Are you Making Tax Digital ready?

A version of this article was first published in October 2022.

Completing tax returns is six times more time-consuming than buying insurance, according to our recent survey of business owners across the UK*. But from April 2026, if you have a gross income of more than £50,000 from self-employment or property, you’ll need to use Making Tax Digital for Income Tax.

If you’re one of the 28% of business owners who finds tax returns the most challenging aspect of running your business, this guide is for you. We break down the purpose of this government initiative, who it applies to and what you need to do to be compliant.

What is Making Tax Digital?

Making Tax Digital (MTD) is HM Revenue and Customs’ (HMRC) plan to move the UK tax system fully online. In simple terms, businesses and individuals will be required to:

Keep digital records of their income and expenses
Use HMRC-recognised software to submit updates
Send information to HMRC more regularly

The aim is to make tax reporting more accurate, efficient and closer to real time. Instead of pulling everything together at the end of the year, MTD spreads reporting across the year, avoiding that last-minute scramble.

It’s part modernisation, part nudge. HMRC wants fewer mistakes, more up-to-date information and a system that reflects how most businesses already work — online, in real time and with fewer piles of paper.

Which taxes are part of MTD?

Making Tax Digital isn’t one single change. It’s rolling out in stages, depending on the type of tax. There were going to be three stages, the last being Making Tax Digital for Corporation Tax. This, however, was scrapped by HMRC in July 2025.

Instead, we now have two stages, which are:

Making Tax Digital for VAT

If you run a VAT-registered business, you should already be signed up for Making Tax Digital for VAT. It applies to sole traders as well as limited companies and has been mandatory for VAT returns starting on or after 1 April 2019.

Under MTD for VAT, all VAT-registered businesses are required to keep digital records and submit tax returns using compatible, government-approved software.

New businesses no longer need to sign up. HMRC takes care of all of this and will automatically sign up all new eligible VAT-registered businesses to MTD for VAT.

Making Tax Digital for Income Tax

The next tax on the MTD roadmap is Income Tax and comes into force on 6 April 2026.

Who it applies to:

Self-employed individuals registered for Self Assessment, with a qualifying income of more than £50,000
Landlords with a qualifying income of more than £50,000
Those who fall into both of these categories

Instead of one annual Self Assessment return, you’ll:

Use software that works with Making Tax Digital for Income Tax
Create and keep digital records of your income and expenses from self-employment and/or property
Send quarterly updates to HMRC
Submit a final declaration at the end of the tax year on 31 January

It doesn’t mean paying tax four times a year. It means reporting four times a year, so HMRC has a clearer picture of your income as it happens.

If you earn more than £30,000 from these sources, you’ll need to use MTD from April 2027.

What is “qualifying income” for Making Tax Digital for Income Tax

Making Tax Digital for Income Tax will apply to sole traders and landlords with a qualifying income of at least £50,000 a year from property or self-employment from April 2026. But what does “qualifying income” mean?

Qualifying income is the total income you get from self-employment and property in a tax year. Your total income may come from more than one source of self-employment or income from property.

For example, if you run a graphic design business, but also do some freelance photography on the side, plus you rent out a flat, HMRC will combine all that income to work out your total.

When HMRC works out whether Making Tax Digital for Income Tax applies to you, it will only look at the money you make from self-employment or property. Everything else you report on your Self Assessment tax return is ignored for this specific threshold.

That means the following don’t count towards your qualifying income:

Employment income through PAYE
Your share of profits from a partnership
Dividends, even from your own limited company
State Pension
Private pensions

So if you have a mix of income — say a salary, some dividends and freelance work — HMRC will only look at the freelance income (and any property income) when deciding if you fall under MTD for Income Tax.

How do I find Making Tax Digital software?

You can use two types of software for keeping digital records and reporting your VAT or Income Tax:

MTD-compatible accounting software: this allows you to track your tax, expenses and income in one place. If you choose one that links to HMRC, you’ll be able to submit your tax return directly
Bridging software: if you prefer to keep tax records in a spreadsheet, you can use bridging software that enables you to transfer your data to HMRC

HMRC has lists of accounting and bridging software that's compatible with Making Tax Digital for VAT and Making Tax Digital for Income Tax. You can use this list to research different options and look up providers to check whether they're compatible.

