Category: Income Tax

MTD – qualifying income

Making Tax Digital for Income Tax (MTD for IT) will become mandatory in phases from April 2026. If you are self-employed or a landlord and have over £50,000 in qualifying income you need to start preparing to submit quarterly updates, keeping digital records and cope with a new penalty system.

Your qualifying income is the total income you receive in a tax year from self-employment and property. Other income, such as from employment (PAYE), partnerships or dividends (including from your own company), do not count towards your qualifying income.

HMRC will calculate your qualifying income based on your self-assessment tax return you submitted in the previous year. For example, to assess your income for the 2026-2027 tax year, they will use the return you submit for the 2024-2025 tax year which is due to be submitted by 31 January 2026. If your qualifying income is over £50,000, HMRC will inform you when you need to start using MTD for IT.

Qualifying income includes your share of income from jointly owned property, certain trusts, VAT-registered businesses and disguised investment management fees. It does not include business partnership income, transition profits or qualifying care relief payments.

Initially, MTD for IT will only apply to self-employed individuals, and landlords with an annual qualifying income exceeding £50,000. From 6 April 2027, the rules will extend to those with a qualifying income between £30,000 and £50,000. From April 2028, sole traders and landlords with qualifying income over £20,000 will need to follow MTD rules. The government is also exploring ways to bring those earning under £20,000 within the MTD framework at a future date.

Christmas crafters and tax

If you earn fees or sell goods as a side hustle, you may need to pay tax on your profits.

HMRC has launched a new press release encouraging Christmas crafters and anyone with a fee earning hobby to check their tax reporting obligations as part of its Help for Hustles campaign. This is relevant to individuals earning extra income, whether from crafting Christmas decorations, selling festive items at market stalls, or upcycling furniture for seasonal sales. Those earning more than £1,000 in total from these activities may need to report their earnings to HMRC.

To help these side hustlers navigate their tax obligations, HMRC has introduced an online checker tool that helps individuals determine whether or not they need to declare additional income.

There are two £1,000 tax allowances available for small amounts of miscellaneous income: one for trading income and one for property income. Taxpayers who have both types of income can claim £1,000 for each.

• Trading Allowance: If a taxpayer makes up to £1,000 from self-employment (e.g., craft sales or content creation), this income is tax-free and doesn’t need to be declared. However, the £1,000 threshold applies to all combined trading activities. For example, if someone earns £600 from craft sales and £500 from content creation, their total trading income exceeds £1,000 and must be reported to HMRC.
• Property Allowance: If a taxpayer earns £1,000 or less from property-related activities (e.g., renting out a driveway), they don’t need to report this income to HMRC or include it in their tax return.

These allowances cover all relevant income before expenses. If a taxpayer's income is under £1,000, it’s tax-free. If they earn more than £1,000, they can either deduct the £1,000 allowance from their income or list their actual expenses when calculating taxable profit.

However, if side hustle income exceeds £1,000 in a tax year, taxpayers may need to complete a Self-Assessment tax return. This also includes income from cryptoassets. Importantly, this requirement applies only to active trading or selling services. If someone is just clearing out old items, there is usually no need to worry about tax.

For the 2024-25 tax year, the deadline to submit a tax return online and pay any tax owed is 31 January 2026.

Paying tax arrears using HMRC payment plans

If you are unable to pay your tax bill, it's important to reach out to HMRC as soon as possible.

HMRC may offer a Time to Pay arrangement, allowing you to settle the debt in manageable instalments based on your financial situation.

Taxpayers with liabilities of up to £30,000 can use the online Time to Pay (TTP) service to set up instalment payments. This service is available without the need for direct contact with an HMRC advisor and can be accessed up to 60 days after the payment deadline.

To be eligible for the online service, the following conditions must be met:

• No outstanding tax returns
• No other unpaid tax debts
• No existing HMRC payment plans

For those who do not qualify for the online option, alternative payment plans can be arranged. These plans are typically tailored to the individual's or business's specific financial situation, allowing repayment over an agreed period.

HMRC will generally grant extended payment terms if they believe you will be able to pay the full amount in the future. However, if HMRC determines that additional time won't resolve the issue, they may require immediate payment and take enforcement actions if the debt remains unpaid.

Loss of personal allowance – the £100k ceiling

For the current tax year, taxpayers with adjusted net income between £100,000 and £125,140 will face an effective marginal tax rate of 60%, as their £12,570 tax-free personal allowance is gradually withdrawn.

