Making Tax Digital: What UK Businesses Need to Know
Your complete guide to MTD deadlines, software requirements, and avoiding penalties
In this guide, you will learn: What Making Tax Digital means for your business, whether you need to comply and when, which software you need, how quarterly reporting works, and what happens if you fail to meet the requirements. By the end, you will have a clear action plan for MTD compliance.
Who This Guide is For
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) will eventually affect millions of UK taxpayers. You need to read this guide if you are:
- Self-employed sole traders with gross income over the threshold
- Landlords receiving rental income above the threshold
- Partners in partnerships where qualifying income exceeds thresholds
- Anyone with multiple income sources combining to exceed thresholds
- Accountants and bookkeepers managing client compliance
Even if you are below current thresholds, understanding MTD now means you will be prepared when the rules expand, and they will.
Step 1: Understand What MTD Actually Requires
The shift to digital record-keeping sounds daunting, but at its core, MTD has three simple requirements:
Requirement 1: Keep Digital Records
Spreadsheets alone no longer cut it. You must use MTD-compatible software to record your business transactions. This software must be able to store and preserve your digital records in a format HMRC can access if needed.
But here is the relief: you can still use spreadsheets for initial data entry. The catch? That data must then flow digitally into MTD-compatible software. Manual retyping breaks the digital link and is not compliant.
Requirement 2: Submit Quarterly Updates
Instead of just one annual tax return, you will submit quarterly summaries of your income and expenses. These are not full tax returns, just updates showing HMRC how your year is progressing.
Quarterly Deadlines for 2026/27 Tax Year:
- Quarter 1 (April-June): Due 7 August 2026
- Quarter 2 (July-September): Due 7 November 2026
- Quarter 3 (October-December): Due 7 February 2027
- Quarter 4 (January-March): Due 7 May 2027
Requirement 3: Submit an End of Period Statement (EOPS)
After your quarterly updates, you submit an End of Period Statement, essentially confirming your figures for the tax year. This must be submitted by 31 January following the tax year end.
Step 2: Determine Your Start Date
When you must start depends on your income level. HMRC is phasing in MTD based on gross income thresholds:
Phase 1: April 2026
Self-employed individuals and landlords with gross income over £50,000 must comply from 6 April 2026.
Phase 2: April 2027
Those with gross income over £30,000 join the scheme from 6 April 2027.
Future Phases
The government has signalled further expansion to lower income levels, though specific dates have not been confirmed. If your income is between £20,000 and £30,000, expect to be included within a few years.
Important: The £50,000 and £30,000 thresholds are based on gross income, not profit. A landlord with £60,000 rental income but £40,000 in allowable expenses still has gross income of £60,000 and must comply from April 2026.
Worried about which threshold applies to you? Here is how to calculate it:
- Add up all your self-employment turnover
- Add all your property income (rent received)
- If combined total exceeds the threshold, you are in scope
Step 3: Choose MTD-Compatible Software
Not all accounting software meets HMRC requirements. Your software must be on HMRC's approved list and capable of:
- Creating and storing digital records
- Submitting quarterly updates directly to HMRC
- Receiving information back from HMRC
- Providing a final declaration function
What to Look For in Software
Beyond basic compliance, consider these features when choosing your solution:
- Bank feeds: Automatic transaction import saves hours of manual entry
- Receipt capture: Photograph receipts on your phone for instant digital storage
- Multi-property support: Landlords need software that tracks multiple properties separately
- Integration: Does it work with your existing tools and your accountant's systems?
- Support: When HMRC deadlines loom, responsive customer service matters
Free vs Paid Options
HMRC offers free software for simple cases, but most businesses will benefit from paid solutions offering better features and support. Expect to pay anywhere from £10 to £50 per month for quality MTD software.
The investment is worthwhile. Good software does not just keep you compliant; it saves you time and often identifies savings you would otherwise miss.
Step 4: Set Up Your Digital Records
Once you have chosen software, you need to establish compliant record-keeping from day one. Here is what HMRC expects:
For Each Transaction, Record:
- Date of the transaction
- Amount
- Category (income type or expense type)
For Income, You Also Need:
- Customer details for invoices
- Invoice numbers
- Payment dates
For Expenses, Ensure You Have:
- Supplier details
- VAT amounts (if VAT registered)
- Digital copies of receipts and invoices
Pro Tip: Do not wait until April 2026 to start. Begin using MTD software now. Run it parallel to your existing system for a few months. This way, you will be comfortable with the process well before compliance becomes mandatory.
Step 5: Understand the Quarterly Submission Process
Quarterly updates under MTD are simpler than many fear. Here is exactly what happens:
Before Each Quarter End
- Ensure all transactions for the quarter are recorded in your software
- Categorise any uncategorised items
- Reconcile your bank feeds to ensure nothing is missed
Submitting the Update
- Your software generates a summary of income and expenses
- Review the summary for obvious errors
- Click submit, and your software sends it directly to HMRC
- HMRC confirms receipt and provides a submission reference
What Happens Next?
After each submission, HMRC calculates a running estimate of your tax liability. This helps you see where you stand throughout the year, avoiding nasty surprises come January.
Think of quarterly updates as checkpoints, not hurdles. They give you regular opportunities to catch errors and plan ahead.
Pro Tips and Warnings
Tips for Smooth Compliance
- Automate everything possible: Bank feeds, recurring transactions, and automated categorisation reduce your workload dramatically
- Set calendar reminders: Quarterly deadlines come around fast. Set reminders for a week before each deadline
- Keep personal and business separate: Dedicated business bank accounts make MTD compliance far simpler
- Reconcile monthly: Do not leave everything to the quarter end. Regular reconciliation catches issues early
Critical Warnings
- Do not rely on manual spreadsheets: Data must flow digitally. Manual copy-paste breaks compliance
- Watch your thresholds: If your income grows during the year, you might become subject to MTD mid-year
- Do not ignore it: HMRC penalties for non-compliance are real and accumulate quickly
Common Mistakes to Avoid
Mistake 1: Waiting Until the Deadline
Trying to set up new software, migrate historical data, and submit your first quarterly return all in the same week is a recipe for errors and stress. Start early.
Mistake 2: Not Testing Your Submission Process
Before your first mandatory quarter, do a test submission. HMRC provides a sandbox environment. Use it to ensure your software connects properly.
Mistake 3: Ignoring the Digital Link Requirement
If you use spreadsheets to gather data, that data must flow to your MTD software via digital links (APIs, imports), not manual retyping. Breaking the digital chain is a compliance failure.
Mistake 4: Forgetting About Property Income
Many focus on their business income but forget rental income counts toward the threshold. If you are a self-employed plumber earning £35,000 with a rental property bringing in £18,000, your gross income is £53,000, and you are in scope from April 2026.
Tools and Resources
- HMRC Compatible Software List: Check GOV.UK for the current list of approved MTD software providers
- HMRC MTD for ITSA Guidance: Detailed technical guidance on requirements and exemptions
- Agent Services Account: If you use an accountant, ensure they have set up their Agent Services Account to act on your behalf
- TaxBot MTD Module: Our platform offers full MTD compliance with automated quarterly submissions