Making Tax Digital: Everything UK Businesses Need to Know

Making Tax Digital (MTD) is changing the way many UK businesses and landlords keep financial records and report income to HMRC. For some sole traders and landlords, the changes are no longer something to prepare for in the future. Making Tax Digital for Income Tax became mandatory for those within the first threshold from 6 April 2026, with the first quarterly update deadline on 7 August 2026.

With further businesses coming into the system in 2027 and 2028, understanding what MTD means now can help you avoid a last-minute scramble with your accounting records and software.

What Is Making Tax Digital?

Making Tax Digital is HMRC’s move towards a more digital tax system. Rather than relying on traditional spreadsheets, paper records and a single Self Assessment submission at the end of the year, businesses within MTD for Income Tax must keep certain records digitally and send HMRC quarterly updates through compatible software.

It is important to understand that a quarterly update is not the same as a tax return. The quarterly submission provides HMRC with a summary of your business income and expenses. You will still need to complete your end-of-year tax return and make any necessary adjustments before submitting it and paying your tax.

The system is designed to give businesses and HMRC more up-to-date information about income and tax liabilities throughout the year.

In simple terms, MTD means:

• Keeping relevant business records digitally
• Using MTD-compatible accounting software
• Sending quarterly income and expense updates to HMRC
• Reviewing and correcting your records throughout the year
• Completing an end-of-year tax return
• Paying your tax by the usual deadline

Who Needs to Use Making Tax Digital for Income Tax?

This is one of the most important questions for business owners.

MTD for Income Tax currently applies to sole traders and landlords who are registered for Self Assessment and whose qualifying income is above the relevant threshold.

The rollout is being introduced in stages:

Qualifying income is based on your total turnover from self-employment and property income before expenses, rather than your profit. This is an important distinction because a business with relatively modest profits could still fall within the MTD requirements if its turnover exceeds the relevant threshold.

HMRC has also confirmed that partnerships will be brought into MTD for Income Tax in the future, although the timetable for partnerships has not yet been set.

Important: If you are a limited company, MTD for Income Tax does not apply to your company’s Corporation Tax simply because you operate a business. The current MTD for Income Tax rollout is focused on individuals with self-employment and property income.

What Is the First Making Tax Digital Deadline?

For those entering MTD for Income Tax from April 2026, the first quarterly update covers the period 6 April to 5 July 2026.

The deadline for submitting it is:

7 August 2026

HMRC has confirmed that more than 864,000 sole traders and landlords are within the initial MTD population.

The standard quarterly timetable is:

There is also an option to use calendar-based update periods if your accounting period runs from 1 April to 31 March. The submission deadlines remain the same.

What Information Do You Need to Keep Digitally?

You need to maintain digital records of relevant income and expenses for your self-employment and property businesses.

For each transaction, your digital records generally need to include information such as:

• The amount
• The date
• The relevant income or expense category
• Details needed to support the transaction

You must also continue to keep supporting records, such as invoices and bank statements. Going digital does not mean you can simply throw away your underlying evidence.

The exact records you need will depend on the type and size of your business.

What About Spreadsheets?

This is an area where business owners need to be careful.

Simply having a spreadsheet on your computer does not automatically mean you have met all MTD requirements. You need to use software that is compatible with MTD for Income Tax.

There can, however, be situations where spreadsheets form part of a compliant digital record-keeping system, provided the necessary digital links and software requirements are met.

For many small businesses, moving to suitable accounting software is likely to be the simplest approach.

What Is MTD-Compatible Software?

You need to use software that works with Making Tax Digital for Income Tax to maintain your digital records and submit quarterly updates.

HMRC does not provide the accounting software itself. Instead, businesses can choose from compatible commercial software and should check that their chosen product supports the specific MTD functions they require.

This is why it is worth checking your software well before your first deadline.

You should consider:

• Whether it is MTD-compatible
• Whether it connects to your bank
• Whether your accountant can access it
• How easy it is to record expenses
• Whether it produces useful financial reports
• Whether it can submit quarterly updates
• Whether it will continue to meet your needs as your business grows

Does MTD Replace Self Assessment?

Not completely.

This is one of the biggest misconceptions surrounding Making Tax Digital.

Quarterly updates do not replace the end-of-year tax return. You will still need to review your figures, make relevant adjustments, claim applicable reliefs and allowances, include other income where required and submit your final tax return.

For those starting MTD for Income Tax from April 2026, the first MTD tax return will relate to the 2026/27 tax year and will need to be submitted by 31 January 2028.

This means the introduction of quarterly reporting does not mean you will suddenly have four tax returns to complete each year.

Are There Penalties for Missing MTD Deadlines?

There are penalties for failing to meet certain MTD obligations, but there is an important transitional point for the first year.

HMRC has confirmed that penalty points will not be applied for late quarterly updates during the 2026/27 tax year. However, penalties can still apply to late tax returns and late tax payments.

From later tax years, the points-based system will apply to missed quarterly updates. Generally, reaching four penalty points results in a £200 penalty, with further penalties possible for additional missed deadlines.

This means businesses should not treat the first-year penalty relaxation as a reason to ignore the deadlines. Getting your processes right from the beginning will make future compliance much easier.

What Happens If Your Income Falls Below the Threshold?

Your position is determined using the qualifying income rules for the relevant tax year.

For example, someone who has qualifying income above £50,000 based on their 2024/25 tax return will need to use MTD from April 2026, even if their income subsequently changes.

If you are unsure whether you are within the rules, HMRC provides an online checker to help establish when you need to start using MTD and whether you may qualify for an exemption.

Can You Be Exempt From Making Tax Digital?

Yes, exemptions are available in certain circumstances.

For example, you may be able to apply for an exemption if you are digitally excluded, meaning it is not reasonable or practical for you to use digital tools because of factors such as age, disability or other circumstances.

Exemptions are not automatic in every situation, so if you believe MTD would be impractical for you, check the relevant HMRC guidance rather than simply choosing not to comply.

How Can an Accountant Help With Making Tax Digital?

Making Tax Digital is ultimately about more than buying accounting software.

Your accountant can help you determine whether you are within the MTD rules, calculate your qualifying income, select suitable software and establish processes for recording income and expenses.

They can also help you understand what the figures actually mean.

This is particularly valuable because quarterly reporting gives business owners more frequent insight into their financial position. Instead of waiting until the end of the tax year to discover how profitable the business has been, you can use up-to-date financial information to make better decisions throughout the year.

An accountant can also review your records before quarterly submissions, identify errors and help you prepare for your final tax return.

What Should Businesses Do Now?

The biggest mistake is assuming that MTD is simply an HMRC form that needs to be completed four times a year.

The real change is the move towards continuous digital record keeping and more regular financial reporting.

For businesses already using cloud accounting software and keeping accurate records, the transition may be relatively straightforward. For those relying on spreadsheets, paper records or catching up with bookkeeping once a year, there is likely to be considerably more preparation involved.

Getting organised now can make the transition much easier and may also give you a better understanding of your business finances.