Making Tax Digital for Small Businesses

What is Making Tax Digital?

Making Tax Digital (MTD) is HMRC's programme to modernise the UK tax system. The aim is for all businesses and sole traders to keep digital tax records and submit information to HMRC using MTD-compatible software rather than manual entry via the HMRC portal.

MTD is being rolled out in phases. The first phase (MTD for VAT) is already mandatory for all VAT-registered businesses. The second phase (MTD for Income Tax) is being phased in from April 2026.

MTD for VAT — Already Mandatory

Since April 2022, all VAT-registered businesses must keep digital VAT records and file VAT returns via MTD-compatible software. You can no longer key figures directly into the HMRC online portal.

If your business is VAT-registered and you are not yet using MTD-compatible software, you are already non-compliant and should act immediately. HMRC has been issuing penalties.

The VAT registration threshold remains at £90,000 turnover in the last 12 months (as of 2024/25). Once you exceed this, you must register for VAT and comply with MTD for VAT from your first VAT return.

MTD for Income Tax Self Assessment (MTD ITSA) — Rollout Dates

MTD for Income Tax applies to self-employed individuals and landlords who file Self Assessment returns. The mandatory rollout dates are:

FromWho is Affected
April 2026Self-employed / landlords with gross income over £50,000
April 2027Self-employed / landlords with gross income over £30,000
April 2028Self-employed / landlords with gross income over £20,000

Partnerships and limited companies are not yet included in MTD ITSA — HMRC will announce timelines separately.

How MTD ITSA Changes Things

Under MTD ITSA, instead of filing one annual Self Assessment return, you will need to:

  1. Keep digital records of all income and expenses using MTD-compatible software
  2. Submit quarterly updates to HMRC (four times per year, within 1 month of the end of each quarter)
  3. Submit a final declaration at the end of the tax year (replacing the current Self Assessment return)

The quarterly updates are cumulative summaries — not full tax returns — so they are less work than they sound. However, they do require you to maintain up-to-date digital records throughout the year rather than just before the January deadline.

Compatible Software

HMRC publishes a list of MTD-compatible software at gov.uk. Key options for small businesses include:

Free or Low Cost

  • FreeAgent — free with a NatWest, Royal Bank of Scotland, or Lloyds business bank account. Excellent for sole traders and small businesses. Full MTD for VAT and MTD ITSA support.
  • TaxCalc — low-cost desktop and cloud option, strong for MTD ITSA.
  • HMRC-approved bridging software — if you use spreadsheets, bridging software connects your spreadsheet data to HMRC's systems. A viable short-term solution, but not ideal long-term.

Paid Accounting Packages

  • Xero — from £16/month. Cloud-based, excellent bank feeds, widely used by UK accountants.
  • QuickBooks Online — from £14/month. User-friendly, good for sole traders and small companies.
  • Sage Accounting — from £15/month. Long-established UK accounting software brand.
  • KashFlow — UK-focused, from £10/month. Simple interface suited to non-accountants.

How to Prepare Now

Even if MTD ITSA does not apply to you until 2027 or 2028, it makes sense to start using compatible software now. Benefits of acting early:

  • Your records will be clean and organised from the start of your business
  • Bank feeds import transactions automatically, saving hours of manual entry
  • Your accountant can access your books remotely, reducing their fees
  • You gain real-time visibility of your profit, tax liability, and cash position
  • VAT returns are filed directly from the software — no manual copying of figures

Penalties for Non-Compliance

HMRC introduced a new penalty regime for MTD. For MTD for VAT, late submission triggers a points-based system — accumulate enough points and a £200 fixed penalty applies. There are also separate late payment penalties (2% of unpaid VAT after 15 days, escalating to 4% and then daily charges).

MTD ITSA will use a similar points-based approach when it becomes mandatory.

Frequently Asked Questions

MTD for VAT is already mandatory for all VAT-registered businesses — you must keep digital records and file returns via compatible software. MTD for Income Tax (MTD ITSA) is being phased in: mandatory from April 2026 for self-employed/landlords earning over £50,000.

April 2026 for self-employed individuals and landlords with gross income over £50,000. April 2027 for income over £30,000. April 2028 for income over £20,000. Partnerships and limited companies are not yet included — HMRC will announce timelines separately.

HMRC-approved MTD-compatible software such as Xero (from £16/month), QuickBooks (from £14/month), Sage (from £15/month), or FreeAgent (free with NatWest, Lloyds, or RBS business bank accounts). Bridging software is available if you want to keep using spreadsheets.

Not directly — you need either MTD-compatible accounting software or HMRC-approved bridging software that connects your spreadsheet to HMRC's systems. Bridging software is a valid short-term solution but most businesses find proper accounting software more efficient long-term.

HMRC uses a points-based penalty system. For MTD for VAT: each late submission earns a point, and once the threshold is reached, a £200 fixed penalty applies. Separate late payment penalties start at 2% of unpaid VAT after 15 days, escalating to 4% after 30 days, then daily charges.