Bookkeeping

During December’s Facebook Live, I explained what the Flat Rate Scheme is, who is eligible, and the specific flat rates for different industries. I provided a clear comparison to standard VAT accounting to help business owners decide if it can simplify their bookkeeping and potentially save them money.

A Quick VAT Recap

VAT stands for “Value Added Tax”.  It is a tax that is placed on goods and services that businesses must pay to HMRC.  The VAT a business charges on their sales (input tax), does not belong to the business, they are simply collecting it on behalf of HMRC.  The amount that a business pays to HMRC will depend on the VAT collected on sales, and the VAT paid on any goods or services that were purchased (output tax).  If more VAT is collected by a business, that is then paid to HMRC.  If the business paid out more VAT on its purchases than it collected on its sales, then the business receives a refund from HMRC for the VAT owed.

There are three different rates of VAT, and the rate charged depends on the product or service:

• Standard Rate: 20% which applies to most goods and services
• Reduced Rate: 5% which generally applies to domestic fuel, children’s car seats
• Zero Rate: 0% which applies to most food, children’s clothing, and books.

There is also the Exempt VAT rate which is for items that are Exempt from VAT and includes things like insurance premiums, loans, most bank charges, selling/leasing/letting of commercial land and buildings.

You can refer to the Government website to find out more about how to treat specific items in relation to VAT.  The information on this page is not exhaustive, so if you are really unsure how to record VAT for something, contact a qualified bookkeeper, accountant, or tax advisor.

The current VAT registration threshold is £90,000, which means that if, during a 12-month rolling period, a business has a VAT taxable turnover of over £90,000, they must register for VAT.  The 12-month rolling period is NOT the same as the tax year.  It runs from January to December, February to January, March to February and so on.  This is one reason it is so important to ensure your accounts are fully up to date at the end of each month, so that you can see when you are approaching the VAT threshold and avoid any fines or penalties for not registering on time.

There are 2 main VAT schemes in the UK.  The Standard VAT scheme and the VAT Flat Rate Scheme.  The Standard VAT scheme is where you record the correct VAT rate as per any invoices/receipts you received, and the VAT on your sales at the correct rate, submit your returns to HMRC, and then the difference is either refunded to you or paid by you to HMRC.

There is also Accrual VAT accounting, which is simply recording the VAT as per the date of the invoice, or Cash VAT accounting, where the VAT is recorded on the date the transaction was paid.  Some businesses may belong to the VAT Annual Accounting Scheme, which means they only file one VAT return a year, and others will submit returns to HMRC quarterly.

There are then a couple of other schemes that only retail businesses or those that sell second-hand goods can use, such as the VAT margin scheme (the business pays VAT on the value added to the goods you sell) and the VAT retail scheme (the business calculates the VAT once with each VAT return instead of calculating it for each sale you make.  There are very specific requirements for these schemes.

The Flat Rate VAT scheme is designed to make life easier for small businesses.

How does the VAT Flat Rate Scheme Work?

The Flat Rate VAT scheme allows a business to work out what VAT they owe to HMRC based on a fixed rate percentage, based solely on the total sales a business has.  This percentage is lower than the standard 20% rate, and the business is allowed to keep the difference. The business does have to record the VAT on purchases, but these figures are not taken into account when the amount owed to HMRC is calculated.  However, there are certain capital purchases over £2,000 where the VAT for those items can be claimed, but this is done outside of the Flat Rate Scheme.  You can find out more about the special considerations for capital purchases on the Government website.

Who is Eligible for the Flat Rate Scheme?

To use the Flat Rate Scheme, your VAT taxable turnover must be £150,000 or less, excluding VAT, in the next 12 months.  To work out your VAT taxable turnover, you need to look at the total of everything you have sold that is not Exempt from VAT.

There are some very strict rules about who cannot join this scheme, which include if you left the Flat Rate Scheme in the last 12 months, have committed a VAT offence in the last 12 months, or if you have joined a margin or capital goods VAT scheme.

If you join the Flat Rate Scheme, you cannot use the Cash Accounting Scheme.

You must leave the Flat Rate Scheme if any of the following apply:

• You are no longer eligible to use the scheme
• Your turnover in the last 12 months was more than £230,000 (including VAT), or you expect it to be in the next 12 months
• You expect your total income in the next 30 days alone to be more than £230,000 (including VAT).

You can visit the Government website to find the instructions for joining the Flat Rate Scheme and then how to leave the scheme if necessary.

Finding Your Percentage & The “Limited Cost Business” Rule

The percentage you use for calculating how much VAT you need to pay to HMRC depends on your industry.  You may also pay a different rate if you only spend a small amount on goods.  During your first year as a VAT-registered business, you are eligible for a 1% discount.

Here are some examples of the percentage used in the Flat Rate Scheme:

• Catering services, including restaurants and takeaways from 1 April 2022: 12.5%
• Hairdressing or other beauty treatment services: 13%
• Pubs from 1 April 2022: 6.5%
• Retailing food, confectionery, tobacco, newspapers or children’s clothing: 4%
• Retailing not listed elsewhere: 7.5%

You can read the full list of percentages used for different types of businesses on the Government website. 

If you spend a small amount on goods, then HMRC classifies you as a “limited cost business”.  This applies if your goods cost less than 2% of your turnover or £1,000 a year (if your costs are more than 2%).  That means you pay a higher rate of 16.5%.  If your business does not fall under the “limited cost business”, then you would use the percentage for your industry that HMRC provides.  You can calculate if you need to pay the higher rate by going to the Government website and using their in-built assessment tool. If you are a “limited cost business”, this can make the Flat Rate Scheme unattractive, as you aren’t making much of a saving.  It will primarily affect service-based businesses.

What are the Pros vs Cons of the Flat Rate Scheme?

One of the biggest pros of the Flat Rate Scheme is that it allows for much simpler bookkeeping.  While you still need to track the VAT on every purchase or sale, you just need to calculate the VAT owed using your VAT-inclusive turnover and the fixed percentage provided by HMRC.  A lot of the cloud-accounting software out there even makes the calculations simple by allowing you to enter the flat rate percentage into the settings.  You would enter the sales and purchases as normal, applying the correct VAT rate, and the software would automatically calculate the amount you owe to HMRC

Another big pro is the fact that you could reduce your costs and make a small financial gain if your flat rate is favourable.  The Flat Rate Scheme allows businesses to use a fixed percentage which is lower than the standard 20% rate.  If you are in your first year of joining the scheme, you can also get a 1% discount.  Instead of having to pay the whole 20% of VAT to HMRC, you would be paying out a lower amount, leaving you with the difference as profit.

As you know what percentage you will pay to HMRC for VAT, you can better predict what your VAT liability will be.  This can help with planning the future of your business and allows for more accurate budgeting.  You will have a much better idea of how much money to set aside to pay the VAT bill, which potentially frees up more funds to reinvest in your business so you can grow it.

