Making Tax Digital (MTD) is HMRC’s programme for moving the UK tax system towards digital record-keeping and online reporting. It is not a new tax. It changes how certain taxpayers keep records and report information to HM Revenue & Customs (HMRC). The first major phase began with VAT. Now the programme is expanding to Income Tax, bringing more sole traders and landlords into mandatory digital record-keeping and quarterly reporting.

For business owners, the important question is no longer simply whether tax can be filed online. It is whether your business records, software and reporting process meet the requirements of the MTD regime that applies to you. This guide explains what Making Tax Digital is, who needs to comply, how it works, what software is required, and what the latest implementation dates mean for businesses in 2026 and beyond.

What Is Making Tax Digital?

Making Tax Digital is a government initiative designed to make the UK tax system more digital. Under MTD, taxpayers within the relevant rules use compatible software to maintain digital tax records and, depending on the tax, submit information to HMRC electronically. The idea is to move away from tax reporting that relies heavily on manually prepared records and traditional paper-based processes.

MTD has been introduced in stages rather than as one single change. The first major mandatory phase was Making Tax Digital for VAT, introduced from April 2019. Today, VAT-registered businesses generally need to keep specified VAT records digitally and submit VAT Returns using compatible software. The next major phase is Making Tax Digital for Income Tax, which began for qualifying sole traders and landlords from April 2026.

Is Making Tax Digital a new tax?

No. This is one of the most important points for anyone encountering MTD for the first time. MTD does not create a separate tax or automatically increase the amount of tax you owe. Instead, it changes the record-keeping and reporting process for taxpayers who fall within its scope.

For example, a sole trader who becomes subject to MTD for Income Tax still pays Income Tax and National Insurance under the applicable rules. The difference is that they must use compatible software to maintain their digital records and provide quarterly updates to HMRC.

Why Is HMRC Introducing Making Tax Digital?

HMRC's objective is to modernise tax administration, improve the quality of information available to taxpayers and reduce avoidable errors. Digital records can make it easier to identify missing transactions, reconcile income and expenses and prepare tax information throughout the year rather than reconstructing everything shortly before a filing deadline. For a small business, this can have a practical benefit beyond tax compliance. A well-maintained digital system can give the owner a clearer picture of:

• sales and income;
• business expenses;
• cash flow;
• outstanding invoices;
• tax liabilities; and
• financial performance.

The government has also described MTD as part of the wider digitisation of the UK's tax administration and business environment. The important distinction is that digital tax administration does not mean every business must immediately move every aspect of its finances into one particular accounting system. The rules depend on the tax regime and whether the taxpayer falls within its scope.

Making Tax Digital for VAT

Making Tax Digital for VAT is already established. If a business is VAT registered, it generally needs to maintain the relevant VAT records digitally and submit VAT Returns using software capable of communicating with HMRC's systems. This applies regardless of whether the business is a limited company, sole trader or another type of organisation, provided it is VAT registered and subject to the relevant VAT rules.

What records need to be digital?

MTD for VAT requires certain records that support the VAT Return to be maintained digitally. These can include information about:

• sales and supplies;
• purchases and expenses;
• VAT rates;
• VAT amounts;
• the business name;
• principal place of business;
• VAT registration number; and
• applicable VAT accounting schemes.

HMRC also has rules concerning digital links where information moves between software products. This means that simply keeping figures in a spreadsheet and manually retyping them into another system may not always satisfy the digital-link requirements. The exact treatment depends on how the software and records are structured.

Does MTD for VAT mean everything must be digital?

Not necessarily. The requirement focuses on the records covered by the MTD rules. HMRC states that some supporting records, such as invoices and certain original documents, may still need to be retained in their original form even where relevant information has been entered into accounting software. That distinction matters because digital tax compliance is not simply a matter of scanning every piece of paper.

Making Tax Digital for Income Tax

The next major stage is MTD for Income Tax. This affects individuals with income from self-employment and/or property who meet the relevant qualifying-income thresholds and are not exempt. The rollout is being introduced in stages.

MTD Income Tax deadlines

The current timetable is:

HMRC confirms that the threshold is being reduced progressively, with the £20,000 threshold applying from April 2028. This means the number of people affected will increase over time.

Who is affected?

The current Income Tax rollout primarily concerns:

• sole traders;
• landlords; and
• certain individuals with both trading and property income.

Partnerships are also expected to come within MTD for Income Tax in future, although HMRC has stated that the timetable for partnerships will be set out separately. A limited company should not assume that MTD for Income Tax applies to it simply because it has directors or shareholders. Corporation Tax is a separate tax regime.

What Does MTD for Income Tax Require?

