Under Making Tax Digital for Income Tax Self Assessment (MTD for ITSA), sole traders and unincorporated landlords within its scope will be required to keep digital records of their trading and/or property income and provide quarterly updates to HMRC using MTD-compatible software.
Its introduction is being phased in.
Phase 1 – April 2026 start date
From 6 April 2026, MTD for ITSA will apply to sole traders and unincorporated landlords whose combined taxable business and property income exceeds £50,000 a year.
It is important to note that the trigger is the total from both sources.
For example, a sole trader with business income of £40,000 who also has property income of £12,000 will need to comply with MTD for ITSA from 6 April 2026 regardless of the fact that separately neither business nor property income exceed £50,000.
Phase 2 – April 2027 start date
The MTD for ITSA mandation threshold is lowered to £30,000 from 6 April 2027.
From that date, sole traders and unincorporated landlords with business and/or property income of more than £30,000 must comply with the requirements of MTD for ITSA.
The rate increase also extends to Class 1A National Insurance contributions (payable by employers on taxable benefits in kind, taxable termination payments and taxable sporting testimonials) and to Class 1B National Insurance contributions (payable by employers on items within a PAYE Settlement Agreement and on the tax due under the agreement), both of which rise to 15% from 6 April 2025.
Impact
The impact of the changes will depend on the number of employees that an employer has and the amount that they are paid.
For example, for an employee on £20,000, before taking account of the Employment Allowance, employer’s National Insurance will increase from £1,504.20 for 2024/25 to £2,250 for 2025/26 – an increase of £745.80.
However, for an employee on £100,000, the bill will rise from £12,544.20 for 2024/25 to £14,250 for 2025/26 – an increase of £1,705.80
Very small employers with only a handful of employees who are not highly paid may find that their bills fall as the increase in the Employment Allowance outweighs the rise in secondary contributions.
For example, an employer with three employees paid £30,000 will pay £3,652.60 for 2024/25 after deducting the Employment Allowance but will only pay £750 in 2025/26 after deducting the Employment Allowance.
At the other end of the scale, as press reports attest, the additional cost can be significant.
Employers with a workforce comprised predominantly of lower paid part-time workers, as is often the case in the hospitality industry, will be hard hit by the fall in the secondary threshold.
Currently, no contributions are payable on earnings below £9,100; from April 2025, employer contributions are due on earnings over £5,000.
Mitigation
Eligible employers should ensure that they claim the Employment Allowance as this is not given automatically.
Consideration can also be given to the make-up of their workforce.
For example, savings can be made by employing workers under the age of 21 or armed forces veterans looking for their first civilian job, as contributions are only payable where earnings exceed £50,270 rather than £5,000 – potential savings of up to £6,790.50 per employee. Taking on two part-time workers rather than one full-time worker will also cut the bill by accessing a further £5,000 NIC-free band (saving £750).
Employers should also review the taxable benefits that they provide, and consider instead a switch to exempt benefits to save the associated Class 1A National Insurance.
Employers should also review existing PAYE Settlement Agreements to check whether they remain affordable.
Trueman Brown Chartered Accountants: Your Partner in Tax Compliance
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In conclusion, HMRC’s vigilant methods in monitoring taxpayer’s income underscore the importance of accurate and timely reporting.
Trueman Brown Chartered Accountants stand as reliable partners, guiding landlords through the complexities of tax compliance and empowering them to bring their tax affairs up-to-date while maximizing financial efficiency and avoiding the repercussions of non-disclosure.
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