline and sole traders and landlords with income above £50,000 will join from April 2026, and those with income above £30,000 from April 2027. The most significant announcement on MTD at the Spring Statement was confirmation that the qualifying income threshold will be reduced to £20,000 from April 2028. This is expected to bring another 900,000 sole traders and landlords within the scope of MTD.
There was also an update on taxpayers who will be exempt, or have a deferral, including taxpayers who have a Power of Attorney, non-UK resident foreign entertainers and sportspeople (who have no other MTD qualifying income), ministers of religion, Lloyds Underwriters and recipients of the Married Couples’ or Blind Persons’ Allowances.
There will also be a deferral until April 2027 for individuals who “have information that they would need to submit using the SA109 schedule”. The SA109 supplementary pages are used to record a taxpayer’s residence and domicile status, and claim personal allowances as a non-UK resident. It is hoped that the 12-month deferral will give HMRC sufficient time to find constructive solutions to questions surrounding the applicability of MTD ITSA to internationally mobile employees. For example, there would appear to be little to be gained from a UK-inbound international assignee being mandated into the regime (with the ensuing compliance costs for either the individual or their employer) when their foreign income might be fully subject to relief under the new Foreign Income and Gains regime. For now, the deferral is welcome and we will continue to engage with HMRC in support of a pragmatic solution.
Another noteworthy announcement was that users will be required to submit their end of year information and final declaration/tax return using software and will be unable, as had previously been expected, to use HMRC’s online service. This means that both the quarterly and end of year returns will have to be submitted via MTD-compatible software.
Closing the tax gap
Still on the subject of MTD, included in the Spring Statement document were details of plans to increase late payment penalties for VAT taxpayers and Income Tax Self Assessment taxpayers as they join MTD, from April 2025 onwards. Such penalties are in addition to interest due on tax paid late. The new late payment penalty rates will be 3 percent of the tax outstanding where tax is overdue by 15 days, plus 3 percent where tax is overdue by 30 days, plus 10 percent per annum where tax is overdue by 31 days or more.
Alongside the Spring Statement, HMRC published a consultation on the better use of new and improved third-party data. The stated aims of these proposals are to help taxpayers get their tax right the first time, whilst closing the tax gap.
The outlined proposals build on previous publications centered around the simplification of tax reporting for individual taxpayers through digitisation and better use of third-party data. This particular consultation focuses on bank and building society interest, with the stated intention of ensuring these amounts are brought into account in PAYE coding (removing the need to file a tax return for many) and used to automatically pre-populate tax returns (for those who are in self-assessment).
This, together with the forthcoming mandation of MTD ITSA, perhaps marks the first tangible step to streamlining personal tax compliance for individuals since the vision of the ‘Single Customer Account’ was initially announced almost five years ago.
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