What about the cons – the main one is not being able to reclaim VAT that you paid out for purchases.  The only time you would be able to reclaim the VAT is if you spend over £2,000 on capital assets.  This is different to the Standard VAT Scheme, as with that scheme you can reclaim VAT on all purchases.  If you spend a high amount on purchases, using the Flat Rate Scheme could be more expensive for you.  The ”Limited Cost Business” rule also makes the Flat Rate Scheme more expensive for certain types of businesses.  This scheme is intended for small businesses, so if your business grows and your turnover increases, you could end up paying out more to HMRC than you would if you were on the Standard VAT scheme.

The Flat Rate Scheme can be a great simplification, but it’s not for everyone.  The “limited cost business” rule is a major trap.  It’s really important that before you join the Flat Rate Scheme, you look at all the factors that affect your business and work out whether it is more financially viable for you to join the scheme or not.

Before you join or leave the scheme, let’s run the numbers together to see what’s more profitable for you. Simply send me an email to book a consultation.

On 27th November 2025, the Chancellor, Rachel Reeves, announced the Autumn Budget 2025. While there were a couple of announcements that affect businesses, the majority of the budget will impact individuals in many ways.

Here are the key highlights of what businesses need to be aware of.

1. Tax Thresholds Frozen until 2031
   
   The tax thresholds for Income Tax and National Insurance will remain at their current levels until April 2031.
   
   Income Tax:
   Personal Allowance: Up to £12,570, your tax rate is 0%
   Basic Rate: From £12,571 to £50,270, your tax rate is 20%
   Higher Rate: From £50,271 to £125,140, your tax rate is 40%
   Additional Rate: Over £125,140, your tax rate is 45%
   
   National Insurance:
   Employees (Class 1 NICS)
   Pay of up to £242/week or £1,048/month: 0%
   Pay from £242 to £967/week or £1,048 to £4189/month: 8%
   Pay over £967/week or £4,189/month: 2%
   
   Employers (Class 1 Category A NI Contributions Only):
   Pay from £96 to £481/week or £417 to £2,083/month: 15%
   Pay from £418.01 to £967/week or £2,083.01 to £4,189/month: 15%
   Pay over £967/week or £4,189/month: 15%
   
   Self-Employed (Class 2 and Class 4 NICS):
   Profits up to £6,844 – Class 2 (voluntary): £3.50/week
   Profits from £6,845 to £12,569 – Class 2 (deemed paid): £0.00/week
   Profits from £12,570 to £50,270 – Class 4: 6%
   Profits over £50,270 – Class 4: 6% on profits from £12,570 to £50,270, plus 2% on profits over £50,270
   
   To find out more about the current National Insurance Rates, please visit the Government website.
   
   
2. Minimum Wage will be increased by 4.1% from April 2026
   
   From April 2026, the National Minimum wage paid to workers will be increased:
   – Over 21 years of age will increase from £12.21/hour to £12,71/hour
   – Between 18 and 20 years of age will increase from £10.00/hour to £10.85/hour
   – For 16 and 17-year-olds, and apprenticeships it will increase from £7.75/hour to £8.00/hour
   
   
3. Tax on Dividend Income will rise by 2% points from April 2026
   
   If you receive Dividend income, you currently pay tax on anything that is over your personal tax allowance and the annual dividend allowance, which is £500.00. The ordinary rate will increase from 8.75% to £10.75%, with the upper rate going from 33.75% to 35.75%. The additional rate will remain at 39.35%.
   
   
4. Pension Salary Sacrifice changes
   
   Currently, employees can sacrifice a portion of their salary each month to be paid into a pension plan provided by the employer, and this is tax-free. From April 2029, employees will have to pay National Insurance on any amount of salary sacrificed for their pension above £2,000.
   
   
5. Changes to the Main Rate for Plant and Machinery
   
   Full expensing for main-rate plant and machinery will continue, in line with the 2024 Corporation Tax Roadmap. However, some notable changes are coming:
   
   Starting January 1, 2026, assets that don’t qualify for full expensing (such as those used for leasing or by non-corporation businesses) will be eligible for a new 40% first-year allowance instead.
   
   From April 2026, the standard writing-down allowance rate drops from 18% to 14% (effective 1 April for corporation tax and 6 April for income tax).
   
   
6. Business Rates for Retail, Hospitality and Leisure Properties
   
   The government is introducing a permanent lower rate structure for Retail, Hospitality and Leisure (RHL) properties through a new five-category multiplier system. This creates a clear distinction between RHL and non-RHL properties, plus a separate band for high-value properties.
   
   The five categories and what their Rate will be from 2026/27:
   Small Business RHL: RHL Properties under £51k RV – 38.2p
   Standard RHL: RHL Properties £51k – £499k RV – 43p
   Small Business (non-RHL): Non-RHL properties under £51k RV – 43.2p
   Standard (non-RHL): Non-RHL properties £51k – £499k RV – 48p
   High-Value: All properties £500k+ RV – 50.8p
   
   The new Small Business RHL multiplier at 38.2p represents a permanent lower rate for qualifying retail, hospitality and leisure businesses – a notable reduction compared to the current small business multiplier of 49.9p.
   
   It’s worth noting that revaluations will also take place from April 2026, so some businesses may still experience bill increases despite the lower multipliers if their rateable value has increased.
   
   
7. Small Business Rates Relief (SBRR)
   
   Small Business Rates Relief will now include a 3-year grace period (up from 1 year), giving businesses more time to keep the relief on their first property when they expand into additional premises.
   
   
8. Business Rates Retention Pilots
   
   The business rates retention pilots that are taking place in Cornwall, the West of England and Liverpool City will be extended to 2028/2029.
   
   
9. Corporation Tax Penalties
   
   The penalty for submitting a Corporation Tax Return late will double from April 1st, 2026. Currently, if your Corporation Tax Return is 1 day late, you will receive a fine of £100.00. If, after 3 months, your return is still late, you will be fined £200.00. After 6 months, HMRC will estimate your Corporation Tax Bill and add a penalty of 10% of the unpaid tax. If you still have not submitted your return after 12 months, then a further 10% of any unpaid tax will be charged. If your return is late 3 times in a row, the £100 penalties are increased to £500 each.
   
   This means that from April 2026, the £100.00 fine will be increased to £200.00 for being 1 day late, and £400.00 after 3 months. If you submit your tax return late 3 times in a row, the fine will increase to £1,000.00.
   

You can read more about the Autumn 2025 Budget on the Government website.

During November’s Facebook Live, I focused on small, limited companies. I clarified two key ways of taking money out of the business. I explained the rules and tax implications of director’s loans (including the £10,000 threshold and s445 tax), and contrasted it with the process and tax efficiency of paying dividends.

One of the first things to understand about limited companies is that they are a separate legal entity from the directors and shareholders.  Unlike a sole trader, you cannot just take money out of the business anytime you like, as that money does not belong to you; it belongs to the limited company.  To withdraw money from the limited company, you need to either take it as a salary through the PAYE scheme, where you are an employee of the limited company, or through the two options I will be discussing today – director’s loan and dividends.

