The way businesses report their taxes to HMRC is changing — and it’s changing fast. Making Tax Digital (MTD) is one of the most significant overhauls of the UK tax system in a generation, and if you’re self-employed or running a small business in England, it’s absolutely essential that you understand what’s coming, how it affects you, and what steps you need to take to stay compliant.
In this guide, we’ll break down everything you need to know about Making Tax Digital, from the basics to the practical steps you should be taking right now.
What Is Making Tax Digital?
Making Tax Digital is a UK government initiative designed to modernise the tax system and make it more effective, more efficient, and easier for taxpayers to get their tax right. At its core, MTD requires businesses and self-employed individuals to keep digital records and submit tax information to HMRC using compatible software, rather than relying on paper records, spreadsheets, or manual submissions.
The programme was first introduced in April 2019 for VAT-registered businesses above the VAT threshold. Since then, it has been gradually expanded, and HMRC’s long-term vision is to bring all major taxes under the MTD umbrella.
The idea is simple: by digitising the tax process, there will be fewer errors, less tax lost to avoidable mistakes, and a more transparent, real-time view of a business’s tax position. For the taxpayer, the promise is that managing tax obligations will eventually become more seamless and integrated into everyday business operations.
Making Tax Digital for VAT — Where We Are Now
If your business is VAT-registered, you should already be familiar with MTD for VAT. Since April 2022, all VAT-registered businesses — regardless of turnover — have been required to keep digital records and file VAT returns through MTD-compatible software. This applies whether you’re a sole trader, a partnership, or a limited company.
If you’re still filing your VAT returns through the old HMRC portal or using paper-based records, you are already non-compliant and could face penalties. It’s crucial that you switch to approved software as soon as possible if you haven’t done so already.
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA)
This is the big change that’s on the horizon for self-employed individuals and landlords, and it’s the one that will affect the largest number of people.
Who Does It Affect?
MTD for Income Tax Self Assessment applies to:
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- Self-employed individuals with gross income from self-employment exceeding a certain threshold
- Landlords with gross income from property exceeding the same threshold
The rules apply to sole traders and partnerships, as well as individuals with income from letting out property.
Key Dates and Thresholds
The rollout of MTD for ITSA has been delayed several times, but the current timeline set by HMRC is as follows:
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- April 2026: MTD for ITSA becomes mandatory for self-employed individuals and landlords with a gross income of more than £50,000 per year.
- April 2027: The threshold drops to include those with a gross income of more than £30,000 per year.
- Future dates (to be confirmed): HMRC has indicated its intention to extend MTD for ITSA to those earning below £30,000, but no firm dates have been announced for these lower thresholds yet.
It’s worth noting that these dates refer to gross income, not profit. So even if your expenses are high and your net profit is relatively low, you may still fall within the scope of MTD if your total income exceeds the threshold.
What Will You Need to Do?
Under MTD for ITSA, you will be required to:
- Keep digital recordsof all your income and expenses using MTD-compatible software.
- Submit quarterly updatesto HMRC. Instead of filing one Self Assessment tax return per year, you will need to send summary information to HMRC every three months.
- Submit a final declarationat the end of the tax year, which replaces the current Self Assessment tax return. This is where you’ll finalise your tax position, claim any reliefs or allowances, and confirm the information you’ve provided is correct.
The quarterly updates will be due by the following deadlines:
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- Quarter 1 (April – June): 8 August
- Quarter 2 (July – September): 8 November
- Quarter 3 (October – December): 8 February
- Quarter 4 (January – March): 8 May
The final declaration will be due by 31 January following the end of the tax year — the same deadline as the current Self Assessment tax return.
What Software Will You Need?
HMRC will not be providing its own software for MTD for ITSA. Instead, you’ll need to use third-party software that is recognised as MTD-compatible. There are many options on the market, ranging from free basic tools to comprehensive accounting platforms.
Some of the most popular MTD-compatible software options include:
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- Xero
- QuickBooks
- FreeAgent
- Sage
When choosing your software, consider factors such as ease of use, cost, the ability to integrate with your bank accounts, and whether it supports the specific needs of your business. If you’re unsure which software is right for you, it’s well worth seeking advice from a qualified accountant who can guide you through the options.
What About Penalties?
HMRC has introduced a new points-based penalty system for late submissions and late payments, which is already in effect for VAT and will apply to MTD for ITSA as well.
Under this system:
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- You receive a penalty point each time you miss a submission deadline.
- Once you reach a certain number of points (typically four points for quarterly submissions), you will receive a £200 fine for each subsequent late submission.
- Penalty points can be reset by maintaining a period of good compliance.
For late payments, penalties are calculated as a percentage of the tax owed and increase the longer the payment remains outstanding. Interest will also be charged on overdue amounts.
The message from HMRC is clear: staying on top of your obligations is more important than ever.
How to Prepare for MTD
If you’re a self-employed individual or small business owner, here are the practical steps you should be taking now:
- Check whether you’re affected.Review your gross income to determine whether you’ll fall within the scope of MTD for ITSA from April 2026 or April 2027.
- Start keeping digital records now.Don’t wait until the last minute. Transitioning to digital record-keeping takes time, and the sooner you start, the more comfortable you’ll be when MTD becomes mandatory.
- Choose your software.Research the available options and select a platform that works for your business. Many software providers offer free trials, so you can test them before committing.
- Get professional help.The transition to MTD can be daunting, especially if you’ve been managing your taxes on paper or through basic spreadsheets for years. A qualified accountant can help you set up your software, ensure your records are accurate, and manage your quarterly submissions on your behalf.
- Stay informed.HMRC’s plans for MTD have changed several times, and further updates are possible. Keep an eye on official announcements and make sure you’re aware of any changes that could affect you.
Why You Shouldn’t Ignore Making Tax Digital
It can be tempting to put MTD on the back burner, especially when you’re busy running your business. But ignoring it is not an option. Non-compliance will result in penalties, and the transition will only become more stressful if you leave it to the last minute.
More importantly, many business owners who have already embraced digital record-keeping report that it actually makes their lives easier. Real-time visibility of your income and expenses, automated bank feeds, and streamlined reporting can save you time and help you make better financial decisions.
Let Mac&G Accounting Help You Navigate Making Tax Digital
If you’re a self-employed individual or small business owner based in London, you don’t have to face the challenges of Making Tax Digital alone. Mac&G Accounting, a trusted London-based accounting firm, is here to help you every step of the way.
Whether you need assistance choosing the right software, setting up your digital records, managing your quarterly submissions, or simply understanding how MTD affects your specific situation, the experienced team at Mac&G Accounting can provide the tailored support you need. Their dedicated professionals understand the unique pressures that self-employed individuals and small businesses face, and they are committed to making the transition to MTD as smooth and stress-free as possible.
Don’t wait until the deadlines are looming — get in touch with Mac&G Accounting today and ensure your business is fully prepared for Making Tax Digital. With the right support by your side, you can focus on what you do best: running your business.
