Making tax digital (MTD) is a UK government initiative that aims to modernize the tax system by replacing paper-based tax returns with digital ones. Making it simpler for people and businesses to manage their tax affairs, lowering errors, and enhancing the effectiveness of the tax system are the main objectives of making tax digital.
If you are an individual or a business owner in the UK, here is a step-by-step MTD guide:
1. Determine if you are eligible for making tax digital
To determine if you are eligible to participate in the making Tax Digital initiative, you will need to consider your tax filing requirements and your gross income or business turnover.
If you are an individual, you must file self-assessment tax returns and have a gross income above the self-assessment threshold, which is currently £10,000 per year. This means that if you earn less than £10,000 per year, you are not required to file a tax return and are not eligible for making tax digital.
If you are a business owner, you must have an annual turnover above the VAT threshold, which is currently £85,000 per year. This means that if your business has a turnover of less than £85,000 per year, you are not required to register for VAT and are not eligible for making tax digital.
2. Choose a digital tax software
To participate in making tax digital, you will need to use digital tax software that is approved by HM Revenue and Customs (HMRC). There are several options available, including commercial software and free software for those with simple tax affairs.
Commercial software is typically more feature-rich and may offer more support and guidance, but it may also be more expensive. Free software is generally suitable for those with simple tax affairs and may be a good option if you do not want to pay for software.
Popular options for digital tax software include HMRC’s own Basic PAYE Tools, as well as software from companies like QuickBooks, Xero, and Sage. You should consider the features and pricing of different software options to determine which one is best suited to your needs.
3. Register for making tax digital
Once you have chosen your tax software, you will need to register for making tax digital with HMRC. You can do this by logging in to your HMRC online account and following the instructions. If you do not already have an online account, you will need to create one.
4. Set up your digital tax account
After you have registered for making tax digital, you will need to set up a digital tax account. This will be your online portal for managing your tax affairs, including filing tax returns and paying taxes.
5. Keep records digitally
To participate in making tax digital, you will need to keep your tax records digitally, using software like Excel or a dedicated bookkeeping software. You will need to keep records of all income, expenses, and other financial transactions that are relevant to your tax affairs.
6. File your tax return digitally
When it comes time to file your tax return, you will need to do so digitally through your digital tax account. You will need to enter all of your tax information, including income, expenses, and other relevant information.
7. Pay any taxes owed
If you owe taxes, you will need to pay them through your digital tax account. You can do this by setting up a direct debit or by making a one-off payment.
By following these steps, you can make the transition to digital tax and participate in the making tax digital initiative. This will make it easier for you to manage your tax affairs and ensure that you are in compliance with UK tax laws. It is important to keep your tax records and tax returns up to date and accurate, as failure to do so could result in fines or other penalties.