What Is ‘Making Tax Digital’?

You can prepare now before it arrives in 2026.

Updated: May 20, 2024
Matt Crabtree

Written By

Matt Crabtree

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For the 4.2 million individuals who file their taxes via self-assessment, a significant change is coming that will affect how you report your income to HMRC, and many people aren't ready for the new requirements.

The UK's tax system is being updated, and Making Tax Digital (MTD) is an element of it. Only value-added tax returns have been affected so far, but that will change beginning April 6, 2026. 

Research by Yonder, commissioned by HMRC, found that 93 percent of firms were familiar with the name or idea of it, yet more than a quarter of them incorrectly believed it didn't apply to their company. 

In addition, the poll indicated that just half of those familiar with it could recall at least one need for using it. As the deadline approaches for the new income tax regulations, Which? explains what MTD is and how it will affect you.

Key Takeaways:

  • MTD, or ‘Making Tax Digital’, is a new tax regime that will only accept digital tax filings.
  • With it, we streamline our tax processes and get arguably better results.
  • Businesses who are VAT registered and fall under the current VAT threshold are required to keep VAT records digitally and submit VAT reports online.
  • As of the year 2026, it will be mandatory for taxpayers filing income tax, UK property tax, and corporate tax.
  • In 2026, only people with incomes above £50,000 will be subject to MTD. 
  • In 2027, this will be reduced to £30k.
  • Keep in mind that not all software resources may be used with MTD.
  • Sign up for MTD on the Government UK website.
  • Companies who don't have to collect VAT will have more time to be ready.
ProviderScoreDetails
1. Sage★★★★★Click Here
2. QuickBooks★★★★★Click Here
3. Xero★★★★★Click Here
4. FreshBooks★★★★★Click Here
5. Zoho★★★★Click Here
6. KashFlow★★★★Click Here

What is Making Tax Digital?

Instead of submitting a tax return once a year, businesses who participate in Making Tax Digital (MTD) will be required to preserve digital records of finances and submit summaries to HMRC every three months.  

For this, you'll need HMRC-approved software; if you're unsure how to proceed, the government provides guidelines on the matter. The idea is that by maintaining digital records and reporting your numbers more often, you can easily monitor your tax liability in real time and plan accordingly. 

In addition, HMRC expects it to decrease the number of accidental errors, which add to the “tax gap”, or the deficit between what the government actually collects and what it expects to collect. Latest data for 2019–20 revealed a tax shortfall of £34.8bn.

Businesses with a VAT turnover of more than £85k in 2019 were the first target audience for the tax project. This year, it was made available to all firms who submit a VAT return.

It was supposed to go live for income tax in 2023, but it was pushed back to 2024 so that those whose lives had been upended by Covid-19 might have more time to adjust. 

To provide more time for small business owners and landlords hit hard by the rising cost of living, the deadline has been put out to April 2026. Corporation taxpayers will likewise be required to use MTD beginning in 2026.

Whose income taxes are subject to MTD?

Starting on 6 April 2026, MTD will apply to landlords and sole proprietors whose yearly business or property turnover or gross revenue is more than £50,000.  

In other words, your net income before tax-deductible costs are subtracted off. Beginning in April 2027, persons with incomes between £30k and £50k will be subject to it. 

Before 6 April 2025, everyone living in the United Kingdom with an annual salary over the threshold must sign up for self-assessment. However, if you are currently domiciled outside of the UK, you need simply utilise MTD to report UK-sourced revenue.

You won't have to sign up for the plan until you've already submitted your first self-assessment tax return as a single proprietor or landlord after 6 April 2025. 

Customers who voluntarily sign up ahead of time will be able to avoid making the most frequent mistakes while handling their taxes and save valuable time doing so.

Mandating MTD for people with incomes below £30,000 has not yet been decided. Instead, we'll be looking at what these tiny companies really need. The government will outline how it will be expanded to encompass this group after the evaluation is complete at the end of 2023.

What will I need to change?

The present self-assessment system requires sending a form to HMRC every year, either electronically or on paper. 

Instead, quarterly paper updates will be replaced with digital ones.  If you file your quarterly summary by the due date, you will get an estimate of your tax liability and have until the standard due date of January 31 to make your payment. 

The specifics of a proposal to let taxpayers make partial payments throughout the year are still being worked out.

These quarterly summaries are not tax returns but rather updates. By January 31st, a final report must be submitted using MTD software or a self-assessment tax return, whichever method you want. Your annual tax liability will be determined at this time.

In what ways will MTD affect current procedures?

The largest shift that will occur as a result of MTD is the time of year in which companies submit their tax returns. The HMRC will now receive tax payments from firms quarterly, rather than annually.

You can switch to an electronic filing system if you just have paper files at the moment. Once you've done that, you can't rely on anything except software moving forward. If you want to streamline everything and make sure you don't forget anything, use FreshBooks' Making Tax Digital checklist.

