Making Tax Digital (MTD) is the biggest change to UK tax administration in decades. It replaces traditional annual tax returns with digital record-keeping and quarterly reporting — affecting millions of self-employed people and landlords. Here is what you need to know and how to prepare.
What Is Changing
Under MTD, instead of filing one annual Self Assessment return, you will:
- Keep digital records of income and expenses using compatible software
- Submit quarterly updates to HMRC (roughly every three months)
- Submit a final declaration at the end of the tax year to confirm your figures
This replaces the traditional paper-based or manual spreadsheet approach with a real-time digital connection between your records and HMRC.
Who Is Affected and When
MTD Timeline
| Date | Who Must Comply |
|---|---|
| Already live | VAT-registered businesses (since April 2022) |
| April 2026 | Self-employed and landlords with income over £50,000 |
| April 2027 | Self-employed and landlords with income over £30,000 |
| TBC | Those with income over £20,000 (date not yet set) |
Income here means your total gross business or rental income — not profit. If your self-employment turnover is £55,000 but your profit is £35,000, you still fall within the April 2026 threshold.
Who Is Not Affected (Yet)
- Employed individuals with no self-employment or rental income
- Self-employed or landlords with income under the current threshold
- Companies — corporation tax has a separate digital reporting system
- Partners in partnerships — specific MTD dates for partnerships are being confirmed separately
What You Need to Do
1. Check If You Are In Scope
If your self-employment income, rental income, or combination of both exceeds the relevant threshold, you must comply from the respective date.
2. Choose Compatible Software
HMRC maintains a list of MTD-compatible software. Options include:
| Software | Monthly Cost | Best For |
|---|---|---|
| FreeAgent | From £12/month | Sole traders, freelancers |
| QuickBooks | From £10/month | Small businesses |
| Xero | From £14/month | Growing businesses, accountants |
| Sage | From £12/month | Traditional businesses |
| HMRC’s free tools | £0 | Very simple affairs |
| Bridging software | Varies | Those wanting to keep spreadsheets |
Bridging software allows you to continue keeping records in a spreadsheet and submit via a compatible “bridge” to HMRC. This is the minimum-change option for those comfortable with spreadsheets.
3. Set Up Digital Record-Keeping
Your software must maintain digital records of:
- All business income (each transaction or summary per customer)
- All business expenses (categorised and recorded)
- Any adjustments (personal use, capital allowances, etc.)
If you currently keep paper receipts in a shoebox or track income in a basic spreadsheet, you will need to transition to a digital system.
4. Submit Quarterly Updates
Approximately every three months, your software submits a summary of your income and expenses to HMRC. The quarterly periods broadly follow:
| Quarter | Period |
|---|---|
| Q1 | 6 April – 5 July |
| Q2 | 6 July – 5 October |
| Q3 | 6 October – 5 January |
| Q4 | 6 January – 5 April |
You will have approximately one month after each quarter end to submit. These are estimates, not final figures — you can adjust them later.
5. Year-End Finalisation
After the tax year ends, you submit a final declaration confirming your income, expenses, and any adjustments. This replaces the Self Assessment tax return for income within scope.
MTD for VAT (Already Live)
If you are VAT-registered, MTD for VAT has been mandatory since April 2022. You must:
- Keep digital VAT records
- Submit VAT returns through compatible software
- Maintain digital links between your records and the submission
The same software typically handles both VAT and income tax submissions.
Costs of Making Tax Digital
| Cost | Typical Amount |
|---|---|
| Compatible software | £0–£170/year |
| Accountant (if using one) | May increase slightly |
| Time spent learning software | Variable |
| Set-up and data migration | 1–5 hours typically |
The government acknowledges that MTD imposes additional costs on small businesses. However, their position is that better record-keeping and fewer errors will ultimately save time and reduce tax over/underpayments.
How to Prepare Now
Even if your threshold date is not immediate:
- Start using digital accounting software — the sooner you adopt it, the easier the transition
- Digitise your records — move from paper to digital receipts and transaction logging
- Talk to your accountant — they can advise on the best software for your situation
- Separate business and personal finances — a dedicated business bank account makes digital record-keeping much simpler
- Review your income — check whether you are above the threshold and when you need to comply
- Use the self-employment tax calculator to estimate your quarterly figures
Penalties for Non-Compliance
HMRC is implementing a points-based penalty system for MTD:
- Each late quarterly submission earns a penalty point
- After reaching a threshold of points (initially 4), a £200 penalty applies for each further late submission
- Late payment penalties accrue as a percentage of the outstanding tax
The system replaces the old fixed-penalty approach and is designed to be more proportionate — occasional late submissions are tolerated, but a pattern of non-compliance is penalised.