Understanding UK Tax Codes: A Complete Guide

HMRC are starting to send out letters to sole traders and landlords in the initial steps towards Making Tax Digital for Income Tax. If you receive one of these letters do not panic, help is at hand. So let’s answer your most asked questions about Making Tax Digital. What is Making Tax Digital for Income Tax? Making Tax Digital for Income Tax (MTD for ITSA) is a UK government initiative aimed at modernising the tax system. It will require individuals and businesses to keep digital records and submit tax information to HMRC using compatible software. It is part of a broader initiative to digitalise tax returns and follows on from the changes already implemented for VAT reporting. Will Making Tax Digital affect me? MTD for ITSA will affect individuals who: Are self-employed (e.g. sole traders) and/or landlords (earning income from property). Have a total income over £50,000 per year (combined from self-employment and property). Are currently required to complete a Self-Assessment tax return. From April 2026 , MTD for ITSA will be mandatory for those earning over £50,000. From April 2027 , this threshold will reduce to £30,000. What will I have to do if my earnings are over the threshold? You will need to keep digital records for income and expenses which will mean using MTD compatible software. This will be a major change for those of you still keeping paper records. Instead of submitting an annual self-assessment return you will need to submit quarterly updates 4 times a year to HMRC. At the end of the tax year an End of Period Statement (EPOS) and a Final Declaration will need to be submitted which essentially replaces the current Self-assessment return. All of these will be required digitally, paper records and manual calculations will no longer be accepted. This means that instead of 1 annual return you will need to make 6 submissions! So what software do I need to use to keep digital records? Acceptable software include: QuickBooks Xero FreeAgent Sage or, HMRC-recognised spreadsheet tools with bridging software ( not highly recommended ) No more shoeboxes of receipts or manual books — everything must be digitally recorded. When will I need to register for MTD? You’ll need to sign up for MTD for ITSA before April 2026 . This is a deadline and not a target, signing up early is always advisable. HMRC will provide a service for you to do this but having the guiding hand of an accountant will make this a much easier task.

The Bank of England has halved its growth forecast for 2025 as it reduced interest rates to their lowest level in over 18 months. The UK economy is now expected to grow by 0.75% in 2025, down from the previous estimate of 1.5%. Despite this downgrade, Bank of England Governor Andrew Bailey expects a "pick-up" in growth, though he emphasised the need for gradual and careful rate cuts due to economic uncertainties. The latest interest rate cut—from 4.75% to 4.5%—signals the Bank’s continued efforts to stimulate economic activity while managing inflation risks. What This Means for Small Businesses in the UK For small businesses, the interest rate cut and lower growth forecast have both benefits and challenges: Positive Impacts Lower Borrowing Costs: Businesses relying on loans, credit, or overdrafts may see slightly reduced repayment costs. This could help with cash flow and investment decisions. Potential Increase in Consumer Spending: Lower interest rates might encourage consumer borrowing and spending, benefiting sectors like retail, hospitality, and services. Reduced Mortgage Payments for Business Owners: Many small business owners with tracker or variable-rate mortgages could see a slight drop in their monthly payments, potentially freeing up more funds. Negative Impacts Slow Economic Growth (0.75% instead of 1.5%): Businesses might experience reduced demand and slower revenue growth due to weaker economic conditions. Rising Employment Costs from April 2025: The increase in employers' National Insurance contributions could make hiring more expensive, discouraging expansion and investment. Inflation Expected to Rise (3.7%): Higher energy and water bills will increase business operating costs, especially for energy-intensive industries. Lower Confidence & Uncertainty: Businesses may hesitate to invest or expand due to economic instability. The Mortgage Impact: Who Benefits? Tracker Mortgage Holders: Around 629,000 homeowners with tracker mortgages will see an estimated £29 reduction in monthly payments. Standard Variable Rate (SVR) Holders: Nearly 700,000 people on SVRs must wait to see if their lenders adjust rates accordingly. Fixed-Rate Mortgage Holders: No immediate change, but they may find better deals when renewing. Savers: Those relying on savings for income, such as retirees, may see lower returns on savings accounts. What Next? The Government’s Response Prime Minister Sir Keir Starmer emphasised the need to "turn the economy around" with a focus on infrastructure, planning, and nuclear energy. However, businesses remain concerned about higher employment costs and stagnant growth. Chancellor Rachel Reeves has introduced measures to stimulate the economy, but critics argue that the employer National Insurance hike will increase costs for businesses, making it harder to invest or hire staff. Shadow Chancellor Mel Stride warned that while rate cuts are good news for families and businesses, the government’s "disastrous Budget" could limit further rate cuts this year. Take Control of Your Finances with MPower Accounting With rising business costs, inflation concerns, and economic uncertainty, small businesses need strategic financial planning now more than ever. Mpower Accounting specialises in helping small businesses across London, Kent, and Sussex navigate financial challenges. Whether you need help managing rising payroll costs, improving cash flow, or planning for tax efficiency, Mpower Accounting has you covered. How MPower Accounting Can Help Your Business Optimise payroll & plan for the National Insurance hike Improve cash flow management to navigate economic shifts Access expert financial advice to make smarter business decisions Prepare for tax changes & ensure compliance Book a consultation today and get expert support tailored to your business! Stay ahead of economic changes with the right accounting partner. Photo by Tim Mossholder on Unsplash