Dividends: A Share of the Profits

Let’s start by explaining what dividends are. Dividends are a payment a company makes to its shareholders if it has sufficient post-tax profits.  They are used as a way for companies that are profitable to reward their shareholders for investing in the company.  As dividends are reliant on the business being profitable, dividends are not a mandatory payment.  A company must ensure that it is not paying out more in dividends than the available profits from the current and previous financial years.  The amount paid can also be changed at any point in time, or even suspended, depending on the company’s financial situation.

Dividends can only be paid to shareholders if they have been declared properly within a board meeting, with it noted in the meeting minutes.  After the dividends have been declared, the proper paperwork must be created, which is called a dividend voucher.  It must show the date, company name, the names of the shareholders being paid a dividend, and the amount to be paid.  A copy of the voucher needs to be given to the recipient, and a copy kept by the company.  The most common type of dividends is a cash dividend, but companies could also choose to issue additional shares to their shareholders.

How are Dividends affected by Tax?

Neither the company nor the director has to pay National Insurance on any dividends received.  However, the director must pay income tax on dividends that exceed the current £500 dividend allowance for the 2025/2026 tax year.  An individual’s personal allowance, currently £12,750, is also taken into account.

Once your dividends go beyond these allowances, they are taxed according to your personal tax band:

Basic Rate taxpayers: 8.75% on dividends
Higher Rate taxpayers: 33.75% on dividends
Additional Rate taxpayers: 39.35% on dividends

From April 2026, the tax on dividends will go up by 2% for basic and higher rate taxpayers:
Basic Rate taxpayers: 10.75% on dividends
Higher Rate taxpayers: 35.75% on dividends
Additional Rate Taxpayers: 39.35%

In summary, you only start paying tax on dividends after your allowances are used, and the rate depends on your income tax band.

Director’s Loans: Borrowing from Your Company

Now, let’s talk about directors borrowing money from their company and how that compares to dividends.

A Director’s Loan Account (DLA) is simply a record of money moving between a company and its director.  Think of it like a tab that keeps track of:

• Money the director puts into the company (the company owes the director) and
• Money the director takes out of the company that isn’t salary, dividends, or expenses (the director owes the company).

It’s not a physical account, just a running total of who owes whom.

Here is an example: imagine you and your friend run a small business.  You each have your own personal money, and the business has its own money.

• One day, you pay a business bill with your personal cash.  The business “owes” you.  It goes on the director’s loan account.
• Another day, you take some money from the business to pay for something personal.  Now you “owe” the business.  That also goes to the director’s loan account.

At any point, the running total tells you:

• Positive Balance: the company owes the director.
• Negative Balance: the director owes the company.

Why is a Director’s Loan Account Important?

As a company is legally separate from the director, any money flowing between them has to be tracked properly.  The DLA keeps everything clear and avoids tax complications or accidental misuse of company money.

What are the tax rules if a director owes the company?

Has anyone found the Director’s Loan Account rules confusing in the past?  Share your answer in the comments.

If there is a negative balance on the DLA at the end of the tax year, the director owes the company money.  As long as that balance is repaid within 9 months and one day of the company’s year-end, there are usually no tax issues for the company.

However, if the amount is not repaid to the company within that time frame, the company must pay Corporation Tax on the amount owed at 33.75%.  This is known as s455 tax.  Once the loan is repaid, the company can claim back the tax that was paid, though this may take some time.  It is important to note that if a loan of £5,000 or more is repaid and then re-borrowed within 30 days, the repayment is disregarded, and the tax charge will still apply.  If the loan amount is more than £10,000 in a tax year, a benefit-in-kind charge may also apply.  The director must report the loan on a P11D form, and the company must report Class 1A National Insurance contributions using form P11D (b) by July 6^th, and then pay the amount due.  A benefit-in-kind is a non-cash benefit provided to an employee that has a cash value and is taxable.

If the company has charged the director interest on the loan, they must report that to HMRC, and the company must deduct tax at source at a rate of 20%.

The rules around Director Loan Accounts for companies can become quite complicated depending on how old the loan is, when it was initially issued, when it was repaid or if it was written off.  You can read more about the tax implications and responsibilities of both the company and the director who owes the money on the government website.

What happens if the Company owes the Director?

If you have lent money to the Company, the tax situation is fairly simple.  The company does not pay Corporation Tax on the amount you lend.  If you charge the company interest, that interest is treated as a business expense for the company and as personal income for you.  You must include this interest on your self-assessment tax return.  The company must pay you the interest after deducting basic-rate income tax (20%), and then report and pay that tax every quarter using form CT61.

Key Comparison and Best Practice

The key difference between dividends and DLA is that dividends are a distribution of profit, and loans are borrowing.

The most tax-efficient way for directors when comparing dividends and DLA is to take a small salary as well as dividends.  The small salary keeps things like state pension credits active and can be counted as an allowable company expense.  The rest as dividends reduces the total tax bill because the tax on dividends is lower.  This combination means the director takes home more money, while the company pays less tax overall, all completely legally.

However, that doesn’t mean that directors’ loans don’t have their place.  They can be useful for short-term needs, but they can get complicated and expensive if they aren’t managed carefully.  Always make sure you keep meticulous records relating to Director’s Loan Accounts.

Getting your remuneration strategy right is key to being tax-efficient and compliant.  If you’re a director and unsure about the best way to take money from your company, please feel free to email me to book a consultation.  We can review your specific situation and ensure your bookkeeping is watertight.

During October’s Facebook Live, I demystified the financial obligations and costs of becoming an employer for the first time, providing a clear checklist of actions.  I covered the essential financial steps, including registering as an employer with HMRC, understanding PAYE, calculating Employer’s National Insurance contributions, auto-enrolment pension obligations, and the costs to factor into your budget beyond just salary.

Are you thinking of hiring in the next 6 months? 

It’s A Big Step!

Hiring your first employee and becoming an employer is a very big step for a business.  It is a sign that your business is growing and becoming a success, but it also comes with serious legal and financial responsibilities.  This blog will break down the financial side into manageable steps.

Step 1: The Hidden Costs – Budgeting Beyond Salary

The “true cost” of an employee is not just their wage.  You need to budget for Employer’s National Insurance Contributions and Employer’s Pension Contributions.  You also need to budget for potential costs such as recruitment fees, equipment, software licenses, and insurance (Employer’s Liability is a legal requirement).

Employer’s Liability Insurance is a policy that covers you if an employee becomes ill or is injured as a result of working for you.  You can read more about Employer’s Liability Insurance on the Government website.

For those who have hired staff, what was the one cost that surprised you the most?

Step 2: Registering as an Employer

You must register with HMRC before your first payday. You can do this online, and once registered, you will receive your employer’s PAYE reference number, which will be sent to you in a letter. 