If a taxpayer earns over £100,000 in any tax year, their personal allowance is gradually reduced by £1 for every £2 of adjusted net income exceeding £100,000. This ceiling applies regardless of age, meaning that any taxable receipt that pushes their income above this threshold will lead to a reduction in their personal tax allowances. If their adjusted net income reaches £125,140 or more, the personal Income Tax allowance will be reduced to zero.

Adjusted net income refers to a taxpayer’s total taxable income before personal allowances, minus certain tax reliefs such as trading losses, charitable donations, and pension contributions.

Taxpayers in this income band should consider financial planning strategies to avoid this "personal allowance trap." Reducing income below £100,000 could be achieved by utilising options like increasing pension contributions, making charitable donations, or participating in certain investment schemes.

For higher-rate or additional-rate taxpayers seeking to reduce their tax bill, gifting to charity is one strategy. Donations made in the current tax year can be carried back to the 2024-25 tax year, provided the taxpayer requests the carry-back before or at the same time as submitting their self-assessment return, but no later than 31 January 2026.

Heads up for company directors

As of April 2025, directors of close companies and self-employed taxpayers face new mandatory reporting requirements on their Self-Assessment returns.

Up to 900,000 company directors and 1.2 million taxpayers carrying on a trade will be impacted by new rules that require them to provide more information when filing their 2025-26 self-assessment returns.

Legislation has been enacted that introduces mandatory reporting obligations for certain taxpayers, including those who begin or cease trading and directors of close companies. These measures came into effect on 5 April 2025 and apply for the current 2025-26 tax year and later tax years.

Company directors of close companies will face new reporting requirements. Most small private companies will meet the definition of a close company and there are some specific tax rules that apply to these companies. From 5 April 2025, taxpayers impacted by the change must confirm whether they are directors of a close company and provide further details, including the company’s name and registered number, the value of dividends received and their percentage shareholding in the company. If shareholding changes during the year, the highest percentage held must be reported. Answering these questions will be mandatory when submitting 2025-26 tax returns and beyond.

The new rules also introduce a mandatory requirement to report the start or cessation of a trade that was previously a voluntary requirement. Taxpayers are now required to include the date of commencement or cessation of their business in their tax return, whether for personal tax, partnerships or trustees. This change applies to tax returns for 2025-26 and beyond.

State benefits taxable and non-taxable

Many people rely on state benefits, but it is not always obvious which payments are taxable and which are tax-free.

HMRC’s guidance outlines the following list of the most common state benefits on which Income Tax is payable, subject to the usual limits:

• Bereavement Allowance (previously Widow’s Pension)
• Carer’s Allowance or (in Scotland only) Carer Support Payment
• Contribution-Based Employment and Support Allowance (ESA)
• Incapacity Benefit (from the 29th week you receive it)
• Jobseeker’s Allowance (JSA)
• Pensions Paid by the Industrial Death Benefit Scheme
• The State Pension
• Widowed Parent’s Allowance

The most common state benefits that are not subject to Income Tax include:

• Attendance Allowance
• Bereavement Support Payment
• Child Benefit (income-based – use the Child Benefit tax calculator to see if you’ll have to pay tax)
• Disability Living Allowance (DLA)
• Free TV Licence for Over-75s
• Guardian’s Allowance
• Housing Benefit
• Income Support – though you may have to pay tax on Income Support if you’re involved in a strike
• Income-Related Employment and Support Allowance (ESA)
• Industrial Injuries Benefit
• Lump-Sum Bereavement Payments
• Maternity Allowance
• Pension Credit
• Personal Independence Payment (PIP)
• Severe Disablement Allowance
• Universal Credit
• War Widow’s Pension
• Winter Fuel Payments and Christmas Bonus

Sharing income from jointly held property

The standard tax treatment for couples living together, whether married or in a civil partnership, is that income from jointly held property is split equally (50:50) between them, regardless of their actual ownership shares.

However, if the ownership is unequal and the couple wishes to have the income taxed in proportion to their respective beneficial interests, they must formally notify HMRC. This is done by submitting HMRC’s Form 17, which declares the true beneficial ownership split of the property and the associated income.

A Form 17 declaration can only be submitted by spouses or civil partners who are living together and jointly own property in unequal shares. It does not apply to unmarried couples, those who are separated, or other relationship types.

The declaration must be agreed upon and signed by both parties. If one partner does not consent, the income will continue to be taxed on a 50:50 basis, regardless of how the property is actually owned.

