How to send a quarterly update to HMRC for Making Tax Digital (MTD) for Income Tax

This article explains how to send a quarterly update to HMRC for Making Tax Digital (MTD) for Income Tax, also known as Making Tax Digital for Income Tax Self Assessment (MTD for ITSA), using FreeAgent.

Please note that FreeAgent’s MTD for Income Tax functionality is currently in pilot. Therefore, you’ll only have access to the functionality if you work with an accountant who is a FreeAgent partner and your business is eligible for HMRC’s pilot scheme. The functionality currently won’t be available if you have an unincorporated landlord account.

If you have a Practice Dashboard, you’ll need to switch to your client’s account to follow the steps below once you’ve set up your practice for MTD for ITSA and signed up your clients.

HMRC requires anyone registered for MTD for Income Tax to keep digital records and send quarterly updates about their business income and expenses to HMRC. These quarterly updates can be submitted from the 6th of the month after the end of the quarter, and they are due one month and five days after the end of each quarter.

The ‘Important deadlines’ panel in FreeAgent provides a useful timeline of when each quarterly update is due to be submitted. For example, the submission window for a quarter ending 30th June will be between 6th July and 5th August.

You’ll need full (level 8) access to your FreeAgent account to send a quarterly update to HMRC once you’ve prepared your accounts in FreeAgent.

1. Navigate to the Self Assessment tax return

Begin by navigating to the 'Taxes' tab at the top of the screen and select 'Self Assessment' from the drop-down menu.

Select the relevant tax year from either the list on the left-hand side of the panel or from the 'History' drop-down menu.

2. Check your figures

Next, check that you’ve entered all of the relevant data for the quarter. In order to create your quarterly reports, FreeAgent needs to have the details of your business’s bank transactions, invoices, bills and out-of-pocket expenses.

FreeAgent will automatically populate your total income for the quarter in the ‘Income’ section.

FreeAgent will automatically populate your total day-to-day running costs for the quarter in the ‘Expenses’ section.

To view a breakdown of the transactions that make up a particular figure, select the relevant item from either the ‘Income’ or ‘Expenses’ list.

This will take you to the ‘Show Transactions’ report filtered by tax reporting type and display all of the transactions that make up the figure. Find out more about how to view the tax reporting type of an accounting category.

If you need to, you can enter adjustments and allowances to send to HMRC for Making Tax Digital (MTD) for Income Tax.

3. Complete the non-financial information section

You also need to submit non-financial information about your Class 2 and Class 4 National Insurance contributions to HMRC as part of the quarterly update of your business income and expenses. To complete this section, scroll down to the ‘Class 2 and Class 4 National Insurance Contributions’ section and complete the relevant information.

Class 2 National Insurance

If your self-employed profits are above the Lower Profits Limit, you have to pay Class 2 National Insurance contributions (NICs). Class 2 NICs are usually a flat rate per contribution week or partial contribution week that you're self-employed (unless you're a share fisherman). 

If your self-employment profits are below the Small Profits Threshold you can still volunteer to pay Class 2 NICs. If you want to do this, select ‘Yes’ and FreeAgent will calculate the amount you owe based on 53 contribution weeks, which is what HMRC requires. If you don’t want to do this, select ‘No’ instead.

Class 4 National Insurance

Most sole traders have to pay Class 4 National Insurance contributions (NICs), but there are a few exceptions. For example, if you are under 16, over state pension age or not a resident in the UK for tax purposes at the start of the tax year in question, you may be exempt from paying Class 4 NICs. If this applies to you, select the relevant option from the drop-down menu. If you’re unsure, please speak to your accountant.

You may sometimes need to adjust the profits on which you're paying Class 4 NICs (e.g. if you've used a loss to claim back some tax, and the loss is still available for NI purposes) to save you Class 4 National Insurance. Check with your accountant to find out whether this applies to you.

If you’re not exempt from paying Class 4 National Insurance contributions, select ‘Not Exempt’ from the drop-down menu.

4. Add any disclosures

If you need to add any disclosures, such as volunteering to pay Class 2 NICs or adding a tax avoidance scheme, select ‘Individual Information’.

Select ‘Yes’ to ‘Do you want to pay Class 2 NICs voluntarily, or disclose any tax avoidance schemes?’.

If you’d like to pay Class 2 NICs voluntarily, select ‘Yes’ to ‘Do you want to pay Class 2 NICs voluntarily’. Otherwise, select ‘No’.

If you need to disclose any tax avoidance schemes, select ‘Add a scheme’.

Enter the eight-digit serial number for the avoidance scheme in the ‘Serial Number’ field and choose the relevant tax year from the ‘Tax Year’ drop-down menu. If you’re unsure whether you need to disclose any tax avoidance schemes, please speak to your accountant.

To add an additional tax avoidance scheme, select ‘Add a scheme’ and enter the relevant details for the scheme.

5. Submit your quarterly tax data to HMRC

Once you’re happy with the information, select ‘Send [X] Update’ in the top-right of the screen.

Select ‘Send Update’ to complete the submission process. FreeAgent will then send your business income, expenses, adjustments, allowances and non-financials for the quarter to HMRC. This will give you a year-to-date calculation of how much tax you will be due to pay at the end of the tax year in the ‘Your estimated tax liability' panel.

What happens next?

Once FreeAgent receives a response from HMRC in relation to your business’s submission, the software will automatically send an email to your registered FreeAgent email address to confirm whether the submission in question was accepted or rejected.

If you would prefer not to receive an email notification for these submissions, you can choose not to receive them by updating your FreeAgent communication preferences. To do this, choose ‘Settings’ from the drop-down menu in the top-right of the screen, then select ‘Communication Preferences’. Untick the ‘Filing notifications’ checkbox in the ‘Emails’ area and select ‘Save Changes’ to complete the process.