This is one of the most significant changes to tax reporting that we have seen in decades. The way self-employed people manage their tax affairs is about to change dramatically with the introduction of Making Tax Digital (MTD).
From April 2026, self-employed individuals with an income over £50,000 will need to use digital systems for their tax reporting. Those with an income between £30,000 and £50,000 will follow in April 2027.
The traditional yearly Self-assessment tax return will soon be replaced by quarterly digital updates. While this new approach promises more efficient tax management, it means you’ll need to change how you track and report your business finances.
If you would like help preparing for MTD, please don’t hesitate to contact us. We offer a no-obligation initial informal discussion to explore how we can support your transition to digital tax reporting. Click here for our contact details or to book a discovery call: https://smartaccountantssussexandsurrey.co.uk/contact-us/
We have put together this guide to help you understand what Making Tax Digital means for your business, including when you need to comply and how to prepare.
Here at Smart Accountants Sussex and Surrey, we’re helping many clients get ready for these changes, and we want to share our practical experience to make your transition as straightforward as possible.
What is Making Tax Digital for Self-Employed?
Many of our clients ask us about Making Tax Digital (MTD) and what it means for their business. MTD represents HMRC’s plan to move away from paper-based records and manual submissions towards digital processes. The scheme, announced in Budget 2015, aims to reduce tax errors while making tax management more straightforward for both taxpayers and HMRC.
Key principles of Making Tax Digital (MTD) explained.
What exactly does MTD mean for your business? The scheme centres around three main requirements:
- Digital record-keeping – Your business and property income records must be maintained using compatible digital tools (either accounting software or spreadsheets).
- Quarterly updates – Rather than submitting one annual return, you’ll send digital updates to HMRC every three months showing your income and expenses.
- Final declaration – Once the tax year ends, you’ll submit a final statement to confirm your yearly figures and make any needed adjustments.
The shift to digital record-keeping is at the heart of these changes. Our experience with MTD for VAT shows that businesses typically find it easier to manage their tax affairs once they’ve adapted to digital systems. Many of our clients have found that moving to digital records has helped them better understand their business finances.
How MTD differs from traditional Self-assessment
The biggest change you’ll notice with MTD is the timing and method of reporting to HMRC. Currently, you submit one Self Assessment tax return annually by 31 January. Under MTD, this changes to five separate submissions per year.
While the reporting schedule is changing significantly, several important aspects remain the same:
- The tax rules haven’t changed – you’ll report the same income and expenses
- You can claim the same allowances and deductions
- Payment dates stay the same (payments on account and balancing payment by 31 January)
One crucial difference (and this catches many people out) is that you must use HMRC-approved software for all submissions. You won’t be able to simply use HMRC’s online portal as you might do now. This change should benefit accountants and tax agents by freeing up time for more valuable advisory work.
Timeline for implementation in 2025-2028
When will these changes affect your business? HMRC is rolling out MTD in stages based on income:
- April 2026 – Required for self-employed individuals and landlords with combined business/property income over £50,000
- April 2027 – Extends to those with an income over £30,000
- April 2028 – Includes those with income above £20,000
This staged approach gives businesses time to prepare properly. The recent Spring Statement confirmed that extending MTD to the £20,000 threshold will bring about 900,000 more sole traders and landlords into the system.
Looking further ahead, HMRC plans to eventually extend MTD to approximately 4 million sole traders and landlords with income below £20,000, though exact timelines aren’t yet confirmed.
Your MTD start date depends on your income level. HMRC will check your Self-assessment return and let you know when you need to join. You can also choose to join earlier than required – some of our clients find this helpful for getting used to the new system gradually.
Who Needs to Comply with Making Tax Digital for Income Tax?
This is one of the questions we are asked most often by our clients. The answer largely depends on your income level and business type. HMRC has created a staged rollout to give everyone enough time to prepare for these changes.
Income thresholds and implementation dates
Let’s look at exactly when different businesses need to join MTD:
Phase 1: April 2026 – Self-employed individuals and landlords with combined business and/or property income over £50,000 must comply with MTD rules first.
Phase 2: April 2027 – Those with an income between £30,000 and £50,000 will join the system.