What will stay the same?

The major dates for wrapping up your tax affairs and paying any tax you owe will still be on January 31st. Any payments that need to be made to settle a balance must also be made by this date. 

If you make estimated tax payments, the due dates of January 31 and July 31 have not changed. In addition, it is still required that you maintain all necessary business documents. You should supply any relevant documentation, such as a receipt, invoice, or bank statement, to verify the details you've provided. 

You need to hang on to this proof because HMRC may want to view it if it ever investigates your tax obligations. 

What are the repercussions if you are late?

Penalties may be incurred for late MTD registration.  

It is not certain that HMRC will be as indulgent as they were with firms who missed the VAT registration deadline during the first phase of the programme.

Keeping this in mind, it could be wise to switch to digital record-keeping if you haven't already. A late quarterly tax summary submission may incur penalties, although they will be less severe than those for a late tax return or payment. 

In its place, the penalty system has been adjusted to make it more fair and to reward good conduct. Each missed deadline will result in a point being added, much to the way drivers get speeding tickets. 

If a taxpayer reaches a particular point total, they will be subject to an automatic £200 fine. The frequency with which you must submit information to HMRC affects the minimum number of points needed to advance.

It's important to remember, however, that individuals who use it for VAT and income tax earn points independently. Therefore, you risk two £200 penalties if you exceed the tax thresholds for each.

If you don't qualify for MTD, you won't have to pay a penalty. If your annual revenue is less than the minimum or you are otherwise exempt from completing a self-assessment tax return online, you do not need to do so.

Does it include my company?

Businesses who are VAT registered and have a taxable turnover of more than the existing VAT threshold are the only ones that will be subject to MTD as of 2022.

Moving forward, income tax, property tax, and corporation tax filings will all use MTD. Companies and individual proprietors alike are held to the same standards here. It does not provide exceptions for small enterprises. Your company's MTD compliance status may be seen on FreshBooks.

Those with an annual income of above £50,000 in 2026 and over £30,000 in 2027 will be required to use it for ITSA (Income Tax Self Assessment). 

FreshBooks MTD VAT Software complies with HMRC's regulations and provides user-friendly digital record-keeping tools, making it a good choice for businesses making the switch to Making Tax Digital.

Gains from going paperless

Less errors ✔️

For the fiscal year 2020–2021, the HMRC predicts a tax revenue shortfall of £32 billion. Most of this money was lost due to mistakes rather than deliberate attempts to defraud the government.

The potential for mistakes to creep into digital records is greatly reduced. The techniques of digital transmission that may and cannot be utilised to maintain a digital audit trail are also highlighted by MTD. Both of these measures are meant to narrow the gap between tax obligations and payments.

Ease ✔️

Those who have used accounting software before know how convenient it is. Most programmes speed up your work by doing maths and giving you immediate access to your financial documents.

There is value offered by financial software. Data analytics, time monitoring, and premade invoice templates are just a few of the extras included with many of these programmes.

Tax returns are further simplified by these digital tools since you can submit all of your documentation electronically instead of having to send paper copies or set up an appointment.

Quicker results ✔️

It may seem like more work if you go from doing your taxes once a year to doing it four times a year. The inverse is true, though. Because of the new quarterly rhythm, companies no longer have to worry about a single, lengthy tax period at the end of the year.

There will be less need for “double checks” with a digital record that has been properly maintained. In addition, checking tools may help you validate the financial data in your firm without having to manually review each transaction.

Live information ✔️

You can keep tabs on your finances all year long with a digital tax account. You may do it at any time, not just when you send in your taxes. You may use this information to make educated business choices and become ahead of schedule.

Fewer formalities ✔️

When you preserve documents digitally, there's no need to search through old receipts and drawers to get what you need. Your online system stores all the information you need to submit. In addition to saving time, this also reduces the possibility that you will forget to turn in a required document.

Drawbacks of Making Tax Digital

Messy migration ❌️

Moving from one system to another might be challenging. This is why the HMRC is introducing MTD gradually rather than all at once. A company may need assistance with staff skill development, software implementation, or the transition to paperless accounting.

Software price tags ❌️

It might be difficult for startups to afford high-quality MTD-compatible software. The price tag for the appropriate IT infrastructure to store digital documents is also significant.

Unlike with self-assessment, the HMRC will not supply low-income taxpayers with free compatible software. This is due to the fact that these tools are independent programmes. The onus is on individual businesses to provide customers with free or inexpensive MTD-compatible software.

Some areas have restricted internet access ❌️

In certain places of the UK, access to the internet might be spotty at best. As a result, entrepreneurs who don't have access to the internet may get a waiver from MTD. If a company's inability to file digital VAT returns due to a lack of internet connectivity, they could call the VAT hotline for assistance.

