Making Tax Digital (MTD) for Income Tax

Making Tax Digital continues to be one of the biggest changes to the way sole traders and landlords report their income to HMRC.

MTD requires qualifying taxpayers to maintain digital accounting records and submit quarterly updates to HMRC using compatible accounting software, rather than relying solely on an annual Self Assessment tax return.

The rollout is taking place in stages, depending on an individual’s qualifying income.

The current timetable is:

• 6 April 2026: Sole traders and landlords with qualifying income over £50,000.
• 6 April 2027: Those with qualifying income over £30,000.
• 6 April 2028: Those with qualifying income over £20,000.

Qualifying income is generally the total gross income received from self-employment and property before expenses are deducted. Where an individual has both sources of income, the relevant amounts are combined.

New MTD Penalty Easement for 2027

The Budget confirmed that taxpayers joining MTD from April 2027 will benefit from a temporary relaxation of the late-submission penalty rules.

Those entering MTD for the 2027/28 tax year will not receive late-submission penalty points for their first four quarterly updates.

This should provide some welcome breathing space for taxpayers getting used to the new reporting system.

However, it is important to remember that this does not delay the introduction of MTD. Digital records must still be maintained, and quarterly updates must still be submitted.

The easement also does not remove other tax obligations, including the requirement to submit the annual tax return and pay any tax due.

Additional MTD Exemptions

The government has also confirmed that certain groups of taxpayers will be exempt from MTD for Income Tax until further notice.

These include individuals eligible for qualifying care relief, non-UK resident foreign entertainers and sportspeople, and certain non-resident taxpayers.

These are specific exemptions rather than a general postponement of the MTD requirements.

What Should Sole Traders and Landlords Do?

If you are approaching the MTD threshold, now is the time to review how you maintain your accounting records.

Moving to suitable accounting software, keeping your bookkeeping up to date and regularly reviewing your income and expenditure will make the transition much easier.

At Swan Saunders, we are already helping clients prepare for MTD, including setting up accounting software, maintaining digital records and managing quarterly reporting requirements.

Increased Trading Allowance for the Self-Employed

From 6 April 2027, the Income Tax Trading Allowance will increase from £1,000 to £3,000.

This could be particularly helpful for individuals earning relatively small amounts from self-employment, occasional trading or side businesses.

The trading allowance can be used instead of claiming actual allowable business expenses.

However, it is important to understand that this does not mean every self-employed person automatically receives an additional £3,000 tax-free allowance on top of their business expenses.

Where actual allowable expenses exceed the trading allowance, claiming those expenses may still be more beneficial.

For anyone running a small side business or considering self-employment, this change could make a difference to their tax position.

Increased Business Mileage Rates

There was some welcome news for business owners and employees who use their own vehicles for business travel.

The government confirmed changes to the approved mileage allowance rates.

The new rates are:

• 55p per mile for the first 10,000 business miles.
• 35p per mile for business mileage above 10,000 miles.

The 55p rate will become permanent, while the rate for mileage above 10,000 miles increases from 25p to 35p.

For tradespeople, consultants, mobile service providers and other businesses that regularly travel to customers, these changes could provide additional tax relief.

It remains important to maintain accurate business mileage records, including the dates, destinations and reasons for journeys.

Ordinary commuting between home and a permanent workplace does not normally qualify as business mileage.

Business Rates Relief for Shops, Cafés and Hospitality Businesses

Business rates remain a significant expense for many small businesses operating from commercial premises.

The Budget announced changes to Small Business Rates Relief in England, particularly benefiting eligible retail, hospitality and leisure properties.

From April 2027:

• The rateable value threshold for 100% relief will increase from £12,000 to £18,000.
• The tapered relief threshold will increase from £15,000 to £21,000.

The government also announced a two-year real-terms freeze on business rates bills for qualifying properties.

These measures could provide welcome support for smaller independent shops, cafés, restaurants and other eligible high-street businesses.

However, eligibility will depend on the property, its rateable value and the applicable relief conditions.

Business owners should check their business rates assessments to understand whether they qualify.

Energy Costs and Support for Businesses

Energy costs continue to be a concern for many businesses, particularly those operating from commercial premises or using energy-intensive equipment.

The Budget confirmed further support through the British Industrial Competitiveness Scheme.

From April 2027, eligible energy-intensive manufacturers will be able to benefit from electricity bill discounts of up to 25%.

However, this is a targeted scheme rather than a general 25% reduction in electricity bills for all small businesses.

Many smaller businesses, including shops, offices, cafés and service providers, will not necessarily qualify.

For these businesses, reviewing energy contracts, monitoring consumption and including future energy costs in cash flow forecasts will remain important.

