Making Tax Digital (MTD): For Self-Employed & Disabled Entrepreneurs

Disclaimer: This article is for informational purposes only and does not constitute financial or legal advice. Please consult HMRC or a qualified accountant to ensure compliance with Making Tax Digital requirements.

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What Disabled, Self-Employed Entrepreneurs on Universal Credit Need to Know

For many self-employed disabled entrepreneurs who rely on Universal Credit, bookkeeping is already a demanding monthly task. Balancing health conditions, business responsibilities, and caring duties can be overwhelming. Now, with HMRC’s upcoming changes to Making Tax Digital (MTD) for Income Tax, further requirements are being introduced. From April 2026, millions of self-employed individuals and landlords with qualifying income will be legally required to submit digital tax updates. This move towards quarterly reporting represents one of the biggest shifts in the UK tax system in recent years.

What is Making Tax Digital (MTD)?

Making Tax Digital is HMRC’s initiative to modernise the UK tax system. The goal is to reduce errors, simplify record-keeping, and give taxpayers a clearer picture of their financial position. Instead of completing a Self-Assessment tax return once a year, qualifying individuals will have to submit updates every quarter using HMRC-approved accounting software.

Who Will Be Affected and When?

The phased rollout of MTD is based on annual qualifying income:

• April 2026: Self-employed and/or landlords with income over £50,000 (based on the 2024–25 tax year).
• April 2027: Income over £30,000 (based on the 2025–26 tax year).
• April 2028: Income over £20,000 (based on the 2026–27 tax year, subject to future legislation).

Universal Credit claimants who are self-employed and meet these thresholds will be required to comply with MTD.

What This Means for Self-Employed Disabled Entrepreneurs

Currently, Universal Credit claimants must submit monthly earnings reports via their journal, which already demands regular bookkeeping. MTD adds another layer of compliance:

• Quarterly updates must be submitted to HMRC using digital software.
• This means keeping records digitally (paper-based systems will no longer be sufficient).
• You may need to invest in accounting software, which is an additional cost for entrepreneurs already facing financial pressures.
• Disabled entrepreneurs, who often juggle health challenges, business admin, and caring duties, may find the transition especially difficult without additional support.

How to Prepare for MTD

HMRC has published guidance and free live webinars to help businesses get ready. Practical steps include:

• Learning the requirements: Understand what records you must keep digitally.
• Choosing the right software: Research HMRC-approved tools that suit your business.
• Speaking to your accountant/agent: If you use an agent, they will need to be authorized to act on your behalf for MTD.
• Signing up early: Don’t leave it until the last minute.
• Exploring benefits: Digital records may help with cash flow forecasting, time-saving automation, and reducing reporting errors.

Challenges Ahead

Disabled entrepreneurs on Universal Credit may face several challenges:

• Affordability of software: Subscriptions may eat into already tight budgets.
• Accessibility concerns: Not all digital software is user-friendly for people with disabilities.
• Mental health strain: The additional reporting burden could worsen anxiety and stress.

It is essential that policymakers and HMRC provide accessible, affordable solutions to ensure no entrepreneur is excluded.

Why Fix What Isn’t Broken?

The Impact of Making Tax Digital on Self-Employed Disabled Entrepreneurs

The government’s Making Tax Digital (MTD) initiative is being promoted as a way to “reduce errors” and “streamline” the tax system. But for many self-employed disabled entrepreneurs, especially those on Universal Credit, the question remains: why fix what isn’t broken?

The Current System Works

The annual Self-Assessment system, while not perfect, is a process that most small businesses and sole traders already understand. It allows individuals to gather all their records once a year, check them carefully, and submit them in good time.

Introducing quarterly reporting through digital software does not simplify this; it complicates it.

Who Will Be Affected the Most?

• Disabled entrepreneurs juggling health, caring duties, and small businesses.
• Universal Credit claimants, already required to submit monthly earnings reports.
• Low-income entrepreneurs may not be able to afford the required software.

These groups are the ones most at risk of missing deadlines or making mistakes, leading to financial penalties.

A Revenue Stream in Disguise?

While MTD is marketed as an efficiency measure, many fear it will become a penalty trap. Those who struggle to adapt, whether due to disability, digital exclusion, or financial hardship, are likely to face fines. It raises the question: Is this reform genuinely about improving efficiency, or is it simply another way for the government to generate revenue?

Accessibility Concerns

Another pressing issue is accessibility. Not all HMRC-approved software is user-friendly for people with disabilities. Without proper consultation and support, the shift to digital risks excludes the very entrepreneurs who need fairness and flexibility the most.

Here’s how it works in practice:

HMRC and Making Tax Digital (MTD)

• Under MTD for Income Tax, self-employed individuals and landlords will have to keep digital records and send quarterly updates through HMRC-compatible software.
• The software does not automatically link to your bank account unless you permit it. Many bookkeeping tools (like QuickBooks, Xero, FreeAgent, etc.) allow you to connect your bank feed, but that’s optional for ease of record-keeping.
• HMRC themselves do not directly connect to your bank account through MTD software. Instead, they rely on the figures you submit via the approved software.

HMRC’s Access to Bank Data

• Separately, HMRC does have legal powers to request bank statements and financial data if they are investigating.
• Banks also provide HMRC with some information automatically (for example, under anti-money-laundering and tax compliance rules).
• This isn’t specific to MTD, but MTD does make it easier for HMRC to spot mismatches between declared income and what’s showing in a bank account if they investigate.