To start the process of registering, go to the Government website and follow the instructions on the screen.

You need to make sure you register in plenty of time so you have the necessary information before you pay your employees for the first time, but you cannot register more than 2 months before you start paying employees.

What’s your biggest worry about becoming an employer?

Step 3: Understanding PAYE (Pay As You Earn)

PAYE, or Pay As You Earn, is HMRC’s system for collecting income tax and National Insurance from employment.  You, as the employer, are responsible for calculating and deducting these from your employee’s pay and paying them to HMRC.

Income Tax is a tax that is deducted from your income once you have exceeded your personal allowance.  The personal allowance is currently £12,570.  The amount of income tax you pay depends on your wage.  The employer pays this amount to HMRC on your behalf.

The current income tax rates are as follows:
Personal Allowance – up to £12,570 – 0%
Basic Rate – from £12,571 to £50,270 – 20%
Higher Rate – £50,271 to £125,140 – 40%
Additional rate – over £125,140 – 45%

National Insurance is another tax that funds specific state benefits and the State Pension.  Two types of National Insurance Contributions affect employees.  Employee’s National Insurance, which is also referred to as Class 1 Contributions.  It is deducted from your income and paid to HMRC by your employer on your behalf.  The amount you pay for Class 1 NI depends on your age, if you are under the State Pension Age, and are earning more than £242 a week from one job. If you earn between £125 and £242 a week, you don’t usually pay Class 1 NI, but you may still earn an NI credit.  If an employee earns less than £125 a week from one job, they can choose to pay voluntary Class 3 Contributions.  For the 2025/2026 tax year, if you earn between £242 and £967 a week (£1048 to £4189 a month), your NI rate is 8%.  If you earn over £967 a week (£4189 a month), your NI rate is 2%. 

Employer’s National Insurance is paid by the employer, on top of the employee’s salary.  The rates for the 2025/2026 year, for most employees, will be 15% on wages from £96 to £481 a week (£417 to £2083 a month), 15% on wages from £481.01 to £967 a week (£2083.01 to £4189 a month), and 15% on wages over £967 a week (£4189 a month).

Employers will also need to pay Class 1A and 1B National Insurance on any expenses and benefits they give to their employees.  The current rate for this is 15%.

You can read up more about the National Insurance Rates by going to the HMRC website. 

The good thing is that there is a lot of different payroll software out there that will do all these calculations for you.  You do need to ensure that whatever software you choose to use, it is recognised by HMRC as RTI Compliant Software.  RTI stands for Real Time Information.

Cloud accounting software usually has payroll built in, though you may have to pay an additional fee for that function.  QuickBooks Online has two different payroll subscriptions to choose from.  Xero, Sage Online, and FreeAgent all have the ability to deal with payroll.  There are also different software options available that only deal with payroll.  If you are using software that is only for payroll, you will need to import that information into your accounts software to ensure that your accounts are correct.

Step 4: Workplace Pensions (Auto-Enrolment)

In October 2012, new legislation came into play that stated employers who had more than 250 employees must automatically enrol eligible employees into a workplace pension scheme.  It was gradually rolled out over a number of years, until all employers had to follow the new legislation from February 2018.

An employee is eligible for auto-enrollment if they are classed as a worker (anyone who works under a contract of employment), between 22 years old and the State Pension age, and earn at least £10,000 a year.  However, if you are a sole director limited company, and there is no other employee, you do not need to follow auto-enrollment.

You can check whether you need to follow auto-enrollment by visiting the Pension Regulator’s website. There is a lot of information on their website about what your responsibilities are in regards to pensions.  If you are a new employer, you can visit a specific page on their website that allows you to answer some questions, and it will give you a tailored duties timeline about what you need to do and by when. 

The current contribution rates are as follows:

• Employer’s Contribution must pay a minimum of 3%
• Employee’s Contribution must pay a minimum of 5%

The total minimum contribution that must be paid towards an employee’s pension is 8% of an employee’s qualifying earnings.  For the 2025/2026 tax year, the qualifying earnings fall between £6,240 and £50,720.

Contributions towards an employee must be made from their first day of employment.  As long as the employee’s wage is over £10,000, they will be automatically enrolled in the pension scheme.   However, an employee can opt out of their workplace pension scheme as long as they do this during the first month they are employed.   As long as they opt out in the first month, any contributions that they have paid will be refunded to them.  They can still opt out at any time, but they won’t get their contributions back until they retire. To opt out, the employee needs to ask their pension provider for an opt-out notice, which should be included in their welcome pack.  They need to complete the form and give it to their employer.

Hiring your first employee is a huge milestone.  Getting the payroll and pensions right from day one is critical.  If you are planning to grow your team, let’s talk.  I can help you with getting your payroll all set up and ensure you’re compliant from the start.  Please feel free to email me.

During September’s Facebook Live, I provided a proactive session focused on moving beyond historical bookkeeping. I covered how to create a simple but effective budget for the upcoming tax year, the basics of cash flow forecasting to anticipate future shortfalls, and how to use these financial tools to make strategic business decisions, set realistic goals, and secure potential funding.  My objective was to empower business owners to move forward from reactive bookkeeping to proactive financial planning, using budgets and forecasts to set goals and control their financial future.

Beyond Just Recording History

When you are completing your accounts, you are looking at transactions that have already occurred and just recording that information.  When you budget and use cash flow forecasting, you are looking into the future and planning for how to make things happen.  It is the difference between looking in the rear-view mirror and looking at the sat-nav to see where you are going.

What is a Budget?

Budgeting looks at the financial direction of where a business owner wants to take their business.  It provides a financial roadmap for what a business wants to achieve for a particular period of time.

When you create a budget, you are creating a detailed plan of your expected income and expenses over a period of time (for example, the next 12 months).  It will include an estimate of income and expenses, expected cash flow, and expected debt reduction.  A business will typically re-evaluate its budget regularly.  A budget will give you a baseline which you can then compare actual results to in order to determine how they vary from the expected performance.  It can provide you with valuable insight into how your business is actually doing in terms of the cost of running the business, and you will be able to improve the day-to-day running of the business, as well as be prepared for any potential problems.

How do I create a Simple Budget?

Depending on the accounts software you are using, you may be able to create your budget by pulling the historical data through and pre-populating the budget based on that information.  However, you can create a very simple budget using spreadsheets.  There are many free templates online that can be used to get you started.  You will set up different sections on the spreadsheet to cover Income, Fixed Costs, Variable Costs, and One-Time Costs.  Each type of income/expense will be entered on its own row, with the figures going across the spreadsheet in the columns.

If you have been in business for a period of time, the best thing to do is to start with your historical data, so the previous year’s profit and loss statement.  It will give you a starting point for what figures to use.

The first thing you want to look at is your income.  Break it down into the different income streams you have – for example, different products, or different sales avenues (website, bricks and mortar shop, Amazon, Etsy), or different locations.  Estimate what your revenue will look like going forward, taking into consideration any seasonal changes, any recurring income that comes in from clients, and any future projects that you have planned.