How do I keep digital records for MTD?

You need to keep digital records from the start of your first Making Tax Digital for VAT accounting period. These records must include:

Basic information, like company name, address and VAT registration number
Any VAT schemes you use
VAT on goods and services you supply and receive, so things you sell, lease, hire or transfer, as well as what you buy and rent
The time of supply and value, excluding VAT
Any adjustments to a return
How much VAT you charge on your goods and service
Reverse charge transactions — VAT recordings of the sale price and purchase price of goods and services
Scheme-related information, such as Daily Gross Takings for retail or asset purchases that are eligible for you to reclaim tax on if using the Flat Rate Scheme
Digital documents that state the multiple transactions that have been made on behalf of your business by volunteers, employees or third-party businesses

Keep in mind that you’ll need to keep these records for six years, so it’s best to store them safely using your chosen software or by saving them on your computer, hard drive or cloud-storage system.

Digital records for MTD for Income Tax

You’ll need to keep digital records from the start of your first Making Tax Digital for Income Tax accounting period. These records must include:

Basic details, such as your business name and address
All self-employment income, including sales, fees and takings
All self-employment expenses, such as stock, travel, office and financial costs
All property income, including rent and lease premiums
All property expenses, like repairs, maintenance and services
The date and amount of each transaction
The correct income or expense category

If you have more than one sole trader business, you’ll need separate digital records — and separate quarterly updates — for each. If you’re a landlord, UK properties are treated as one UK property business and overseas properties as one foreign property business. You only record your share of jointly let properties.

You must also keep your usual supporting records, such as invoices and receipts.

And remember, you’ll need to store your digital records for at least five years after the 31 January submission deadline for that tax year — so make sure they’re saved securely in your software, on your device or in cloud storage.

Making Tax Digital FAQS

Are there penalties for not complying with MTD?

Yes. If you’re required to follow MTD rules and don’t:

You may face penalties for late submissions
You may face penalties for not keeping digital records
Your VAT or Income Tax return may not be accepted outside MTD-compatible software

HMRC operates a points-based penalty system for late submissions under newer rules, so repeated misses can stack up.

Are there exemptions to MTD?

You can apply for an exemption to MTD if:

It’s not reasonably practical for you to use digital tools
You have a disability that makes digital reporting difficult
Your religious beliefs are incompatible with using electronic communications
Your Making Tax Digital for Income Tax qualifying income is £20,000 or less
You don’t have a National Insurance Number

You need to apply to HMRC and have the exemption confirmed. It’s not automatic.

Will I need to submit tax information to HMRC more regularly as a result of MTD?

No, you won't need to submit any more information to HMRC than you already do.

Will Making Tax Digital reduce tax errors?

By allowing you to upload documents and see how much you owe in real-time, MTD should minimise errors and make it easier to calculate your tax throughout the year.

Will MTD mean I spend less time working on my tax?

One of the main aims of Making Tax Digital is efficiency, so it should help you spend less time on your taxes.

How much will MTD-compatible accounting software cost?

HMRC are ensuring that individuals and businesses have free or cost-effective MTD software. And just like your business insurance premiums, you can claim the cost of accounting software against your tax.

Can I still use an accountant with MTD?

Yes, you can still appoint an accountant to check and submit your taxes for you.

Can I still use spreadsheets?

You can still use spreadsheets to keep digital records and work out your tax. But you'll need to use bridging software in order to send the information to HMRC.

What are the quarterly updates for MTD for Income Tax?

Every three months, your MTD-compatible software will total up your digital records for each of your businesses. It groups your income and expenses into categories and creates what’s known as a quarterly update.

You don’t need to make any accounting or tax adjustments before sending this to HMRC. It’s simply a summary of the income and expenses you’ve recorded. The update periods and deadlines are set by HMRC, and your software will usually prompt you when it’s time to submit.

Because reporting is spread across the year, it’s easier to spot and correct mistakes as you go. If you fix an error later in the tax year, you don’t need to resend the original quarterly update — the correction will be reflected in your next submission.

* Superscript surveyed 600 business owners across the UK via Attest in September 2024.