DWP and Universal Credit

• The DWP already has access to claimants’ bank account data through an agreement with banks (sometimes called the “Credit Reference Agency and Bank Data Sharing” process).
• They use this for fraud detection and compliance checks.
• For self-employed UC claimants, DWP requires monthly reporting of earnings. If there are discrepancies between what you report, what HMRC has on file, and what’s visible in your bank account, this can trigger questions or an investigation.
• MTD doesn’t give HMRC automatic access to your bank account, but using digital software makes your business accounts more transparent and easier to cross-check.
• HMRC and DWP can (and do) access bank account data separately if they need to, and will compare it with what’s reported through MTD and UC systems.

HMRC (Tax Purposes – Self-Employment / MTD / Self-Assessment)

• Overdrafts and loans are not classed as income.
• They are considered liabilities (money you owe), not revenue.
• You do not declare the loan or overdraft itself as income on your tax return.
• However:
  • Interest paid on a business loan or overdraft can usually be claimed as an allowable expense, reducing your taxable profit.
  • If you buy equipment with the loan, you may also be able to claim capital allowances.

DWP (Universal Credit)

This is where it gets trickier:

• Loans and overdrafts are not counted as earned income for Universal Credit purposes.
• UC is based on actual earnings (business income minus expenses) reported monthly.
• However, if a loan sits in your bank account at the end of your assessment period, it may temporarily increase your capital balance (savings).
  • If your savings go over £6,000, UC is reduced.
  • If they go over £16,000, you’re not entitled to UC.
• To avoid confusion, it’s usually best to make clear in your records (and UC journal if needed) that any large sums are loans or overdraft facilities, not business earnings.
• For HMRC: Loans and overdrafts are not income, no need to declare as such.
• For DWP (UC): They’re not treated as income, but they could affect your capital assessment if the money is just sitting there.

1. HMRC – Benefit in Kind (Tax Purposes)

• What counts as a Benefit in Kind (BIK): Normally applies to employees when their employer gives them non-cash perks (like a company car or free accommodation).
• As a self-employed person, BIK rules don’t apply in the same way. Instead, HMRC looks at whether what you received is:
  • A discount or incentive that can be considered part of your business income, or
  • A personal gift unrelated to your trading.
• Example:
  • The rent reduction is not money you received, but it reduces your outgoings.
  • If the agent explicitly gives you the reduction in exchange for marketing help, HMRC could technically view that as a payment in kind (barter transaction).
    • Example: If your rent is reduced by £100 and you provide marketing worth £100, HMRC may say you earned £100 income, and your rent is £100 expense; they cancel out, but you’d still need to declare the transaction.
  • If the letters clearly state it’s support/incentive rather than payment for services, you could reasonably argue it’s not taxable income, but documentation is key.

2. DWP – Universal Credit

• Earnings: UC is based on your self-employed income after expenses.
• If HMRC were to treat the reduction as “income in kind,” DWP might follow the same logic.
• But practically, because no money actually enters your account, DWP may not class it as income. Instead, they may see it as a discount on rent.
• As long as you have the letters from the agent explaining it’s an incentive or support, you should have protection if DWP questions it.

3. Key Points for Protection

✅ Keep every letter/email that explains the reason for the reduction.
✅ Record it transparently in your bookkeeping: e.g., “Rent due: £X / Incentive applied: £Y / Rent paid: £Z.”
✅ If it’s ever queried, you can show it’s a rent discount, not earned business income.
✅ If you do provide marketing services formally in return, it could tip into a barter transaction — but if it’s framed as “support” for your advocacy work, that’s different.

4. Practical Example

• Rent due: £800
• The agent reduces rent by £100 for early payment or to support your advocacy work.
• You pay: £700
• Bookkeeping entry: “Rent expense £700 (after incentive).”
• No income to declare because no money entered your business.

Top 5 Things to Keep on File for Self-Employed UC Claimants

1. Bank Statements

• Keep full monthly statements for both personal and business accounts.
• Highlight incoming payments (income) and outgoing payments (expenses).
• Note any loans, overdrafts, or transfers separately so they’re not mistaken as income.

2. Invoices & Receipts

• File all invoices you issue to clients, with dates and amounts.
• Keep receipts for expenses (equipment, subscriptions, utilities, etc.).
• Digital copies (scans/photos) are acceptable as long as they are clear.

3. Rent or Utility Discounts / Incentives Letters

• Keep every letter/email from your landlord, letting agent, or utility company if they reduce charges or give incentives.
• Label them clearly as “discounts/support” so they can’t be mistaken for extra income.

4. Loan & Grant Agreements

• Store copies of loan agreements, overdraft approvals, or grant letters.
• Highlight that these are liabilities or support, not earnings.
• This protects you if DWP or HMRC query sudden large sums in your account.

5. Monthly UC & HMRC Records

• Keep screenshots or copies of what you submit to Universal Credit each month.
• Store copies of your annual Self-Assessment or MTD quarterly updates (when required).
• This creates a clear trail showing consistency across UC, HMRC, and your accounts.

✨ Bonus Tip: Keep everything in date order (physical folder or cloud storage). If anyone ever questions you, you can hand them a neat file showing exactly where every figure came from, which usually stops further probing.

Conclusion

From April 2026, quarterly digital tax updates will become a legal requirement for many self-employed people. While MTD is intended to streamline the tax system, it also poses new hurdles for disabled entrepreneurs on Universal Credit, who already face disproportionate pressures in managing both business and health. The key is to prepare early, explore HMRC’s webinars and guidance, and seek out accessible accounting solutions.

Change can be positive when it solves a real problem. But in this case, Self-Assessment was not broken. For many, MTD feels less like progress and more like an unnecessary burden that risks penalising the most vulnerable.

As disabled entrepreneurs, we deserve a system that is fair, inclusive, and supportive, not one that creates new barriers under the guise of “modernisation.”

• For HMRC, rent reductions are usually just treated as discounts, not income, unless clearly in exchange for work (barter).
• For DWP, they shouldn’t treat it as income because it’s not money in your account, but always keep written proof.