The next thing to look at is the costs associated with running your business.  Some of these costs will be fixed – for example, rent, insurance, software fees, payroll-related expenses (National Insurance, wages) – any expense where the amount paid is the same for the time period you are looking at.  Variable costs will be things like stock, travel expenses, marketing costs, utilities – any expenses that fluctuate in both amount and how often they occur.

The last set of costs you want to look at are the ones that are considered a one-off or unexpected.  You would include things like purchasing equipment, moving office, legal fees, and equipment repairs. These are expenses that you have a contingency for, but may not necessarily happen.

When you enter figures into your budget, look at the historical data, but also think about the plans you have for the business.  For example, are you planning a big marketing campaign? If so, adjust the figure for marketing costs within the budget to see how it impacts your profit.  If you have seasonal changes, ensure that the figures for those months reflect that increase in sales or expenses. 

You want to ensure that you are setting realistic targets for your sales – be conservative with the figures you are hoping to achieve.  Remember, this is a budget, and not what will actually happen.  It is just a tool to help you identify where you perhaps need to cut spending, or increase it, for certain items to help you achieve your goals.

What is Cash Flow Forecasting?

To put it simply, cash flow is the movement of money in and out of a business over a specific period.  The profit of a business is not the same as the amount of money that you have in your bank account.  If you have a positive cash flow, that means more money is coming into the business than is going out and indicates that a business is healthy.  If you have a negative cash flow, you need to look at the spending patterns for the business and work out either how to increase the money coming into the business from sales or where you can cut back on the spending.  Understanding the cash flow of your business is crucial, as even a business that is profitable can still fail if it doesn’t have enough money in the bank to cover expenses.

The purpose of a cash flow forecast is to help a business owner predict any future cash shortfalls so that they can act before they happen.  It can also help to predict any future cash surpluses and allow you to plan for how to invest those funds or use them to grow your business.

To create a simple cash flow forecast, the first thing to do is to choose your planning period.  This could be weekly, monthly, or quarterly.  Plan as far ahead as you can based on your cash flow cycle and try to ensure your figures are as accurate as possible.

For each of the weeks or months in your time period, you will need the following information:

• The opening balances on your various bank accounts (main bank, PayPal, cash)
• The amount of sales you will have coming in (if some of the income isn’t regular, you can try to predict what it will be by looking at the figures from the previous year, if applicable) – ensure that you are putting the figures into the correct time period based on when the payments will clear in your bank account
• any money you receive from tax refunds, loans, interest, or grants
• a list of your expenses (rent, wages, stock, bank fees, loan repayments, utilities, advertising, tax bills)

After you have the information to hand, you can then create a cash flow forecast in a spreadsheet.  Enter the time period across the top of the spreadsheet, with each week/month being in its own column.  In the first column of the spreadsheet, put the names for each of your bank accounts in a row of its own, and then below that list each type of income and expense in its own row.

At the end of the section where you have your income, add in a new row and label it “Net Income”.  The figures in this row will be the total of all your income for that time period.  At the end of the section where you have your expenses, add in a new row and label it “Net Expenses”.  The figures in this row will be the total of your expenses for that time period.  For the final row, you want to have this figure be the “Opening balances”, plus the “Net Income”, minus the “Net Expenses”.  That figure will tell you whether you have a positive cash flow (you have more money coming into the business than you are spending) or a negative cash flow (you are spending more money than you have coming into the business). 

For each week/month, you want to enter the figures for the different income and expenses in the appropriate row and column. You will need to ensure that the “opening balances” for each of your bank accounts are updated for the beginning of each time period, as they will change.  The figures you enter into the cash flow forecast can be updated as and when they are needed.

You can find templates online to use for creating cash flow forecasts using spreadsheets, and depending on the accounts software you use, it might be able to create a forecast for you based on the information you have already entered into the accounts.

How do I use a budget and cash flow forecast for my business?

Once you have your budget and cash flow forecast set up, you can use the information to help you plan for the future. 

They can help you to set goals for your business – for example, you may want to start taking on staff, so by using the budget and your cash flow forecast, you will be able to determine when you will be able to afford to hire staff.  These reports are also helpful in determining whether a marketing campaign or a particular product has increased your sales.

If you are trying to secure funding for your business, a lot of banks and investors will ask for a cash flow forecast.  They want to be able to see whether you will be able to afford the repayments and whether making an investment in your business is a good idea.

Another way these two tools are useful is that they allow you to compare your actual monthly results with your budget, so you can see where there were differences and then work out why.  It can help to highlight if a particular product or service is no longer what your clients are looking for.

This month is the perfect time to plan.  If you’d like help setting up a budget or a forecast for your business, please feel free to email me.

During July’s Facebook Live, I discussed online business bank accounts and their savings spaces – what they are and how to manage them.

Managing “Pots/Spaces” in Online-Only Business Bank Accounts

Many business owners are now using online-only business bank accounts like Monzo and Starling. A key feature of these accounts is the ability to create “pots” or “spaces”—virtual envelopes within your main account to help you set money aside for specific purposes. These pots/spaces aren’t separate bank accounts; they’re part of your main account and allow easy transfers in and out at any time.

Common Confusion Around Pots/Spaces and Accounting

There’s often confusion among business owners and even some accounting software providers about how to handle transactions involving pots/spaces.

Most online accounting software supports Bank Feeds, where transactions are automatically imported from your bank account. If you have multiple bank accounts (e.g. current, savings), each one typically needs a separate connection.

However, pots/spaces in Monzo and Starling don’t have separate account numbers. They sit under a single main account. When setting up the bank feed, you may be given the option to include or exclude transactions involving pots/spaces.

Bank Statements and Pots/Spaces

Your bank may or may not provide individual statements for each pot/space. Even without formal statements, you can still view pot/space activity within your online banking dashboard. Regardless, you must record all transactions related to pots/spaces in your accounts. This ensures accurate tracking of funds—even though the money hasn’t left the business, it’s simply been allocated for a purpose.  It gives you a clear picture of what money you have in the business, and where it is.

A Simple Analogy

Think of a pot like a piggy bank.

You receive £20 and put £5 in your piggy bank and £15 in your wallet. You still have £20 total—it’s just separated for a reason. In traditional banking, you’d need a second account (like a savings account) to do this. Pots/spaces let you do the same, but within one account.

How to Record Pots/Spaces in Accounting Software

The easiest approach is to use sub-accounts:

• Create a parent account, such as “Bank Reconciliation.”
• Under it, set up sub-accounts like:
  • Bank Account 1234 (your main bank account)
  • Bank Account Pots/Spaces (to represent all pots)

Some prefer to create a sub-account for each pot/space, but if you frequently rename or close pots, using a single “pots/space” sub-account is simpler.

