What is Making Tax Digital? A Plain English Guide for Small Business Owners
Making Tax Digital (MTD) is HMRC's programme to move tax record-keeping and reporting online. MTD for VAT is already mandatory for all VAT-registered businesses. MTD for Income Tax (MTD for ITSA) is coming for sole traders and landlords earning over £50,000 from April 2026, over £30,000 from April 2027. You must use HMRC-compatible software — you can no longer file manually.
- What is Making Tax Digital?
- MTD for VAT: what you need to know
- MTD for Income Tax: what is coming and when
- What software you need to be MTD-compliant
- What you need to do right now
What is Making Tax Digital?#
Making Tax Digital is HMRC's plan to make the UK tax system fully digital. Instead of filing annual tax returns based on paper records, businesses will keep digital records and send quarterly updates to HMRC directly from their accounting software. The goal is to reduce errors, make tax more accurate in real time, and eventually allow HMRC to pre-fill tax returns from data it already holds. MTD is being rolled out in phases — VAT first (already live), Income Tax next (coming 2026–2027), and Corporation Tax after that.
MTD for VAT: what you need to know#
All VAT-registered businesses must now keep digital VAT records and file VAT returns using MTD-compatible software. You cannot use the old HMRC VAT portal to file manually. Compatible software includes Xero, QuickBooks, FreeAgent, Sage, and many others — a full list is on HMRC's website. If you currently file VAT returns yourself through the HMRC portal, you need to switch to one of these tools immediately if you have not already. The fines for non-compliance with MTD for VAT can be applied even if you actually owe no VAT.
MTD for Income Tax: what is coming and when#
MTD for Income Tax Self Assessment (MTD ITSA) is the next phase. From April 2026: sole traders and landlords with combined income over £50,000 must file quarterly updates with HMRC. From April 2027: the threshold drops to £30,000. From April 2028: £20,000. Instead of one annual Self Assessment return, you will send four quarterly updates showing your income and expenses, then a final declaration at year end. The annual tax calculation and payment dates remain the same. You must use MTD-compatible software to do this.
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What software you need to be MTD-compliant#
For MTD for VAT: Xero (from £15/month), QuickBooks (from £14/month), FreeAgent (from £19/month), Sage (from £12/month), or any of dozens of other approved tools. For MTD for Income Tax: the same tools will handle quarterly submissions. Many bank accounts offer free software: NatWest and HSBC Business customers get FreeAgent free. Starling Bank has basic accounting built in. If you currently use spreadsheets only, you will need to switch before your MTD deadline.
What you need to do right now#
If you are VAT-registered and not yet using MTD-compatible software, switch immediately — you are already non-compliant. If you are a sole trader or landlord earning over £50,000, start using MTD-compatible software before April 2026. If you are between £30,000–£50,000, prepare for April 2027. The practical steps: choose your software, connect your bank account, start categorising transactions digitally, and either file VAT returns yourself through the software or let your accountant do it. The transition takes a weekend to set up if you are organised; it is not technically complex.
People also ask
When does Making Tax Digital start for self-employed people?
MTD for Income Tax starts for self-employed people (sole traders) and landlords with income over £50,000 from April 2026. The threshold drops to £30,000 in April 2027 and £20,000 in April 2028.
What software do I need for Making Tax Digital?
You need HMRC-approved software. Popular choices include Xero, QuickBooks, FreeAgent, and Sage. Check HMRC's approved software list for the full options. Some bank accounts (NatWest, HSBC) include FreeAgent free of charge.
Is Making Tax Digital mandatory?
MTD for VAT is already mandatory for all VAT-registered businesses. MTD for Income Tax becomes mandatory for self-employed people earning over £50,000 from April 2026. Penalties apply for non-compliance.
Can I still use a spreadsheet for my accounts under MTD?
You can use a spreadsheet for bookkeeping but you must use approved bridging software to submit returns to HMRC — you cannot submit directly from a spreadsheet. Most people in this position find it simpler to switch to dedicated accounting software entirely.
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