Once accepted by HMRC, a Form 17 declaration remains effective until there is a change in the couple’s relationship status (e.g., separation or divorce) or in the ownership structure of the property. In such cases, the default 50:50 split will be reinstated.

It is important to note that Form 17 cannot be used in certain situations—for example, when property is owned as beneficial joint tenants, or where the income derives from shares in a close company or a business partnership.

Where applicable, submitting Form 17 can provide valuable tax advantages by aligning the taxation of property income with the actual economic ownership.

We would be happy to help you ensure you are making the most of your property income structure, please call if you would like to discuss your options.

Tax-free income from letting a room in your home

Homeowners can earn up to £7,500 tax-free under the rent-a-room scheme, with simple reporting and flexible tax options.

This set of special rules is designed to encourage individuals to make use of spare space in their property by providing a tax exemption on rental income of up to £7,500 per tax year.

If the total rental income from lodgers does not exceed the £7,500 threshold, the exemption applies automatically, with no need to file a tax return or report the income to HMRC. This makes the scheme particularly appealing for those seeking a simple way to supplement their income without added paperwork. However, if you prefer, you can opt out of the scheme and instead declare property income and expenses in the usual way.

The relief is only available for furnished accommodation and typically applies when a homeowner rents out a bedroom to a lodger within their main residence. One of the key benefits of the scheme is that it not only allows for tax-free earnings up to the threshold but also reduces the overall tax and administrative burden for participants. If the property is jointly owned and both parties receive rental income, the £7,500 limit is halved to £3,750 per person.

It is important to note that the rent-a-room limit covers not just rent, but also any additional payments received for meals, laundry, or cleaning services provided to the lodger. If your gross receipts exceed the threshold, you have a choice: you can either pay tax on the actual profit (gross rents minus allowable expenses and capital allowances) or choose to be taxed on the total gross receipts minus the £7,500 allowance, with no deduction for expenses or allowances. This flexibility helps taxpayers to choose the most tax-efficient method depending on their specific circumstances.

Two important 2025 self-assessment deadlines

Paper tax returns are due 31 October 2025, and new registrants must notify HMRC by 5 October 2025. Act early to avoid penalties.

Firstly, the deadline for submitting paper self-assessment tax returns is 31 October 2025. If you miss this deadline a £100 late filing penalty will usually apply, even if no tax is due, or if any tax owed is paid in full by the final deadline of 31 January 2026.

Further penalties increase the longer the return remains outstanding. If your return is still not filed three months after the deadline, daily penalties of £10 per day (up to a maximum of £900) will be charged. If the delay extends to six months or more, further fixed or percentage-based penalties may apply, significantly increasing the cost of non-compliance.

We strongly recommend that anyone still submitting paper returns consider switching to the online filing system. Filing electronically not only simplifies the process but also gives you an extra three months, with the deadline for online returns falling on 31 January 2026.

The second key deadline is 5 October 2025. This is the date by which you must notify HMRC if you need to complete a self-assessment return for the 2024–25 tax year and have not previously been required to file one. Failing to register in time can lead to penalties for late notification, even if you file your return on time later.

Being aware of these October deadlines and taking timely action can help you avoid unnecessary stress and potential fines if you were unprepared.

Dividend taxes will they increase?

Speculation is growing that rates or allowances applied to dividend income may change in the next Budget.

The current tax rates for dividends received (in excess of the £500 dividend tax allowance) are as follows:

• 8.75% for basic rate taxpayers will pay tax on dividends
• 33.75% for higher rate taxpayers will pay tax on dividends
• 39.35% for additional rate taxpayers will pay tax on dividends

Dividends that fall within your Personal Allowance do not count towards your dividend allowance and you may pay tax at more than one rate.

If you receive up to £10,000 in dividends you can ask HMRC to change your tax code and the tax due will be taken from your wages or pension or you can enter the dividends on your self-assessment tax return, if you already fill one in. You do not need to notify HMRC if the dividends you receive are within your dividend allowance for the tax year.

If you have received over £10,000 in dividends, you will need to complete a self-assessment tax return. If you do not usually send a tax return, you need to register by 5 October following the tax year in which you had the relevant dividend income.

There has been growing speculation ahead of the upcoming Budget that the government could make further changes to the taxation of dividends. With the government under pressure to raise revenue there is the possibility that the rates of dividend taxes could be increased. The current £500 tax‑free dividend allowance could also be abolished altogether, after having been significantly reduced over the last number of years.