Making Tax Digital: What UK Businesses Need to Know?

Making Tax Digital (MTD) is HMRC’s system for requiring businesses and individuals within scope to keep tax records digitally and submit information through compatible software.

MTD already applies to VAT-registered businesses. For Income Tax, it applies to sole traders and landlords in phases:

Start Date	Qualifying Income Threshold
6 April 2026	Over £50,000
6 April 2027	Over £30,000
6 April 2028	Over £20,000

For the 2026/27 tax year, HMRC looks at qualifying income from 2024/25. From September 2026, HMRC is also beginning to automatically sign up people who should already be using MTD for Income Tax but have not registered themselves.

The thresholds are based on gross qualifying self-employment and property income before expenses, not taxable profit.

What Is Making Tax Digital?

Making Tax Digital is HMRC’s programme for moving tax record keeping and reporting onto digital systems.

For affected sole traders and landlords, MTD for Income Tax generally means they must:

• Keep Digital Records Of Income And Expenses
• Use Compatible Software
• Send Quarterly Updates To HMRC
• Finalise Their Annual Tax Position Through Compatible Software
• Continue Paying Tax Under The Normal Income Tax Payment Timetable

The quarterly updates are summaries based on digital records. They are not four separate tax returns and do not require every year-end accounting adjustment to be completed each quarter.

Who Has To Use Making Tax Digital In 2026?

There are two main MTD regimes businesses need to understand.

MTD for VAT applies to VAT-registered businesses unless an exemption applies.

MTD for Income Tax applies from 6 April 2026 to qualifying sole traders and landlords whose gross qualifying income was over £50,000 in 2024/25.

Qualifying income generally includes:

• Self-Employment Income
• UK Property Income
• Relevant Foreign Property Income

HMRC looks at the combined gross amount before business expenses. For example, a sole trader with £35,000 of turnover and £20,000 of gross rental income has £55,000 of qualifying income.

PAYE salary, dividends and most other personal income do not form part of this particular threshold calculation.

What Is Changing From September 2026?

A major MTD change is happening now.

From September 2026, HMRC is starting to automatically enrol people where its records indicate that they:

• Need To Use MTD For Income Tax In 2026/27
• Had Qualifying Income Above £50,000 In 2024/25
• Have Not Already Signed Up

HMRC says the process will happen in stages.

Anyone signed up automatically should check which income sources HMRC has identified, choose suitable software and bring their digital records up to date from the beginning of the tax year.

If quarterly update deadlines have already passed, affected taxpayers may also need to submit the outstanding updates. This is important because ignoring MTD correspondence does not necessarily keep a taxpayer outside the system.

What Are The MTD Quarterly Deadlines?

Under the standard reporting periods, quarterly updates are cumulative.

Period Covered	Deadline
6 April To 5 July	7 August
6 April To 5 October	7 November
6 April To 5 January	7 February
6 April To 5 April	7 May

Businesses can also elect to use calendar-quarter periods beginning on 1 April while keeping the same submission deadlines.

These updates help HMRC receive more current information throughout the year, but they do not replace the annual tax return process.

Does MTD Mean Paying Tax Four Times A Year?

No.

MTD changes how information is recorded and reported. It does not create four quarterly Income Tax bills.

Affected taxpayers still follow the normal Self Assessment payment timetable, including the usual 31 January balancing-payment deadline and payments on account where applicable.

MTD also does not change Income Tax rates or automatically increase the amount of tax owed.

The main practical difference is that income and expense information is updated more regularly.

Which Taxes Does Making Tax Digital Cover?

MTD does not apply to every UK tax.

Tax	Position In 2026
VAT	MTD already applies to VAT-registered businesses, subject to exemptions
Income Tax	Being phased in for qualifying sole traders and landlords
Corporation Tax	Existing MTD model will not be introduced
PAYE	No separate MTD quarterly regime
Capital Gains Tax	No separate MTD regime
Inheritance Tax	No separate MTD regime

Corporation Tax is especially worth clarifying. HMRC has confirmed that it does not intend to introduce the existing MTD model for Corporation Tax. Instead, Corporation Tax administration is being modernised through separate digital reforms.

A limited company can still be within MTD for VAT if it is VAT registered.

Making Tax Digital Timeline

MTD has been introduced gradually.

• 2017: Early digital Income Tax pilot launched
• 2019: MTD for VAT became mandatory for many VAT-registered businesses
• 2022: MTD for VAT expanded to all VAT-registered businesses unless exempt
• 6 April 2026: MTD for Income Tax began for qualifying income over £50,000
• 6 April 2027: Threshold falls to over £30,000
• 6 April 2028: Threshold falls to over £20,000

The date for partnerships to join MTD for Income Tax has not yet been confirmed.

What Software Can You Use For Making Tax Digital?

HMRC does not require one specific accounting platform. Businesses need software that supports the MTD tasks relevant to them.

Common options include:

Software	Indicative Cost
Xero	Around £7 To £70 Per Month
QuickBooks	Around £10 To £56+ Per Month
Pandle	Free Or Around £5 Per Month Plus VAT
GoSimpleTax/Coconut	Around £12.99 Per Month
Zoho Books	Free Entry Plan With Paid Tiers
FreeAgent	Paid Plans, With Free Access Through Some Banking Arrangements
Sage	Plan Dependent
KashFlow	Around £13.50 To £27.50 Per Month
TaxCalc	Product Dependent
The Tax Kit	Around £30 Per Year For Relevant Bridging Tools

Prices can change, so they should be treated as indicative.

More importantly, software described as “MTD compatible” may not support every MTD regime. A product suitable for MTD for VAT may not provide everything needed for MTD for Income Tax.