For taxpayers who are required to use MTD for Income Tax, compatible software is used to:

1. create digital records;
2. store and correct those records;
3. send quarterly updates to HMRC; and
4. submit the relevant end-of-year information.

HMRC describes the quarterly updates as summaries of business and property income and expenditure rather than four separate tax returns. This distinction is useful.

Quarterly updates are not four tax bills

A quarterly update gives HMRC information about income and expenses during the relevant period. It does not mean that a taxpayer must calculate and pay their entire annual Income Tax liability every three months.

The final tax position is dealt with through the end-of-year process and applicable tax payment deadlines. For example, a sole trader might maintain their bookkeeping throughout the year, submit quarterly updates through compatible software and then complete the required year-end reporting.

What Is MTD-Compatible Software?

MTD-compatible software is software that can perform the digital functions required by the particular MTD regime. For Income Tax, HMRC says compatible software must allow taxpayers to create and store the required digital records and send quarterly updates to HMRC. Depending on the product, software may also handle:

• invoicing;
• bank feeds;
• expense management;
• bookkeeping;
• VAT;
• financial reporting; and
• year-end information.

The key point is that not every accounting package is automatically MTD-compatible for every tax. Before choosing software, check that it supports the specific MTD service you need.

Can You Use More Than One Software Product?

Yes, in some circumstances. A business or individual may use different software products for different parts of their financial process. However, where records move between products, digital-link requirements can apply.

HMRC explains that if more than one product is used for MTD Income Tax records and submissions, the relevant records must be digitally linked. For example, imagine a sole trader keeps bookkeeping records in one application but uses another application to submit information to HMRC.

The connection between those systems needs to comply with the relevant digital-record and linking requirements. This is one reason it is worth planning the software setup before the first mandatory reporting period.

Who Does Not Need to Use Making Tax Digital?

Not every individual or business is automatically subject to MTD. The rules depend on:

• the type of tax;
• the taxpayer's circumstances;
• income thresholds;
• the relevant start date; and
• whether an exemption applies.

For Income Tax, the staged thresholds mean someone earning below the relevant qualifying-income threshold may not yet be required to join. There can also be exemptions for people who are unable to use digital tools because of specific circumstances. If you think you should be exempt, it is important to check HMRC's current rules rather than simply ignoring MTD.

What Does "Qualifying Income" Mean?

For MTD Income Tax, the threshold is based on qualifying income, rather than simply profit. HMRC describes qualifying income as total gross income from self-employment and property before expenses and tax. This is an important distinction for small businesses. Consider a sole trader who has:

• £55,000 of sales;
• £20,000 of allowable business expenses.

Their profit may be £35,000, but their qualifying income can be £55,000. Therefore, looking only at profit could lead to the wrong conclusion about whether the MTD threshold has been exceeded.

How Should a Small Business Prepare for MTD?

The best approach is to prepare before the mandatory date rather than treating MTD as another filing deadline.

1. Establish whether you are affected

Start with the relevant tax regime. Ask:

• Am I VAT registered?
• Am I a sole trader?
• Do I receive property income?
• What was my qualifying income?
• Which MTD start date applies to me?
• Do I qualify for an exemption?

2. Review your current bookkeeping

Look at how transactions are currently recorded. If your system involves paper receipts, disconnected spreadsheets and manual calculations, moving to MTD may require more preparation than simply purchasing software.

3. Choose suitable software

Check whether your existing accounting software supports the relevant MTD service. If you work with an accountant, ask which systems they already support. A technically compliant system that your accountant cannot easily work with may create unnecessary friction.

4. Build good habits early

Digital bookkeeping works best when records are maintained regularly. Instead of leaving twelve months of transactions until the tax return is due, establish a routine for:

• recording sales;
• recording expenses;
• reconciling bank transactions;
• storing supporting documents; and
• checking unusual or missing entries.

5. Understand the reporting calendar

MTD introduces additional reporting responsibilities for those within scope. Missing a quarterly update should not be treated like missing a routine bookkeeping task. HMRC has introduced a penalty framework for MTD Income Tax, including late-submission and late-payment rules.

What Are the Benefits of Making Tax Digital?

MTD can create extra administrative work, particularly for businesses that have relied on spreadsheets or paper records. But there can also be practical benefits.

Better visibility

Keeping records up to date can give a business owner a more current view of revenue and expenditure.

Fewer manual errors

Automated calculations and bank feeds can reduce repetitive data entry.

Easier collaboration

An accountant can potentially access or work with the same digital records rather than waiting for a box of paperwork at year-end.