What kind of digital files must I maintain?

Any document that can be seen on a computer, tablet, or smartphone is considered a digital record. 

According to the MTD regulations, all necessary tax data must be kept digitally and exchanged through its digital connections. The following data must be kept digitally by every company that collects VAT:

  • Company.
  • Information to get in touch with you.
  • VAT reg no.
  • When and how much money was exchanged for VAT.
  • Each purchase's Value-Added-Tax rate (retailers are excluded).
  • Information on when, what, and how much VAT was paid in as input.
  • Sales and EU purchase output tax.

What ‘Making Tax Digital’ (MTD) accounting software should I use? — Reviews

Unfortunately, not all programmes can work with MTD. The MTD for VAT requirements for accounting software are available online from the HMRC. Since the HMRC uses API (Application Programme Interface) to gather tax information, your accounting software must be API-compatible.

HMRC has approved cloud-based accounting software like FreshBooks. You may easily file your VAT returns online, and our digital record-keeping tools couldn't be easier to use. You may also look at your past VAT returns to see whether you owe any money. To begin your free trial, check out their website.

The best MTD software uses HMRC's Making Tax Digital service for submitting UK tax returns quickly and painlessly.

The goal of “Making Tax Digital” is to make filing taxes easier for everyone in the United Kingdom. The ultimate goal is to reduce the complexity of tax calculations and promote more independence in managing personal finances. Using MTD for tax, tax returns, and VAT is essentially the same for both people and companies, despite their somewhat different demands.

Many accounting and tax programmes have been updated to accommodate Making Tax Digital. In reality, HMRC's website has a comprehensive catalogue of certified software. However, our top MTD software guide will quickly have you downloading some of the greatest programmes available.

Consequently, it is wise to get the most up-to-date HMRC-approved financial software in order to stay up with the ever-evolving UK tax environment. This will allow you to maintain optimal control over your financial matters related to taxes. Learn more about MTD and why it's important to take it into account while preparing your tax returns by reading on.

1. Sage Accounting — Best overall Making Tax Digital (MTD) software

✅ Accounting and tax coverage.

✅ Regular discounts on bundles.

✅ Quickly submit forms to HMRC.

❌ The Sage website is a bit of a maze.

Sage Accounting is only one of several offerings from this manufacturer of business software, which caters to sole proprietors, start-ups, and corporations of all sizes.

Sage has invested much time and energy into producing software that is completely MTD-compliant and includes all of the features necessary for fast and effective tax and accounts processing.

Sage is a large enough company that it can cater to a wide variety of customers, and it often conducts promotions and discounts to encourage the adoption of its cloud-based services. Having a variety of plans to choose from is ideal since it allows you to get exactly what you need without overpaying for bells and whistles you'll never use.

Sage software, which has a strong emphasis on MTD, allows you to handle VAT returns, link to bank accounts, and exchange data with an authorised accountant as needed. As an extra bonus, Sage offers packages with access to many channels of customer assistance, including chat, email, and phone.

2. QuickBooks — Best MTD software for discounts

✅ No binding agreement.

✅ Different Bundles.

✅ Excellent backing.

❌ Attaining a first understanding.

If you're looking for a tax and accounting software that will help you stay on top of your MTD duties, look no further than QuickBooks.

There is a QuickBooks package available to meet every need, including versions designed for sole proprietors, larger enterprises, accountants, and bookkeepers.

Given the competitive nature of the software industry, QuickBooks is always looking for new ways to win your business. You may choose a package according to your requirements, and the intuitive accounting software will take care of everything from invoices and costs to VAT and, of course, taxes.

In addition to being ready for Making Tax Digital, using QuickBooks does not need signing a contract. Because of this, it is a safe choice for infrequent usage or if you require it to handle all of your company accounting needs, including things like time tracking.

3. Xero — Great Making Tax Digital software for compliance over the cloud

✅ Good pricing.

✅ Compliance with Tax Digital Systems.

✅ Good app.

❌ Extra charges for ancillary services.

❌ Premium charges add up.

Xero has been increasing its visibility with an effective series of advertising initiatives, and it currently offers software that meets the demands of a wide range of company users and is completely compatible with the requirements of Making Tax Digital.

Xero provides a comprehensive set of features useful for running a company, such as the ability to file VAT returns, pay invoices, and claim expenses, among other things.

As an added bonus, you may streamline business processes by linking your bank accounts, accepting payments, and keeping tabs on projects. Xero has grown in recent years to become a full-service accounting and tax solution, with the addition of payroll processing and bank reconciliation.

A variety of plans are available, each with competitive price and a wealth of included features and tools. Xero is a popular online accounting solution since it is reliable, simple to use, and cancelable after only one month. If you ever get stuck with one of these MTD-related problems, you may take advantage of the round-the-clock online service we provide.