Phase 3: By 2029 – The Autumn Budget 2024 confirmed that those with an income above £20,000 must use MTD by the end of the current parliament. This brings roughly 940,000 more taxpayers into the system.
One point that often surprises our clients – HMRC looks at your total gross income (turnover) from self-employment and property, not your profit, when checking if you need to join MTD.
Multiple income sources and combined thresholds
Working out whether MTD applies to you can be tricky when you have several income sources. Here’s what you need to know:
- Add together all your business and property income when checking against the threshold.
- For example (and we see this quite often), if you have an income of £35,000 from freelancing and £20,000 from a rental property, your total £55,000 means you’ll need to join MTD in the first phase.
- Remember, though (and this catches people out), income from employment (PAYE), partnerships, or dividends doesn’t count towards your MTD threshold.
- For jointly-owned properties, only your share of the income matters for your threshold.
Here’s something important to note – while you combine income for checking thresholds, you’ll need separate digital records and quarterly updates for each income source.
Essential Digital Requirements for Making Tax Digital Compliance
This is one of the most important aspects of MTD that we discuss with our clients. Getting the right digital tools in place makes all the difference in how smoothly your transition will go.
HMRC-approved software options
You’ll need to choose software from HMRC’s approved list. The software must be able to:
- Create and maintain digital records of your business income and expenses
- Send quarterly updates to HMRC
- Submit tax returns by the 31 January deadline
- Receive information from HMRC, including tax estimates
We often advise our clients to think carefully about whether they want one piece of software to handle everything or prefer multiple connected solutions. Some of our clients like software that connects directly to their bank accounts, while others prefer manual entry of their records.
Why we recommend Xero
One of the most popular choices among our clients – and the software we use ourselves – is Xero. It’s a cloud-based accounting platform that ticks all the Making Tax Digital boxes: it keeps digital records, connects directly to HMRC, and handles both quarterly submissions and final declarations with ease.
(Here’s why we like it) – Xero is intuitive, scalable, and works beautifully whether you’re a sole trader or managing multiple income streams. It links to your bank accounts, automates regular transactions, and even offers smart insights to It’s you stay on top of your business finances throughout the year.
Xero works especially well for clients who have both trading and property income, which is more relevant than ever, with Making Tax Digital applying to anyone with an income over £50,000 from a combination of self-employment and rental property. The threshold is based on your turnover – not your profit – so even landlords who aren’t full-time traders will need to comply. From April 2026, that means many property owners will be joining MTD whether they realise it yet or not.
We’ve found that clients who get set up with Xero early tend to hit the ground running. Once it’s in place, you’ll not only be compliant with Making Tax Digital but also benefit from real-time access to your financial data. That makes it easier to budget for tax, plan for growth, and avoid any surprises down the line.
(Our honest view?) While there are several good software options out there, Xero strikes the right balance between usability, features and support – and it’s our top recommendation for most small business owners and landlords preparing for MTD.
Digital record-keeping fundamentals
The heart of Making Tax Digital is keeping proper digital records. Your records must include:
- Business name, address, and VAT registration number (if applicable)
- Transaction dates (tax points)
- Transaction values
- Categories for income and expenses
(Here’s something that catches many people out) – once you’ve recorded something digitally, it must stay digital. You can’t print it out and type it back in later, as HMRC doesn’t allow this under MTD rules.
Using spreadsheets with bridging software
Many of our clients ask if they can keep using Excel spreadsheets. The answer is yes, but you’ll need special bridging software. This lets you:
- Keep your records in Excel (or similar)
- Connect to HMRC through bridging software
- Submit your MTD updates electronically
(A word of caution, though) – spreadsheet solutions often create more work in the long run. We’ve found that clients who switch to proper MTD-compatible accounting software typically save time and reduce errors.
Cloud accounting vs desktop solutions
We’re often asked about the choice between cloud and desktop software. Here’s what we’ve learned:
Cloud accounting gives you access anywhere with an internet connection. It’s brilliant for working remotely and makes it easier for us to help you with your accounts. Most of our clients find the automatic backups particularly reassuring.
Desktop solutions might suit you better if you have a complex business or prefer working from one location. Many now offer cloud features, too, giving you the best of both worlds.
The key is choosing what works for your business size, budget and plans. We’re happy to discuss the options that might suit your particular circumstances.