Better financial discipline

Perhaps the biggest benefit is behavioural. When bookkeeping is maintained throughout the year, financial problems tend to become visible earlier. For a growing business, that can be more valuable than the tax compliance itself.

Common Making Tax Digital Mistakes

Assuming MTD is only about filing online

It isn't. For relevant taxpayers, digital record-keeping is a central part of the rules.

Confusing turnover with profit

For Income Tax MTD, qualifying income is based on gross income before expenses, so calculating your threshold using profit can be misleading.

Choosing software without checking compatibility

Not all software supports every MTD service. Check before committing to a system.

Ignoring digital links

If multiple software products are used, the transfer of relevant information may need to satisfy digital-link requirements.

Waiting until the deadline

A last-minute software change can expose problems with historic records, bank feeds, invoices and reconciliation. Preparation is considerably easier when the business is already keeping clean records.

What Does Making Tax Digital Mean for Global Founders?

MTD is particularly relevant to international entrepreneurs operating UK businesses. A founder living outside the UK may have a UK company, UK VAT obligations or UK-based trading activities while maintaining financial operations elsewhere. The important thing is to separate the different UK compliance regimes.

Companies House deals primarily with company registration and corporate information. HMRC deals with taxation. Making Tax Digital is an HMRC tax-administration initiative, not a Companies House filing system. A UK company may therefore have Companies House obligations and HMRC obligations that operate independently.

For overseas founders, getting the distinction right is important because using a company formation or management service does not automatically mean every tax obligation has been dealt with. IncorpUK, for example, sits within the broader UK company formation and management landscape, while tax compliance remains a separate area requiring the appropriate HMRC processes and, where necessary, professional advice.

Is Making Tax Digital Mandatory?

For taxpayers within the relevant rules, yes. However, when it becomes mandatory depends on the particular tax and taxpayer. MTD for VAT is already mandatory for VAT-registered businesses subject to the rules. MTD for Income Tax is being introduced progressively:

• over £50,000 qualifying income: from 6 April 2026;
• over £30,000: from 6 April 2027;
• over £20,000: from 6 April 2028.

The government has also confirmed that the £20,000 threshold will bring additional sole traders and landlords into the system from 2028.

Making Tax Digital FAQ

Is Making Tax Digital a tax?

No. MTD is a system for digital record-keeping and tax reporting. It does not create a separate tax.

Does every UK company have to use Making Tax Digital?

No. MTD requirements depend on the tax regime and the company's or individual's circumstances. VAT-registered businesses are subject to MTD for VAT rules, while MTD for Income Tax primarily affects qualifying sole traders and landlords.

Do sole traders need Making Tax Digital?

Increasing numbers do. From April 2026, qualifying sole traders with more than £50,000 of relevant income are required to use MTD for Income Tax, subject to exemptions. The threshold falls to more than £30,000 in 2027 and more than £20,000 in 2028.

Is MTD for Income Tax the same as Self Assessment?

No. MTD for Income Tax changes the way certain taxpayers keep records and report information. Self Assessment continues to exist, and taxpayers still have year-end tax obligations.

Do I need special accounting software for MTD?

You need software that is compatible with the particular MTD service that applies to you. HMRC provides guidance on compatible software and the functions it must perform.

Can I use spreadsheets for Making Tax Digital?

It depends on the circumstances and how the spreadsheet forms part of a compliant software setup. MTD is not simply a requirement to type figures into a spreadsheet; the relevant digital-record and submission rules must be satisfied.

Does MTD apply to landlords?

Yes, qualifying landlords can be within MTD for Income Tax. The staged thresholds are based on qualifying income from relevant self-employment and property activities.

What happens if I cannot use digital technology?

There are exemption provisions for people who meet the relevant conditions. If you believe you cannot comply for a valid reason, check HMRC's current guidance and apply for an exemption where appropriate.

Final Thoughts

Making Tax Digital is best understood as a change in the way tax information is maintained and reported, rather than a new tax. For VAT-registered businesses, digital VAT records and online filing are already part of normal compliance. For sole traders and landlords, MTD for Income Tax is now being introduced in stages, with the threshold falling from £50,000 to £30,000 and then £20,000 over the next few years.

The practical lesson is straightforward: do not wait for your mandatory start date to fix your bookkeeping system. Check whether you are affected, understand your qualifying income, choose suitable MTD-compatible software, establish reliable digital record-keeping habits and understand your reporting deadlines.

For founders and growing businesses, the real opportunity is to treat MTD as more than a compliance exercise. A well-organised digital finance system can give you better visibility of your business, reduce avoidable errors and make it easier to work with accountants and advisers. As the UK tax system continues its move towards digital administration, businesses that build those habits early will be better positioned for whatever comes next.