Self-assessment tax, between navigating tax codes, understanding what to include, allowable expenses, and the deadlines, it’s easy to feel like you’re spinning in circles with no clear direction, a bit like being on a Magic Roundabout! Well with that in mind I’ll hand over to some much loved characters to explain more... On a sunny day in Tax Meadows, Dougal the dog, Florence, Zebedee, and the gang gathered around to talk about a magical thing called Self-Assessment . Boing went Zebedee and said, "Self-Assessment is telling the Tax Gardeners at HMRC about how many seeds you’ve made from the lovely flowers in our magic meadow. If you’ve made more seeds that you planted you have to pay some of them back to them to keep the meadow looking lovely!” Young Florence, who didn’t know much about the Tax Gardeners also asked, "and who has to tell them, don’t they know already?" Zebedee nodded wisely. “If you have a job, your employer will tell them but if you’re like Ermintrude the cow, selling flowers at the market, or Brian the snail, renting out your shell as a holiday home, you need to do tell them about all the income you earn!” Dougal wagged his tail, “When do we have to send it to the Tax Gardeners?” Boing went Zebedee, as he couldn’t contain his excitement at being the Tax Gardeners expert. “You must file by 31st January and pay the seeds you owe them or they might start blowing dandelion fluff everywhere and we don’t want that! “Yes, don’t be late," warned Ermintrude, "or they'll send Soldier Sam with a nasty letter!" Zebedee looked put out that she had butted in and his spring, for once, didn’t boing! Ermintrude continued, pleased to have something better to do than chew the flower in her mouth! “First, there’s the arrival of a £100 fine —a little like an unexpected boing from Zebedee, but far less delightful. This fine appears whether or not you owe any tax. If you dawdle for three months, you’ll meet another twisty challenge. Now it’s £10 per day , up to a maximum of £900, like being chased, if rather slowly, around the roundabout endlessly by Brian. After six months, an extra 5% of tax owed (or £300, whichever is greater) is added to the dandelion mix.” The sun had started to set, Florence smiled and said, "So, Self-Assessment isn’t scary—it’s just about telling the Tax Gardeners the truth and helping the meadow thrive!"  "Exactly!" Zebedee laughed. “Be a Brian, start off early, take it slow but steady and you’ll get there in plenty of time. Boing when Zebedee one last time, “Time for bed and tomorrow we’ll work on keeping our meadow blooming!” I hope you enjoyed our visit to the Magic Roundabout, a fun look at Self-assessment tax. If you haven’t been a Brian please do contact us now and we can wave our magic wand to make your self assessment return go away!