What Is Making Tax Digital?
Making Tax Digital (MTD) is HMRC's long-running programme to modernise the UK tax system by requiring businesses and individuals to keep digital records and submit tax information electronically using approved software. The ambition is to reduce errors, improve efficiency, and give taxpayers a more accurate picture of their tax position throughout the year — rather than one annual reckoning.
MTD is being rolled out in phases, and 2025 marks a significant expansion of the programme.
MTD for VAT: Already in Full Effect
MTD for VAT has been mandatory for all VAT-registered businesses since April 2022. If you're VAT registered — regardless of turnover — you must:
- Keep digital VAT records.
- Submit VAT returns using MTD-compatible software.
Manual processes and unlinked spreadsheets are not compliant. If your business hasn't fully transitioned, HMRC's compliance activity is increasing and penalties for non-compliance have been tightened.
MTD for Income Tax Self Assessment (ITSA): What's Coming
The most significant upcoming change is the extension of MTD to Income Tax Self Assessment. Under MTD for ITSA:
- Sole traders and landlords with qualifying income above the relevant threshold will be required to keep digital records and submit quarterly updates to HMRC.
- Instead of a single annual Self Assessment return, they'll send four quarterly summaries of income and expenses, plus an end-of-period statement and a final declaration.
Planned MTD for ITSA Timeline
| From April | Who Is Affected |
|---|---|
| 2026 | Self-employed individuals and landlords with qualifying income over £50,000 |
| 2027 | Those with qualifying income over £30,000 |
| TBC | Those with qualifying income over £20,000 (date not yet confirmed) |
Note: Thresholds and dates are subject to government confirmation. Always check the latest HMRC guidance.
MTD for Corporation Tax: Further Down the Line
HMRC has indicated that MTD will eventually extend to Corporation Tax for limited companies, but mandatory implementation is not expected before the late 2020s at the earliest. A voluntary pilot is likely to precede any mandatory rollout. Limited companies should monitor HMRC announcements but do not need to take immediate action on this front.
What Software Do You Need?
MTD requires the use of HMRC-recognised software. The market has a wide range of options suitable for different business sizes and needs:
- Xero — popular with SMEs and accountants; strong integration capabilities.
- QuickBooks Online — user-friendly, good for small businesses managing their own bookkeeping.
- Sage Accounting — well-established, with options for businesses of varying complexity.
- FreeAgent — particularly popular with freelancers and contractors.
- Bridging software — if you prefer to work in spreadsheets, bridging tools can connect your data to HMRC's systems compliantly.
HMRC maintains a full list of recognised software on its website. Always verify that any software you use is on the approved list.
How to Prepare Now
Even if mandatory MTD requirements don't yet apply to your business, preparing early has clear advantages:
- Adopt compliant software now to build good habits and avoid a last-minute scramble.
- Review your record-keeping processes — are your income and expense records digital and accurate?
- Talk to your accountant about how MTD will affect your specific tax obligations.
- Sign up for HMRC's MTD for ITSA pilot if eligible and willing — early adopters gain experience before mandatory deadlines hit.
Penalties for Non-Compliance
HMRC has introduced a points-based penalty system for late submissions. Each missed submission earns a penalty point; once a threshold is reached, a financial penalty is charged. Points can be wiped after a period of full compliance. This system is designed to be fairer to those who make occasional mistakes, while penalising persistent non-compliance more firmly.
Making Tax Digital is not going away — it's accelerating. Businesses that embrace digital record-keeping now will be better placed, less stressed, and more in control of their tax affairs as the programme continues to expand.