If you're self-employed, a landlord, or run a small business, you've probably heard the phrase "Making Tax Digital" — usually followed by a sense of mild panic. Don't worry. This guide will explain exactly what it is, who it affects, when it applies, and what you need to do about it. No jargon. No waffle.
What is Making Tax Digital?
Making Tax Digital (MTD) is HMRC's programme to modernise the UK tax system by requiring digital record-keeping and online submission of tax returns via approved software. The idea is that keeping records digitally — rather than on spreadsheets or in shoeboxes — reduces errors and makes tax administration more efficient for everyone.
MTD has been rolling out in phases since 2019. Here's where things currently stand:
- MTD for VAT: Mandatory since April 2019 for all VAT-registered businesses with taxable turnover above the threshold. Extended to all VAT-registered businesses in April 2022.
- MTD for Income Tax (MTD for ITSA): Being phased in from April 2026 for self-employed people and landlords.
- MTD for Corporation Tax: Still in consultation. Expected to apply to limited companies eventually, but no mandatory date confirmed yet.
Who does MTD for Income Tax affect?
MTD for Income Tax Self-Assessment (MTD for ITSA) will affect you if you're:
- Self-employed (sole trader) with annual business income above £50,000 — from April 2026
- A landlord with annual rental income above £50,000 — from April 2026
- Self-employed or a landlord with income between £30,000 and £50,000 — from April 2027
If your income is below these thresholds, you won't need to comply yet — but HMRC has signalled the threshold may be lowered further in future years. It pays to be prepared.
What will MTD for Income Tax actually require you to do?
Under MTD for ITSA, you'll need to:
- Keep digital records of all business income and expenses using HMRC-approved software
- Submit quarterly updates to HMRC via that software — reporting your income and expenses for each quarter
- Submit a final declaration at the end of the tax year, replacing your current Self Assessment tax return
The quarterly updates aren't a quarterly tax payment — you'll still pay tax in the same way as now. The updates just give HMRC a more current picture of your finances.
What software do I need?
You'll need HMRC-approved MTD-compatible software. HMRC publishes a list of approved providers — and the good news is that the most popular cloud accounting platforms are all on it.
At NumberCrunch, we use FreeAgent and Xero — both of which are fully MTD-compliant, included free in our plans, and set up for you from day one. No technical knowledge required.
Can I use a spreadsheet?
You can — but only if you use a compatible piece of bridging software that connects your spreadsheet to HMRC's systems. In practice, this is more complicated and more error-prone than simply using MTD-ready accounting software. We'd strongly recommend against it.
What happens if I don't comply?
HMRC is implementing a new points-based penalty system for MTD non-compliance. You'll accumulate penalty points for missing quarterly submission deadlines, and once you reach a threshold, a financial penalty is applied. Persistent non-compliance can result in significant fines.
What should I do now?
If you fall within the affected income thresholds, here's what to do:
- Don't panic. You have time to prepare, and the transition is straightforward with the right support.
- Get on the right software. If you're not already using cloud accounting software, now is the time to start. Our clients get FreeAgent or Xero included as part of their plan.
- Talk to an accountant. We can assess exactly when MTD applies to you, get you set up on the right platform, and handle all your quarterly submissions on your behalf.
If you're a NumberCrunch client, you don't need to do anything — we're already handling MTD compliance for you as part of your plan.
The bottom line
Making Tax Digital is coming, and for businesses above the income thresholds, it's mandatory. But it doesn't have to be stressful. With the right accountant and the right software, the transition is seamless — and the end result is a cleaner, more organised approach to your finances that actually benefits your business.
If you have questions about MTD and how it affects your specific situation, book a free consultation with one of our accountants. We're here to help.