Recording Pot/Spaces Transactions

• If pot/space transactions appear in your bank feed, categorise them as transfers to or from the “Bank Account Pots/Spaces” sub-account.
• If they don’t appear, enter them manually based on your bank statement or transaction history.

Recording these movements ensures you can later show where money came from when it’s moved back into the main account—it’s not income, just an internal transfer.

Reconciling Your Bank Account

At month-end, reconcile the parent account (“Bank Reconciliation”). This will combine the main account and pot/space sub-accounts, giving you a full picture of your bank balance.

Note: This method works well in QuickBooks Online. If you use different software, check with your provider, bookkeeper, or accountant to make sure you’re capturing pot activity correctly.

If you have any questions about how to deal with the unique system for saving funds used by some online bank accounts, please feel free to email me.

During June’s Facebook Live, I discussed the penalties you could receive if you do not follow MTD ITSA regulations, and how to avoid them.

From April 2026, UK sole traders and landlords will have to start submitting their accounts information to HMRC every quarter, under Making Tax Digital for Income Tax and Self-Assessment.  Failure to follow the regulations correctly could lead you to receive penalties and fines. 

What is MTD ITSA?

MTD ITSA is HMRC’s initiative to digitise the tax reporting process for self-employed individuals and landlords.  It is designed to make the UK tax system more effective, efficient and easier for taxpayers. 

It is going to be a gradual process for those who have to start following MTD ITSA.  Sole Traders and Landlords with an income over £50,000 will need to follow MTD ITSA from April 2026.  Those with an income of over £30,000 from April 2027, and those with an income of over £20,000 from April 2028.  At this point in time, no announcements have been made about partnerships or limited companies.

Overview of Penalties for MTD ITSA

There is a new penalty system put in place by HMRC to support MTD ITSA, which has been designed to encourage sole traders and landlords to comply with MTD ITSA regulations.  It includes ensuring they are keeping accurate digital records, sending submissions on time, and making sure their accounts are accurate.  Understanding the associated penalties is crucial to ensure compliance and avoid unexpected fines.  The penalty system for MTD ITSA is separate from the penalty system for MTD VAT.  If you are VAT registered and also have to file under MTD ITSA, if you incur penalties for MTD VAT, these will not affect your penalties for MTD ITSA and vice versa.

There are several components to the MTD ITSA penalty system:

• Late Submission Penalties
• Late Payment Penalties
• Specific Penalties for Record-Keeping Failures

Let’s look at each of the penalty systems.

Late Submission Penalties

Late Submission Penalties are applied when a return has been submitted after the deadline, both the quarterly updates and the final declaration at the year-end.  For every late submission, you will receive 1 penalty point.  Once you have reached the threshold of penalty points allowed, you will receive a fine of £200.00.

The threshold of points is dependent on the submission frequency.  For quarterly submissions, the threshold is 4 points, and for annual submissions like the Final Declaration, it is 2 points.  That means if you accumulate 4 points for late quarterly submissions, you will receive a fine of £200.00.  For every subsequent late submission once you’ve reached the points threshold, you will be issued a further £200.00 fine.

If you have more than one business that needs to follow MTD ITSA, you will be required to file 2 separate quarterly updates and two separate Final Declarations.  The submissions will contribute to a single penalty point per quarter.  For example, if you submit both quarterly updates late, you would only receive one penalty point for the quarter.

The penalty points do expire after a certain time period and will reset to zero.  If you have accumulated penalty points, but have not reached the threshold, the points automatically expire after two years.  It is important to note that the two-year period starts from the month after you have received the points.  For example, if you receive a penalty point in May, the two-year period would start from June.

Once you have reached the point threshold, in order for the points to expire, you need to maintain a “period of compliance” before the points are removed from your records.  The “period of compliance” depends on the frequency of the return submissions.  During the “period of compliance”, you cannot have any further late submissions.  For Annual Submissions (the Final Declaration), it is a period of 24 months, and for quarterly submissions, it is 12 months.  Not only do you need to ensure you file all submissions correctly and on time, but all outstanding submissions from the previous 24 months must also be filed.  Once both conditions have been met, your accumulated points will reset to zero.

Late Payment Penalties

If you are late making a payment for your tax that’s due, you will be charged interest, and the amount depends on how overdue the payment is.

For the first 15 days after the payment was due, no interest will be levied.  However, if the payment is 16 days or more late, that is when you will be charged interest.  For payments that are between 16 and 30 days late, there will be 2% penalty charged on the outstanding tax amount.  For payments that are 31 days or more late, you will be charged an additional 2% of the outstanding tax due as of day 30, and then a daily accruing interest charge of 4% annually.

Other Types of Penalties

There are other penalties that can be levied by HMRC in relation to MTD ITSA.

This includes:

• A fine of up to £400 per return submitted through non-MTD-compatible Software (including using spreadsheets without MTD-compatible bridging software)
• If you aren’t keeping proper digital records, you will usually be issued with a written warning the first time, but for those who repeatedly fail to keep the proper records, a fine of up to £3,000 per failure for each tax period could be levied.  This isn’t a fine that is issued automatically.  It is for more serious cases.
• If you are failing to use digital links, ie. You are manually re-keying or copy and pasting data between systems, which breaks the digital journey; you could be fined anywhere between £5 and £15 per day
• If there are inaccuracies in the Final Declaration that lead to an understatement of your tax liability, a percentage of the lost revenue, anywhere from 0% to 100%, could be levied and is dependent on the cause of the inaccurate information

The fines and penalties could quickly add up if multiple infractions are committed.  For example, not keeping your records properly could lead to late quarterly submissions and an inaccurate final declaration.

Can a business appeal the penalties?

Like with any penalty HMRC issues, penalties and fines for MTD ITSA can be appealed.  There is no guarantee that HMRC will waive the penalties, but if you believe you have received them unfairly or have extenuating circumstances, you can use the reviews and appeals process.

How to avoid getting penalties for MTD ITSA

So, what can you do to avoid receiving penalty points or fines in relation to MTD ITSA?

There are a number of things that you, as a business owner, and your bookkeeper or accountant can do to ensure you do not receive penalty points or fines.

• Ensure that you enrol for MTD ITSA at the right time; If your income from self-employment and/or rental income meets the threshold of £50,000 in April 2026, make sure you are following MTD ITSA from April 2026 and filing your quarterly returns on time.
• Ensure that the software being used for your accounts is MTD Compliant, or any bridging software that is being used is MTD Compliant
• Maintain your accounts on a regular monthly basis so that the quarterly returns and the Final Declaration can be submitted to HMRC on time
• Make sure that your digital records are being kept properly and that all the correct information is being stored

By following these simple steps and keeping on top of your accounts, you will be able to mitigate the penalties you could face for not following the MTD ITSA regulations.

