Making Tax Digital (MTD) and What it Means for Business

What is Making Tax Digital?

This represents one of the biggest changes to the tax system within recent years, by moving away from paper-based records and manual submissions, and heading towards a fully digital approach.

Under Making Tax Digital, sole traders and landlords are required to keep digital records of all income and expenses in order to submit any tax updates to HMRC by using MTD-compatible tax software

Why has Making Tax Digital been introduced?

Making Tax Digital has been designed to reduce unintentional errors and to overall improve accuracy of tax reporting.

By keeping your business records digitally and submitting information more frequently, HMRC aims to reduce the amount of mistakes that are typically caused by manual record-keeping and last-minute tax returns.

Making Tax Digital helps taxpayers by:

• Reducing the overall risk of unintentional errors.
• Aims to help you report your tax more accurately.
• Encourages productivity by promoting organisation.
• Aids financial planning by improving awareness.
• Overall helps to provide your business a better view of tax obligations throughout the year.

Who will be affected and when?

If you are a landlord and or a sole trader, Making Tax Digital will apply to you, when you earn income from self-employment and/or property. It does not apply to limited companies, however as a director, if you make a self assessment return, you may be affected. You will need to use Making Tax Digital if:

• You are registered for self employment.
• You receive income from self-employment and or property.
• You have qualifying income that exceeds:
  • £50,000 from April 2026
  • £30,000 from April 2027

Your qualifying income refers to the total gross income before expenses from self-employment and property. This means you may still need to comply even if your net profit is relatively low.

Key aspects of Making Tax Digital

Digital record keeping

Under MTD rules, if you qualify you are legally required to keep the digital records of all income and expenses using MTD-compatible tax software. Paper records and non-compatible spreadsheets will no longer meet the requirements unless they are linked to compatible software.

Quarterly updates

Typically, you would have submitted accounts to HMRC on an annual basis but it is now required to send quarterly updates within the year. All these updates will summarise your income and expenses for every quarter, which will help you to keep your tax position up to date.

It is important to know that this does not mean that you will have to make tax payments quarterly. This will simply be reports of income and expenses, that allow the estimation of your tax position to be more accurate. This will not replace the annual tax payment.

End of year final declaration

At the end of the tax year, you would have to submit your final declaration using MTD-compatible tax software. The final declaration confirms and finalises your tax position.

The submission deadline typically remains at 31st January following the end of the tax year, and the return will be pre-populated using information from your quarterly updates.

Compatible software

All MTD submissions must be made using compatible tax software that can connect directly to HMRCs systems.

This software is very important for your business as you will use it to:

• Record your income and expense.
• Submit your quarterly updates.
• Complete the final declaration.

HMRC provides a list of their approved MTD-compatible software options on its website.

How can I get started with Making Tax Digital?

1. Sign up for Making Tax Digital

You must sign up for MTD through the government website using your Government Gateway details.

2. Choose compatible tax software

You will need to select a suitable software that suits your business. When you choose the software, take into consideration whether it integrates with HMRC's system.

3. Authorise the software

Once you've chosen the best software for you, you must authorise the tax software using your Government Gateway account. This allows the software to submit on your behalf.

4. Maintain digital records

You need to make sure that all your income and expenses has been recorded digitally and meet the requirements set by HMRC. Keeping up-to-date throughout year will make quarterly submissions and year end reporting a lot simpler.

Conclusion

Making Tax Digital may feel like a big change, but it is designed to make managing your tax simpler, more accurate, and less stressful in the long run. By keeping digital records and staying on top of regular updates, you can have greater visibility over your finances and avoid last-minute situations. With the right software and support in place, Making Tax Digital can help you stay compliant, organised, and in control of your business finances year-round.