4. FreshBooks — Popular MTD software for HMRC compliance

✅ Straightforward tax advice.

✅ Simple navigation interface.

✅ Towards a Paperless Tax System.

❌ High-volume users have fewer available selections.

With HMRC clearance and complete MTD compliance, FreshBooks is a terrific choice for businesses that want a robust accounting solution at an affordable price.

FreshBooks is another all-in-one option that includes features for invoicing, cost management, and time monitoring, among other accounting chores.

In addition, organisations that work with contractors or employees, as well as people who are self-employed or freelancers, may take advantage of packages designed specifically for them. FreshBooks, like other MTD-friendly software, has a wide range of price points to accommodate a wide range of users.

The fact that FreshBooks often provides discounts and other incentives, all geared towards providing the most value possible, further adds to the service's allure. Being able to save money on accounting and tax filing is a boon for any company owner, whether large or small.

5. Zoho Books/Expense — Alternative MTD software

✅ Facilitated usage.

✅ Numerous capabilities and characteristics.

✅ Payroll issues.

❌ Restricted to just the largest of companies.

The Zoho software suite as a whole includes a broad variety of applications, including the accounting programme Zoho Books.

The latest update has made the UK version completely MTD compliant, making it a viable solution for businesses of all sizes, from single proprietors to corporations.

In addition to its own benefits, the suite's compatibility with the other Zoho software products makes for a more streamlined experience as you go from one activity to the next. Zoho Books is powerful when used alone, with many useful capabilities for things like completing VAT taxes.

The cloud-based configuration of this programme, as is the case with most current software packages, offers the added advantage of remote document storage and security.

That means you can check up on your financial records and tax filings whenever and wherever you choose. Depending on your needs and budget, you can choose from various different versions of Zoho Books.

6. KashFlow — Simple MTD software

✅ Licenced MTD Programmes.

✅ Facilitated usage.

❌ Collateral function of a larger entity.

❌ Video guides for a fee.

The IRIS Software company, of which KashFlow is now a part, also offers tax preparation software that meets the criteria for use with Making Tax Digital.

It caters to companies and agents by providing a comprehensive set of tools for maintaining records. It also includes VAT-specific tools that make filing VAT returns and determining the amount of VAT due more simpler.

In addition, there are a variety of user-specific packages from which to select, so you may tailor your experience to your own specifications. Depending on your needs and budget, you may choose from KashFlow's Starter, Business, or Business & Payroll plans.

The good thing about this is that you may choose a plan that works for your needs right now. But if you find yourself needing additional functionality down the road, upgrading is a breeze.

You may now obtain support and additional products from the IRIS software group, since KashFlow is a part of that. When it comes to software, IRIS has you covered with a wide range of options and expertise. However, some of these come at a higher cost than others. KashFlow, as it exists, is, nonetheless, a very good and generally inexpensive choice.

Tips for selecting the most effective MTD software

Make sure the MTD software you're considering has been given the green light by the HMRC before you commit to purchasing it.

When you're ready to begin submitting tax returns, you'll have peace of mind knowing that the package you're considering has been approved by the tax authorities and has passed muster with HMRC.

You'll need accounting and bookkeeping software to get through the year without a hitch before then. Having everything you need in one convenient software package makes filing taxes a breeze. Your MTD software's ability to use information from inside the HMRC-approved software itself should be invaluable.

Think carefully about how many options and features you need. No one likes to pay more than they have to for the top MTD programme, so make your selection based on the functions you'll really use.

This is the case, for instance, if you're a single proprietor or independent contractor whose tax situation is uncomplicated. Your requirements should be easily met by a simple plan. 

What is Making Tax Digital? Verdict

The stated goal of the Making Tax Digital scheme is to make the tax system in the United Kingdom more streamlined and less prone to human mistakes. 

The UK government is promoting the use of digital tax records through its Making Tax Digital (MTD) programme. The goal of this project is to create a digital audit trail that will make the process more streamlined and open. As an added bonus, digital files eliminate the possibility of human mistake.

To put it simply, taxpayers must now submit their information electronically. Each company will be issued a digital tax account that can be used to submit quarterly tax reports.

This idea seems to be straight-forward. It does, however, come with a number of compliance criteria to ensure that tax information is kept secure. An MTD-compliant digital connection is required, for instance, for any data transmission to occur. 

VAT-registered firms and single proprietors are the only entities exempt from MTD as of the year 2022. Property, income, and corporate taxes will all be included by 2026.

FAQs

What is happening with VAT MTD?

What is happening with income tax MTD?

Where can I go to sign up for MTD?

What should I do now to get ready for digital tax?

What are the costs associated with breaking MTD regulations?

How will Making Tax Digital develop in the long run?

When it comes to MTD, can companies still utilise spreadsheets?

If a company is not set up to collect VAT, how will they be affected?

How can companies make sure they are ready?

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