MTD ITSA – should you sign up early?

In recent years, we’ve written a lot about Making Tax Digital. Currently, VAT registered businesses have to comply with Making Tax Digital for VAT. This means they have keep digital financial records and submit their VAT returns electronically. Making Tax Digital for Income Tax Self Assessment (MTD ITSA) was due to be introduced in April 2024. However, this has been delayed. Sole traders and landlords earning more than £50,000 will now have to comply with it from April 2026. Those earning more than £30,000 will need to comply from April 2027.

MTD ITSA testing

While MTD ITSA has been delayed, you may be able to sign up early to help test the system. You can either do this via an agent (normally your accountant) or individually.

If you are already using cloud accounting software, you may think it’s worthwhile signing up for MTD ITSA early. It’s up to you, but before you act it’s worth knowing what signing up for MTD ITSA entails. In this article, we look at two things you need to consider: the software you use and a changed penalty regime.

Can you sign up for Making Tax Digital for Income Tax?

If you’re thinking of signing up for MTS ITSA early, you first need to check that you’re eligible. The full eligibility criteria are on this page. Essentially, you need to be up to date with your taxes and have income from self-employment or property. However, do check the criteria. Certain individuals, such as people who have high income Child Benefit charges, partners in a partnership, Ministers of religion and foster carers cannot sign up yet.

MTD ITSA software

Perhaps the most important thing to consider before signing up to MTD ITSA is the accounting software you use. There are only five software packages that are compatible for MTD ITSA during the 2025/25 financial year. These are:

• 123 Sheets (bridging / record keeping software)
• Intuit QuickBooks Online (record keeping software)
• Sage Accounting (record keeping software)
• SE_reports (bridging software)
• self assessment direct (bridging / record keeping software)

There are many other software providers who are working to make their products compatible with MTD ITSA. However, unless you use one of the five packages listed above, we don’t recommend signing up for MTD ITSA just now. This includes our clients who use one of our three preferred cloud accounting platforms: FreeAgent, Xero and Hammock.

MTD ITSA and penalties

If you do decide to sign up for MTD ITSA, you need to be aware that you’ll be subject to different penalties. Indeed, you need to agree to them before you’re allowed to sign up.

The penalties are points based. If you are late making an annual return, you get one penalty point. Get two penalty points and you face a £200 penalty. If another annual return is late, you get another £200 charge. Points will be removed if you submit returns on time for 24 months.

While MTD ITSA requires you to submit quarterly updates, penalty points aren’t applied to late submissions of these during the testing phase.

It’s also important to note that you’ll get a late payment penalty if you don’t pay your year-end tax bill or July balancing payment on time. If you are more than 15 days late, you’ll pay 2% of the outstanding tax. If you don’t pay within 30 days, you’ll be slapped with another 2% charge. After day 30, there’s a penalty of 4% per year for every day the tax is unpaid.

Essentially, under this regime, late payment of your annual income tax bill is penalised earlier. In addition, late balancing payments attract penalties – currently they are only subject to interest.

Should I sign up now?

As we said earlier, it’s entirely up to you whether you want to sign up for MTD ITSA early. If you don’t have compatible software, it’s best to wait until your cloud accounting package is compliant. Also, only sign up if you’re happy to accept a harsher penalties regime. If you’d like any advice on Making Tax Digital, please talk to your account manager at THP. They’d be delighted to help you.