Quarterly Reporting and Tax Payments Under Making Tax Digital
This is one of the biggest changes our clients need to prepare for. The move from yearly to quarterly reporting means significant changes to how you’ll manage your tax affairs.
Understanding the quarterly submission process
We’re often asked exactly how the quarterly submissions will work. You’ll need to submit digital summaries of your income and expenses every three months using your MTD-compatible software.
(Here’s something helpful to know) – these updates are cumulative, meaning if you spot an error in an earlier submission, you can simply put it right in your next update. HMRC will send you an estimated tax bill after each submission based on the figures you’ve provided.
Tax year vs calendar quarters
One question we’re frequently asked is about choosing reporting periods. You have two options:
Standard quarters (following the tax year):
- Quarter 1: 6 April to 5 July (deadline: 7 August)
- Quarter 2: 6 April to 5 October (deadline: 7 November)
- Quarter 3: 6 April to 5 January (deadline: 7 February)
- Quarter 4: 6 April to 5 April (deadline: 7 May)
Or you might prefer calendar quarters:
- Quarter 1: 1 April to 30 June (deadline: 7 August)
- Quarter 2: 1 April to 30 September (deadline: 7 November)
- Quarter 3: 1 April to 31 December (deadline: 7 February)
- Quarter 4: 1 April to 31 March (deadline: 7 May)
(This is important) – you’ll need to choose your preferred quarters before your first submission each tax year.
End-of-period statements
We have some good news here. The Autumn Statement 2023 brought a welcome simplification – the government has scrapped the requirement for End of Period Statements (EOPS). This removes one administrative task while keeping the essential reporting elements intact.
Final declaration requirements
At the end of the tax year, you’ll still need to submit a final declaration, much like the current Self Assessment tax return. This pulls together all your quarterly updates and any other income not covered by MTD, such as employment income, dividends, or savings interest.
(Here’s something that hasn’t changed) – while reporting becomes more frequent, your payment dates stay the same. You’ll still make your tax payments by 31 January following the tax year.
Practical Steps to Prepare for Making Tax Digital in 2025
This is one of the most common topics our clients ask about. With the April 2026 deadline approaching for those earning over £50,000, getting ready early will make your transition much smoother.
Creating your MTD transition plan
The first question to ask yourself is: when do I need to comply? Once you know your deadline, look at how you currently keep records and what needs to change. Here’s what we suggest including in your plan:
- A review of your current accounting methods
- Key dates for implementing changes before your start date
- Steps for moving your records to digital systems
- A schedule for managing quarterly submissions
(Here’s something we’ve learned from experience) – starting your preparations 12-18 months ahead gives you plenty of time to adapt without rushing.
Software selection and implementation
Choosing the right software is crucial – we see many clients struggle when they rush this decision. Start by checking HMRC’s approved list. Your software needs to:
- Create digital records
- Send quarterly updates
- Submit final declarations
(An important technical point) – after choosing your software, you’ll need to connect it to HMRC using your Government Gateway ID and password.
Training and support options
HMRC provides several helpful resources:
- Webinars about MTD requirements
- YouTube guidance videos
- Regular email updates
- Community forums for asking questions
We find many of our clients benefit from professional support during this transition, especially if they’re not confident with digital systems. This is particularly true for those moving from paper records or basic spreadsheets.
Common implementation challenges and solutions
Having helped many businesses through this transition, we’ve seen several common challenges:
Technical setup issues often crop up at the start – but don’t worry; software providers usually offer good support channels. The quarterly reporting schedule can feel demanding at first, but we suggest setting calendar reminders to help you stay on track.
(Something reassuring we tell all our clients) – while the learning curve might feel steep initially, most businesses find their rhythm within a few months of starting.
Conclusion
This is one of the biggest changes to tax reporting that many of our clients will face. While moving to digital tax reporting might feel daunting at first, we’ve seen that good preparation makes all the difference.
Your start date will depend on your income level, but starting early brings clear benefits. (Here’s something we’ve learned from helping clients through Making Tax Digital for VAT) – those who set up their systems and learn the processes well before their deadline find the transition much smoother.
Some aspects of tax reporting won’t change at all. The tax rules stay exactly as they are, and you’ll still make payments by the same deadlines. This gives you some stability while adapting to the new digital requirements.