Fuel Duty Changes

The government also confirmed that the temporary 5p-per-litre reduction in fuel duty will continue until 1 July 2027.

The planned inflation-linked increase in fuel duty has also been deferred.

For businesses operating vans, company vehicles or regularly traveling to customers, this should provide some short-term protection against rising fuel costs.

However, fuel remains a significant expense for many businesses, so keeping an eye on vehicle running costs and business mileage is still worthwhile.

Electronic Invoicing to Become Mandatory

Another significant announcement concerns electronic invoicing.

From 1 April 2029, VAT invoices will need to be issued in a specified electronic format.

This is different from simply creating an invoice and emailing it to a customer as a PDF.

Electronic invoicing involves structured digital information that can be processed directly by compatible accounting systems.

The government intends to publish the detailed policy and technical requirements by April 2028.

Although implementation is still some time away, VAT-registered businesses should start considering whether their existing accounting software will be suitable.

For businesses already using cloud accounting software, the transition may be more straightforward, although software providers will need to ensure their systems meet the final requirements.

Changes to Self Assessment Tax Payments

The Budget also announced plans to change how some taxpayers pay their Self Assessment liabilities.

From April 2029, taxpayers who currently make payments on account will be required to make more regular payments during the tax year towards their final tax liability.

Further details will be needed to understand exactly how these arrangements will work.

For sole traders and landlords, this could change how money needs to be set aside for tax.

Rather than relying on the existing payment timetable, individuals may need to plan for more frequent payments.

This makes accurate bookkeeping and regular tax planning even more important.

Understanding your expected tax liability throughout the year can help prevent unexpected bills and pressure on cash flow.

Changes to VAT and PAYE Payment Arrangements

The government also plans to introduce new direct debit requirements for certain VAT and PAYE liabilities.

The proposed implementation dates are:

• 1 April 2029: VAT.
• 6 April 2029: PAYE.

Businesses will need to understand how these arrangements apply to them once HMRC publishes further guidance.

For employers and VAT-registered businesses, maintaining sufficient funds to meet tax liabilities will continue to be essential.

Regularly reviewing VAT, PAYE and other tax provisions can help avoid unexpected financial pressures.

Corporation Tax and Tax Simplification

The government has announced plans to simplify certain aspects of Corporation Tax.

The intention is to work with businesses and tax professionals to reduce unnecessary complexity, improve certainty and make the tax system easier to navigate.

For small limited companies, any genuine simplification would be welcome.

However, the practical benefits will depend on the detailed proposals and any subsequent legislation.

Company directors should continue to review their profits, Corporation Tax provisions, dividend arrangements and future investment plans throughout the year.

Waiting until the annual accounts are prepared can mean missing opportunities to plan ahead.

Increased HMRC Compliance Activity

The Budget also confirmed further investment in HMRC’s compliance work.

An additional 670 compliance officers are expected to be recruited by 2029/30, alongside previously announced recruitment plans.

This forms part of the government’s wider approach to improving tax compliance and reducing the tax gap.

For businesses and individuals, the message is clear: accurate accounting records and timely tax reporting remain essential.

Maintaining good bookkeeping records is not just about satisfying HMRC.

It also helps business owners understand profitability, monitor expenditure, manage cash flow and make better financial decisions.

What Should Small Business Owners Be Doing Now?

Although several of the changes announced in the Autumn Budget will not take effect immediately, there are practical steps businesses can take now.

Review your bookkeeping systems. Make sure your accounting records are accurate, up to date and maintained using suitable software.

Check your MTD obligations. Sole traders and landlords should establish whether they are already required to comply with MTD or will be joining in April 2027 or April 2028.

Review your tax provisions. Consider whether you are putting enough money aside for Corporation Tax, Income Tax, VAT and PAYE liabilities.

Monitor your business expenses. Rising costs can quickly reduce profitability, so reviewing expenditure regularly can help identify areas where savings may be possible.

Plan for future changes. Electronic invoicing and changes to tax payment arrangements may still be several years away, but preparing early can make the transition easier.

Review your financial performance. Understanding your profit and loss account, balance sheet and cash flow throughout the year can help you make better decisions.

How Swan Saunders Can Help

At Swan Saunders, we believe accounting should be about more than preparing annual accounts and submitting tax returns.

We work with small limited companies, sole traders, landlords and growing businesses to help them understand their finances, meet their tax obligations and plan for the future.

Whether you need help preparing for Making Tax Digital, maintaining your bookkeeping, understanding your tax liabilities or reviewing your business performance, our team is here to help.

Our Quarterly Review Meetings also provide an opportunity to sit down and look at your profit and loss account, balance sheet, cash flow, potential tax liabilities and future business plans.

It’s about understanding where your business is today and making informed decisions about where you want it to go.