The introduction of MTD ITSA by HMRC is going to cause a significant change in how businesses report their income to HMRC.  Businesses that meet the thresholds will no longer be able to submit their information just once a year or be able to use software provided by HMRC.  By understanding the new penalty structure that makes up part of the MTD ITSA regulations, business owners will be able to avoid unnecessary fines.  By staying informed and starting to make changes to how your accounts are kept now, business owners will be able to navigate the transition smoothly and maintain compliance. Avoid a last-minute scramble and stay one step ahead of the curve.

If you have any questions about penalties for MTD ITS, please feel free to email me.

During May’s Facebook Live, I discussed how to keep digital records for MTD ITSA, what counts and what doesn’t count.

Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) is on the horizon, and if you’re a self-employed individual or landlord earning over £50,000 per year, this affects you from April 2026.

So, what exactly counts as a digital record for MTD ITSA, and what doesn’t? Let’s break it down.

What Is Making Tax Digital?

MTD is an HMRC initiative designed to make the UK tax system more effective, efficient, and easier for taxpayers. Under MTD, businesses must:

• Keep digital records of income and expenses
• Submit quarterly updates to HMRC via MTD-compatible software
• Submit a Final Declaration annually

Gone are the days of paper ledgers and spreadsheets – at least in their traditional forms.

Under MTD ITSA, an individual who is self-employed and is also a landlord will be required to submit separate submissions for each of the income streams.  This means they will be required to maintain two separate sets of digital records.  If the landlord has UK property income, as well as foreign property income, that information will also need to be kept separate and individual submissions will be required for the different types of property income.

What Does Count as a Digital Record?

A digital record is any financial data that is created, stored or transferred electronically.  Understanding what counts as a compliant digital record for MTD ITSA is paramount, as HMRC have set out specific requirements regarding the data that must be captured and the formats in which it should be maintained.

According to HMRC guidelines, digital records must include the following key pieces of information. 

For each transaction:

• Date of the transaction – this should align with existing tax rules for when income is recognised or expenses are incurred
• Amount (income or expense)
• Category/type (ie, Rent, repairs, utilities, sales, rental income)
• Supplier or customer name (where relevant)

Acceptable Digital Formats:

• Cloud accounting software (ie QuickBooks, Xero, Sage)
• Desktop software that can integrate or export data to MTD-compliant systems
• Mobile apps that record income/expenses and feed into MTD software
• Spreadsheets – only if they are linked to bridging software that submits the data to HMRC digitally (copying and pasting is not compliant)

Digital Links:

If you are using multiple systems, they must be digitally linked – not retyped or copied and pasted.  Examples include:

• Import/export via CSV
• APIs between apps
• Automatic bank feeds
• Cloud-based integrations

Digitising supporting documents like invoices and receipts is good practice and can help complete your accounts, but it doesn’t replace the core requirement of MTD ITSA.  The data about each transaction must be entered into approved MTD ITSA-compliant software or a compliant spreadsheet.  The software you use for recording your accounts information must be able to communicate digitally with HMRC for submitting the quarterly updates and the final declaration at year-end.

What Doesn’t Count as a Digital Record?

HMRC have laid out very clear information about what does not count as a digital record for MTD ITSA.  By following the guidelines about what does and doesn’t count as a digital record, you will ensure that you avoid penalties and ensure the integrity of your financial records.

Manual Records:

• Paper receipts, handwritten ledgers, or notebook entries (unless they are digitised and stored within a digital system). While you can use paper documents as supporting evidence of your transactions, you cannot use manual ledgers to keep your accounts.
• Manually typed summaries from a stack of paper invoices.  The data you submit to HMRC cannot be based on summary figures you have entered manually into your accounts, you need to ensure that all transactions entered are digitally recorded individually, unless you are allowed to use approved summarised records like Daily Gross Takings, which retailers can use.
• Totals written into a spreadsheet without a breakdown per transaction

Copying and pasting figures from one program to another (like manually entering totals into HMRC’s website or bridging software) is not compliant with MTD ITSA.  HMRC wants to see a digital journey from transaction to tax return.

Snapping a photo of a receipt is not enough unless that image is stored within a compliant digital system that logs transaction data (ie, AutoEntry, Dext, HubDoc, or accounting software receipt tools)

One of the most important things to remember is that if there is any break in the digital transfer of the data between the software and HMRC, it is not compliant with MTD ITSA.   You also need to ensure that any software you use to submit your returns to HMRC is compliant with MTD ISTA – whether that is using accounts software that connects to HMRC’s API, or using spreadsheets with recognised MTD-compatible bridging software.

Tips for Clients

Here are some tips for getting prepared for MTD ITSA:

• Get used to going digital now – even if you’re not affected until April 2026, getting used to ensuring your accounts are being kept digitally now will put you ahead of the game.
• Save receipts, but also make sure you log each one into your software.
• Ask your bookkeeper for tools that simplify day-to-day tracking (ie, Mileage logs, mobile expense capture).
• Keep your records up to date in real-time (or as near as possible) as this will help to reduce errors and stress.  If you consistently wait to have your accounts completed just in time to submit the quarterly submissions, you increase the risk of not getting all transactions entered into the accounts and making errors.  It also causes you extra stress as you may not remember what a transaction from 3 months ago was for, or receipts/invoices may have been lost.

Keeping digital records under MTD ITSA isn’t just about switching from paper to a computer; it’s about ensuring that your financial data flows digitally from the source transaction all the way to HMRC, with no manual breaks in the chain.

By getting systems in place now, both bookkeepers and clients can avoid a last-minute scramble and stay one step ahead of the curve.

If you have any questions about keeping digital records for MTD ITSA, please feel free to email me.

During April’s Facebook Live, I discussed how UK businesses and landlords should prepare for Making Tax Digital for Income Tax and Self-Assessment.

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is on its way — and if you’re a UK business owner, sole trader, or landlord, it’s time to start preparing. The new rules may seem daunting at first, but getting ready early can make the transition much smoother.

Whether you’re tech-savvy or still using spreadsheets, this guide breaks down what MTD ITSA means and how you can prepare.

What is MTD ITSA?

MTD ITSA is part of the Making Tax Digital initiative introduced by the government in 2015.  The initiative is designed to modernise the tax system by requiring digital record-keeping and quarterly reporting to HMRC.  MTD for VAT was the first stage, and now MTD ITSA is being introduced. 

Who will be affected?

MTD ITSA may apply to you if you are self-employed and/or you are a landlord with UK property income.

From April 2026, all self-employed individuals and landlords with a total income (either from business or rental income) of over £50,000 will need to:

• Keep digital records of income and expenses
• Submit quarterly updates to HMRC using MTD-compatible software
• Submit a final declaration annually.

In April 2027, all those with an income over £30,000 will be required to follow, with those whose income is over £20,000 to file from April 2028.

At this stage, no announcements have been made about partnerships or limited companies.

6 Key Steps to Prepare for MTD ITSA

If you are already keeping your accounts up to date on a regular monthly basis, then you are already a step ahead of the game.  Here are 5 tips to help you get prepared for MTD ITSA.

