MTD for Income Tax is coming: Are your self-employed clients ready?

Image: “Income Tax” by Images Money is licensed under CC BY 2.0.

At a glance

• Making Tax Digital for Income Tax Self Assessment comes in for the self-employed next April.
• Self-employed freelancers and sole traders remain overwhelmingly unprepared.
• Accountants can help set up the right software to avoid penalties after the deadline.

It’s been a tough few years for the self-employed, who are feeling the squeeze of economic uncertainty and cost-of-living pressures. The number of sole proprietorships decreased by 2% between 2023 and 2024, reflecting this strain.

The government says it introduced MTD ITSA in a bid to “exploit the opportunities offered by digitalisation to make it easier for everyone to get tax right”.

However, awareness of the regulation and what needs to be done to comply remains a challenge. Jonathan Cooper, Founder and Director of The Director’s Helpline, has experienced the lack of awareness first hand from speaking to sole traders.

“Even the ones that are aware often lack a clear understanding of the details – and, more importantly, how it could affect them and their respective businesses.”

Worse still, accountants are also unprepared. A new survey conducted by IRIS Software Group (IRIS) found that more than two in five accountants (42%) are not yet prepared for the requirements.

What is MTD for Income Tax?

MTD for Income Tax includes keeping a digital record of all income and expenses using compliant accounting software. Popular options include QuickBooks and Xero, but more affordable alternatives like FreeAgent, TaxNav, and SE_reports are also available depending on the level of service needed.

HMRC publishes a list of the compliant digital tools, to help accountants work with clients to choose the right software.

Previously, sole traders only had to submit an annual tax return, but they will now need to complete quarterly updates too, which include details of income and expenditure.

What does the new regulation mean for sole traders?

Andreas Jones, Founder and Editor of KindaFrugal, says: “There’s a sense among some that MTD is only for larger businesses or something to worry about down the line, but it’s crucial they understand that the shift to digital record-keeping and quarterly reporting is inevitable and can be a real game changer.”

A recent survey conducted by Accountex London found that 82% of accounting professionals saw MTD as their top challenge of the next 12 months, while 79% saw it as their biggest opportunity.

Jones notes that freelancers and sole traders may experience some fear of change due to the added administrative burden and potential costs for software and training.

“For many, the process of switching to digital systems may feel overwhelming, especially if they’ve been managing their finances manually for years. Some might not have the technical skills or the time to learn how to use new software.”

However, the opportunities are also clear. The move to digital reporting has the potential to streamline operations and reduce the risk of mistakes, leading to more accurate tax returns. With real-time data, freelancers and sole traders can get a clearer picture of their finances throughout the year, helping them make better decisions.

How accountants can help

Sole traders and freelancers may be more susceptible to non-compliance than businesses, as they often have tight margins and may be unwilling to spend on the necessary software. Many also have complex income streams which can complicate matters, such as overseas clients or part-time employment.

In the first year of the new rules in particular, it’s crucial for accountants to take a proactive approach in identifying potential challenges for clients, helping them navigate them, and ensuring full compliance. One of the first steps is to help clients understand why MTD matters, and explain how it will benefit their business in the long run. 

For Cooper, it’s important that accountants establish their relationship with clients in an advisory capacity, not just compliance. “Too often, sole traders and directors of small businesses see accountancy as a necessary overhead, instead of what it actually is – a strategic investment.”

“The truth is that having the right accountant is key to the success of any business. And a proactive, communicative relationship ensures business owners are informed and supported through key changes like MTD.”

Accountants should take the initiative to recommend suitable software options that fit their client’s needs and budget, and offer training or support to get them comfortable with the tools. 

Caroline Hobden, Portfolio Event Director of Accountex, says that the wealth of financial software platforms and AI tools available on the government’s list of approved MTD software means that there will be something that fits everyone’s different requirements from the software. 

“Accountants should spend time researching and learning how different software options work and think about what their ideal software does so that when they’re transitioning their clients, it’s easier to demonstrate the value,” Hobden says.

Jones adds that it’s also essential to assist with setting up systems for regular, efficient data entry so clients don’t fall behind on quarterly reporting. “Regular check-ins and proactive guidance will help them stay on track and avoid stress when the changes take full effect.”

The MTD for Income Tax transition presents an opportunity for accountants who should see it as a chance to deliver value, rather than just a compliance hurdle. By helping self-employed clients streamline admin and improve cash flow forecasting, accountants can establish themselves as a partner to guide them through the changes.

HMRC will be presenting on Making Tax Digital for Income Tax – getting ready! at the upcoming IFA Conference on 26 June. Register for the conference here.