Businesses comparing broader bookkeeping and invoicing features can also review suitable accounting software for small businesses before choosing a platform.

Can A Business Bank Account Handle MTD?

Some business banking providers now include MTD-related tools.

Examples include Starling, Monzo Business, Lloyds and Tide, which offer varying combinations of digital record keeping, bookkeeping and MTD submission functionality.

For a straightforward sole trader, this could reduce the need to buy separate accounting software.

However, functionality varies. Landlords, VAT-registered businesses and people with multiple income sources should check exactly what their banking platform supports before relying on it as a complete MTD solution.

Benefits And Drawbacks Of Making Tax Digital

MTD can improve financial administration, but there are trade-offs.

Potential Benefits	Potential Drawbacks
More Regular Record Keeping	Software Costs
Less Manual Re-Keying	Initial Setup Work
Better Visibility Of Income And Expenses	More Reporting Deadlines
Easier Collaboration With Accountants	Dependence On Digital Systems
Earlier Detection Of Errors	More Complexity For Multiple Income Sources

Businesses already using cloud accounting may notice relatively little disruption.

Those who previously organised receipts and records only near the Self Assessment deadline may face a much bigger change in working habits.

Can An Accountant Or Bookkeeper Manage MTD?

Yes.

An authorised accountant or tax agent can manage important MTD tasks, including digital records, corrections and submissions.

However, appointing an agent does not transfer legal responsibility for the taxpayer’s affairs. The business owner or taxpayer remains responsible for making sure the underlying information is accurate.

It is worth agreeing early who will maintain records, make corrections and submit quarterly updates.

What Happens If You Miss An MTD Deadline?

The first year has special treatment.

For 2026/27, HMRC has confirmed that taxpayers will not receive penalty points for missing MTD for Income Tax quarterly update deadlines.

That does not mean the updates can be ignored. Digital records still need to be maintained, and the required information must eventually be brought up to date.

From 2027/28, missed quarterly deadlines can count under the points-based penalty system.

In general:

• A Taxpayer Can Accumulate Penalty Points For Missed Deadlines
• Reaching The Relevant Threshold Can Trigger A £200 Penalty
• Further Failures Can Lead To Additional £200 Penalties
• Late Payment Can Trigger Separate Penalties
• Interest Can Accrue On Unpaid Tax

Late filing and late payment are therefore separate compliance issues.

What If Your Income Drops Below The Threshold?

Falling below the threshold for one year does not automatically remove someone from MTD.

HMRC says a person already using MTD for Income Tax may be able to opt out if their qualifying income stays below the applicable threshold for three consecutive tax years.

Different rules can apply where someone stops all self-employment or property activity.

The important point is to keep monitoring qualifying income rather than assuming one high-income year permanently fixes MTD status.

Are There MTD Exemptions?

Some taxpayers can apply for an exemption where using digital systems is not reasonable or practical.

HMRC may consider circumstances involving:

• Disability
• Age
• Remote Location
• Religious Beliefs
• Other Serious Barriers To Digital Use

Simply preferring paper records or finding accounting software inconvenient is unlikely to be enough on its own. Anyone who believes they qualify should check HMRC’s digital-exclusion rules.

How Should Businesses Prepare For MTD?

A practical preparation process is:

1. Check Qualifying Income: Use gross self-employment and property income before expenses.
2. Confirm Your Start Date: Establish whether the £50,000, £30,000 or £20,000 threshold applies.
3. Check HMRC Messages: This is especially important from September 2026 because automatic enrolment has started.
4. Choose Compatible Software: Confirm that the product supports the exact MTD regime you need.
5. Set Up Digital Records Early: Connect bank feeds, invoices and expense records before deadlines arrive.
6. Agree Responsibilities With Your Accountant: Decide who will maintain records and submit updates.

Businesses due to enter MTD in 2027 or 2028 can benefit from switching to regular digital record keeping before it becomes compulsory.

Conclusion

Making Tax Digital is now a live compliance issue for thousands of sole traders and landlords, not simply a future tax reform.

The first Income Tax phase began on 6 April 2026 for qualifying income over £50,000, while HMRC’s automatic sign-up process started in September 2026.

The next thresholds are already confirmed at over £30,000 from April 2027 and over £20,000 from April 2028.

For businesses, the priority is to understand when MTD applies, keep accurate digital records, choose suitable software and avoid confusing quarterly reporting with quarterly tax payments.

Frequently Asked Questions

Is Making Tax Digital Compulsory?

Yes, where the rules apply. MTD for VAT is compulsory for VAT-registered businesses unless exempt, while MTD for Income Tax is being introduced according to qualifying income.

Is The £20,000 MTD Threshold Confirmed?

Yes. The threshold falls to over £20,000 from 6 April 2028.

Does MTD Mean Paying Income Tax Quarterly?

No. Quarterly updates are reporting requirements, not quarterly Income Tax bills.

Can I Still Use A Spreadsheet?

Possibly, but spreadsheets must meet digital record-keeping requirements and may need bridging or compatible submission software.

Does MTD Apply To Limited Companies?

MTD for Income Tax does not apply to company profits. However, VAT-registered limited companies must still comply with MTD for VAT.

Can My Accountant Submit MTD Updates?

Yes. An authorised agent can manage submission and records, although the taxpayer remains legally responsible for accuracy.

What Happens If HMRC Signs Me Up Automatically?

Check the income sources HMRC has identified, choose compatible software and bring your digital records up to date from the start of the tax year.

What Happens If My Income Falls Below £50,000?

You do not normally leave MTD immediately. HMRC may allow an opt-out after qualifying income remains below the relevant threshold for three consecutive tax years.