Sole traders and businesses can say goodbye to the annual Self Assessment tax return, because the government has just rolled out their Making Tax Digital initiative. From April 2026, Making Tax Digital is set to completely transform the way taxes are filed in the UK, and businesses have to start using it immediately.
But what exactly is Making Tax Digital, and what does it mean for businesses in the UK? At Tax Driven Accountants, we’ve been staying up to date with what’s going on with Making Tax Digital and in this guide, we will detail everything you need to know about this new initiative so that you don’t go into your taxes blindly this financial year.
What Is ‘Making Tax Digital’?
Making Tax Digital is a brand-new government initiative that requires businesses to keep digital tax records, use the recommended compatible software, and submit quarterly updates to HMRC, rather than the usual annual returns.
This is part of the transition from physical tax keeping to digital, with the aim of reducing mistakes in tax filing and repayment and streamlining the process for businesses across the UK.
It is now mandatory for businesses, self-employed individuals, and landlords to follow the scheme, effective April 6th 2026, though it has been mandatory for all VAT-registered businesses since 2019.
Who Does Making Tax Digital Apply To?
Not sure if you need to start using Making Tax Digital? Some examples of when MTD applies include:
MTD for VAT Registered Businesses
Regardless of your business’s turnover, all VAT-registered businesses are required to use the recommended, compatible software to manage their records and also submit quarterly returns to HMRC.
Sole Traders and Landlords
Enforceable from April 2026, self-employed individuals who may have previously used Self Assessment to file their tax returns will now be required to use Making Tax Digital to submit their taxes going forward.
Income Thresholds for Sole Traders and Landlords
There is an income threshold in place to ease the transition, but this threshold is set to decrease in the coming years. The income thresholds that you should be aware of are:
- Over £50,000 — April 2026
- Over £30,000 — April 2027
- Over £20,000 — April 2028
What Does MTD Actually Require You to Do?
Now that you have a better understanding of what Making Tax Digital is, you may wonder what your obligations are under the initiative. We understand that it is a big change for businesses and may cause some confusion, which is why we strongly believe that all businesses should work with an accountant to ensure compliance with new expectations and make informed decisions.
Keep Digital Records
Gone are the days when businesses could keep physical copies of their incomings and outgoings. With so many mistakes made in the filing and tracking of financial records amongst businesses across the UK, the government now insists that all financial records within your business are tracked on a government-approved Making Tax Digital software. Our bookkeeping service can help you keep your digital records accurate and compliant from day one.
Submit Quarterly Updates to HMRC
It has always been standard practice to submit your HMRC self-assessment and financial statements annually, but Making Tax Digital has changed that. By being required to send quarterly reports, there is hope that real-time record-keeping will reduce errors and provide a clearer picture of tax liability.
File a Final End-of-Year Declaration
Instead of an annual Self Assessment tax return, businesses will have to submit a declaration confirming that all figures in their quarterly updates are correct, add any other income, claim any relief, and calculate the final tax owed.
Something that has not changed is that you are required to submit your MTD final declaration by 31st January.
What Accounting Software Do You Need?
There is a range of software approved by the government for keeping a digital record of your quarterly income and expenses. It is essential that you use one of the government-mandated software platforms, or you will be unable to submit your mandatory quarterly updates and could face a penalty.
You can find a list of recommended software here.
Need support in using the mandated software? At Tax Driven Accountants, we can help you figure it out and use it for your business.
Making Tax Digital: What Are the Penalties for Not Complying?
For businesses, complying with Making Tax Digital is essential. Non-compliance can result in penalties. A points system is used for late submissions, with an initial fine of £200 starting after 15 days of delay. This fine increases with further delays, and businesses can face fines of up to £400 for not using compatible software.
You can expect the following penalties for the 2026/2027 tax year:
- 15 days or less late: No penalty.
- 16 to 30 days late: 3% of the tax owed at day 15 (no penalty in the first year).
- 31+ days late: 3% of the tax owed at day 15 + 3% of the tax owed at day 30.
- Daily penalty: From day 31, an annual rate of 10% interest accrues daily.
For more guidance on staying HMRC-compliant, take a look at our guide on how compliance services keep your business HMRC-safe.
Are There Any Exemptions From Making Tax Digital?
Though most businesses are expected to comply with Making Tax Digital, there are specific exemptions to the rule.
These include:
Digital Exclusion
If it is not reasonable for the business owner to use the required Making Tax Digital for any reason, including disability, remote location, or even age, an exception can be made.
Religious Objections
Some practising members of religions whose beliefs are incompatible with electronic record-keeping are exempt from Making Tax Digital.
Income Threshold
If your qualifying income is below the mandatory threshold for Making Tax Digital, you are exempt from the new rules.
How to Apply for Exemption
If you believe that you are exempt from Making Tax Digital, you are required to contact HMRC by phone or letter to request a digital exclusion exemption. We would recommend working with an accountant on this application to ensure that it is accurately filled out.
How to Prepare for Making Tax Digital (MTD)
If you’re self-employed, a landlord, or run a small business, MTD will affect you. Here’s how to get ready.
Check Your Income
The first step is understanding whether MTD applies to you and when. HMRC is rolling out MTD in phases based on income thresholds, so your annual turnover or property income will determine your start date.
- If your combined income from self-employment and property is over £50,000, MTD for Income Tax applies from April 2026
- If your income is over £30,000, it applies from April 2027
- If your income is over £20,000, it applies from April 2028
It’s worth checking your figures now rather than waiting, as the deadlines are closer than many people realise.
Choose and Set Up MTD-Compatible Software
Under Making Tax Digital, you will no longer be able to use spreadsheets or manual records alone. You’ll need software that is recognised by HMRC as MTD-compatible. This software will store your digital records and submit quarterly updates directly to HMRC on your behalf.
When choosing software, consider the following:
- Does it integrate with your existing bookkeeping or invoicing tools?
- Is it suitable for your level of accounting knowledge?
- What is the ongoing subscription cost?
- Does it support multiple income streams, such as both self-employment and rental income?
Popular options in the UK include QuickBooks, Xero, FreeAgent, and Sage, though there are many others on HMRC’s approved list. Take time to compare before committing, as switching later can be disruptive.
Register With HMRC
Once your software is in place, you’ll need to sign up for MTD through HMRC. This is a separate process from your existing Self Assessment registration and must be done before your MTD start date.
To register, you will need:
- Your Government Gateway user ID and password
- Your National Insurance number or Unique Taxpayer Reference (UTR)
- Your business start date and accounting period details
HMRC recommends signing up well in advance of your deadline to allow time to resolve any issues. Once registered, your software will connect directly to your HMRC account, and quarterly submissions will replace your annual Self Assessment return.
Talk to an Accountant
Making Tax Digital signifies a major shift in how tax records are kept and reported. Even if you currently handle your own tax matters, consulting an accountant before the changeover is highly recommended.
An experienced accountant can help you select the right software, ensure your records are properly organised from the beginning, and help you meet all deadlines. For landlords and small business owners with more complex income sources, professional advice can also help prevent common errors that could lead to penalties later. If you’re unsure where to begin, you can find your nearest Tax Driven office and get started early.
Stay Compliant With Tax Driven Accountants
Through this guide, you should now have a better understanding of what Making Tax Digital is, the software you’re required to use and the consequences of non-compliance.
Are you a business owner who needs support with the changes to how your business manages its finances? Get in touch with us today. At Tax Driven Accountants, we’re here to help. Get a free quote or contact us to speak to a member of the team.