1. Understand Your Income Streams
   
   First, you need to work out whether your income puts you over the MTD ITSA threshold so that you can work out when you need to start submitting regular quarterly returns.  Combine all relevant income from your self-employment and/or rental income from being a landlord.  If you are close to the £50,000 mark, start planning now because you may be required to join the scheme in April 2026.
   
   
2. Switch to Digital Record-Keeping
   
   If you aren’t already using accounts software or spreadsheets to keep your accounts, now is when you need to make the move to start.  While you will be able to keep your records using spreadsheets, you will need to pay for additional bridging software to file your returns, so using MTD compliant accounts software like QuickBooks, Xero, FreeAgent, or Sage, to do your bookkeeping is the method I would recommend.  Not only will you be able to submit your quarterly returns without needing to use additional software, but you will be able to produce your financial reports, ensure all accounts are properly reconciled, and attach the proof for each transaction directly to the entry in the accounts.
   
   You will need to do the following:
   
   – Ensure you are using MTD compatible software
   – Record your income and expenses in real-time (or as close as possible)
   – Maintain digital copies of receipts and invoices.
   
   The earlier you start using software and getting into the habit of doing your accounts regularly, the easier it will be when it comes time to file through MTD ITSA.
   
   
3. Talk to your Accountant or Bookkeeper
   
   If you work with an accountant or bookkeeper, check with them to see if they are MTD-ready.  Ask:
   
   – Are they using MTD-compliant software
   – Can they support you with quarterly submissions
   – Do they offer training or transition support
   
   If you don’t have an accountant or bookkeeper, this might be a good time to find someone who is qualified and can help to ensure you are meeting all the legal requirements.
   
   
4. Get Familiar with Quarterly Reporting
   
   Under MTD ITSA, you will need to send a summary of income and expenses to HMRC every 3 months.  While HMRC won’t calculate your tax based on these updates, they will build a picture of your estimated liability.
   
   You will also be required to submit a final declaration at the end of the year (this will replace the traditional Self-Assessment return).
   
   Practice now by doing a dry run, especially if you are already using accounting software.
   
   
5. Make Sure You Have A Government Gateway Login
   
   You will need to ensure that you have your Government Gateway login details and know how to access your account.  If you are going to be submitting your quarterly returns yourself, you will need to use the login details to submit the information.
   
   If you are going to have your accountant or bookkeeper submit your quarterly returns, you will need to permit them to act on your behalf.  If you have both a bookkeeper who does your day-to-day bookkeeping and an accountant who submits your self-assessment, you can set your bookkeeper up to be a supporting tax agent just to submit the quarterly returns. 
   
   
6. Join the MTD ITSA Pilot (Optional but Recommended)
   
   HMRC are running a pilot program which is open to a small number of individuals and businesses.  Joining the pilot early gives you a head start, lets you test out your systems, and reduces stress when the rules go live.
   
   Talk to your bookkeeper or accountant to see if you are eligible to join the pilot.

Benefits of Being MTD-Ready

While it might seem like more admin, MTD ITSA could actually simplify your tax life.  The benefits include:

• Better visibility of tax owed throughout the year
• Fewer surprises at tax time
• Improved record accuracy
• Can help with cash flow management
• Easier collaboration with your accountant or bookkeeper

MTD ITSA is more than just a compliance obligation, it’s an opportunity to modernise your business finances.  By starting early, choosing the right tools, and getting professional support, you’ll be in a strong position to meet HMRC’s requirements and avoid last-minute stress. can ultimately lead to a more successful and financially secure business.

If you have any questions about how you can prepare for MTD ITSA, please feel free to e-mail me.

On Wednesday, March 26th, 2025, Chancellor, Rachel Reeves, delivered the 2025 Spring Statement with several important announcements for businesses. While no tax changes were announced, there are significant updates that may affect how you manage your tax obligations. Let’s explore what these changes mean for you.

Making Tax Digital is Expanding

HMRC has confirmed the phased rollout of Making Tax Digital for Income Tax and Self Assessment (MTD ITSA):

• From April 2026: Sole traders and/or landlords with an income over £50,000
• From April 2027: Sole traders and/or landlords with an income over £30,000
• From April 2028: Sole traders and/or landlords with an income over £20,000

If you fall into these categories, you’ll need to submit quarterly accounts to HMRC, plus a final year-end submission that serves as your self-assessment tax return. It is important to note that HMRC will not provide free somewhere for this – you’ll need to use approved MTD ITSA software for all your submissions.

HMRC will start contacting those who are eligible to file through MTD ITSA from April 2026 within the next couple of months.

HMRC hasn’t yet announced any dates for when partnerships or limited companies will be expected to follow MTD.

Who is exempt?

Several groups may qualify for exemption, including those without an NI number, trusts and charities, foster carers, and others. The full list of exemptions includes ministers of religion, Lloyd’s Underwriters, and recipients of specific allowances. If you are unsure about your status, we recommend checking with HMRC when they begin contacting eligible taxpayers in the coming months.

Increased Penalties for Making Tax Digital (VAT and ITSA)

Beginning April 6th, 2025, HMRC is increasing penalties for late payments under MTD VAT and MTD ITSA:

• 3% of tax outstanding where tax is overdue by 15 days; plus
• 3% where tax is overdue by 30 days; plus
• 10% per annum where tax is overdue by 31 days or more.

These increases are designed to encourage timely payments, so it’s more important than ever to keep on top of your tax deadlines.

HMRC’s Enhanced Debt Recovery Powers

For businesses and individuals who can pay but choose not to, HMRC will resume “direct recovery” of tax debts of £1,000 or more. They must leave a minimum of £5,000 across accounts when using this power. The government is also exploring automated collection methods for smaller tax debts.

Important Consultations Announced

Several consultations were announced that could impact businesses:

• Behavioural Penalty Reform – creating a new model for dealing with inaccuracies in tax submissions
• Tackling Non-compliant Tax Advisers – enhancing HMRC’s powers against advisers who facilitate non-compliance in their client’s tax affairs
• Improving Data Quality – exploring additional reporting requirements to help close the tax gap

Self-Assessment and Pension Changes

From the summer of 2025, employed individuals will be able to report family Child Benefit payments digitally and pay HMRC directly through PAYE instead of registering for Self-Assessment.

Two significant pension changes were also announced:

1. The automatic enrolment age threshold will drop from 22 to 18, with contributions calculated from the first pound of earnings.
2. The pension age will increase to 67 by the end of 2028, with an increase to 68 expected within the following two years of parliament.

What This Means for You

These changes represent significant shifts in how businesses interact with HMRC. If you’re a sole trader and/or landlord, you should begin preparing for MTD ITSA now, especially if your income exceeds the thresholds. The increase in late payment penalties also means it’s more crucial than ever to maintain timely compliance with your tax obligations.

For more comprehensive information, we recommend visiting the government website to read the full Spring Statement.