We’ve found that clients who embrace these changes often discover unexpected benefits. Digital record-keeping typically gives better insight into business finances and saves time once the systems are up and running.
If you would like help preparing for MTD, please don’t hesitate to contact us. We offer a no-obligation initial informal discussion to explore how we can support your transition to digital tax reporting. Click here for our contact details or to book a discovery call: https://smartaccountantssussexandsurrey.co.uk/contact-us/
Frequently asked questions about Making Tax Digital for the self-employed.
When will Making Tax Digital become mandatory for self-employed individuals?
Making Tax Digital for Income Tax will be introduced in phases. From April 2026, it becomes mandatory for self-employed individuals and landlords with a combined income exceeding £50,000. Those with income between £30,000 and £50,000 will join in April 2027, and those earning over £20,000 will be included by 2029.
What are the key requirements for Making Tax Digital compliance?
The main requirements are digital record-keeping using HMRC-approved software, submitting quarterly updates of income and expenses, and providing a final declaration at the end of the tax year. You must use compatible software that can create and maintain digital records, send updates to HMRC, and receive information from them.
How will the quarterly reporting process work under Making Tax Digital?
Under MTD, you’ll need to submit digital summaries of your business income and expenses every three months. You can choose between standard quarters based on the tax year or calendar quarters. After each submission, you’ll receive an estimated tax bill based on the information provided.
Can I still use spreadsheets for record-keeping under Making Tax Digital?
Yes, you can continue using spreadsheets alongside specialised bridging software. This software creates a digital connection to HMRC, allowing you to submit your required MTD updates electronically. However, you must ensure that you use formulas rather than copy-paste operations to update cells.
How can I prepare for the transition to Making Tax Digital?
Start by determining your compliance date based on your income threshold. Evaluate your current accounting processes and create a transition plan. Choose and implement MTD-compatible software well in advance. Consider attending HMRC webinars or seeking professional support to understand the requirements fully. Gradually digitise your existing records and familiarise yourself with the new quarterly reporting schedule.
Do VAT-registered businesses need to comply with Making Tax Digital, too?
Yes, but most already do. MTD for VAT has been mandatory for VAT-registered businesses over the threshold since April 2019 and for all VAT-registered businesses (regardless of turnover) since April 2022. If you’re already using MTD-compatible software for VAT returns, you’re a step ahead for MTD for Income Tax. Just make sure your software can handle both types of reporting – or that your systems talk to each other.
What happens if I miss a VAT return deadline under MTD?
Late VAT returns can now trigger penalties under HMRC’s points-based system. Each late submission earns a penalty point, and after four points (if you file quarterly), you’ll receive a £200 fine. (Here’s something clients often miss) – these points reset after 12 months of good behaviour, so staying on top of deadlines pays off. The good news? Using MTD-compatible software helps reduce the risk of missing submission dates.
Does Making Tax Digital affect the VAT threshold?
No, the VAT registration threshold remains unchanged for now (£85,000 as of this writing). MTD doesn’t change whether or not you need to register for VAT – it only changes how you submit VAT returns if you’re registered. That said, it’s worth keeping an eye on threshold changes in future Budgets.
Is Making Tax Digital part of a wider government initiative?
Absolutely. MTD forms a central part of the government’s initiative to modernise the UK tax system. The goal is to reduce human error, improve compliance, and make tax admin easier for individuals and businesses alike. It’s part of a broader digital transformation across public services – and it’s here to stay.
Will late payment penalties apply under Making Tax Digital for Income Tax?
Yes, the same late payment penalties that apply under Self Assessment will continue under MTD. If you don’t pay your tax on time, interest will accrue from the day after your due date. HMRC has also introduced a new penalty regime where penalties increase the longer a payment remains outstanding. (Our advice?) Budget quarterly to avoid surprises – and use your estimated bills to plan ahead.
How does corporation tax fit into Making Tax Digital?
MTD for Corporation Tax is not here just yet. It’s still in the consultation phase, with no firm launch date confirmed. But it’s very much on HMRC’s radar. Larger incorporated businesses should begin preparing now by reviewing their digital record-keeping processes. (Our tip?) If your company already uses digital accounting software for VAT or payroll, you’re likely in good shape for future changes.
