What is Making Tax Digital? Guide for UK Business Owners

Are you struggling with Making Tax Digital requirements that seem complex and overwhelming? You’re certainly not alone.

HMRC reports that 40% of UK businesses still find MTD compliance challenging, despite the initiative being introduced back in 2019. However, with the right approach and tools, navigating these digital tax requirements becomes significantly easier. Digital record keeping not only helps meet legal obligations but also reduces errors by up to 30% compared to manual methods.

The MTD timeline continues to evolve, with different deadlines applying to various business types and tax thresholds. Therefore, understanding which rules apply to your specific situation is crucial. Whether you’re concerned about MTD for VAT or preparing for MTD for income tax and self-assessment, this plain-English guide will walk you through everything you need to know.

Throughout this article, we’ll break down complex requirements into manageable steps, explain which MTD software solutions might work best for your business, and show you how to avoid costly penalties while making the transition to digital tax reporting as smooth as possible.

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What is Making Tax Digital and Why It Matters

Making Tax Digital (MTD) represents a fundamental shift in how UK businesses interact with the tax system. Launched as part of the government’s ambitious Tax Administration Strategy, this initiative aims to create a modern, digital tax framework that aligns with how businesses operate in today’s world.

The goal of MTD in simple terms

At its core, Making Tax Digital seeks to create a trusted, modern tax system that reduces errors and makes tax management easier. The primary objectives include reducing the tax gap (the difference between tax owed and tax collected), improving accuracy in tax submissions, and bringing tax records closer to real-time.

Research shows that businesses already using MTD have experienced tangible benefits. Approximately 67% of businesses reported that using compatible software has reduced mistakes in at least one aspect of their record keeping, showing how digital tools improve accuracy. Additionally, 80% of businesses commented that they found the process of using compatible software straightforward.

The initiative focuses on three key requirements:

1. Keeping digital records of all business transactions
2. Using MTD-compatible software that connects with HMRC
3. Submitting quarterly updates to bring the tax system closer to real-time

Rather than simply digitising existing processes, MTD fundamentally changes how businesses track, manage, and report their tax affairs, creating opportunities for better financial management and planning.

Who needs to follow MTD rules

MTD implementation follows a phased approach, with different business types required to comply at different times. As of now, all VAT-registered businesses must already follow MTD rules for VAT returns.

For self-employed individuals and landlords, MTD for Income Tax will be introduced in stages:

• From April 2026: Those with annual business or property income exceeding £50,000
• From April 2027: Those with annual business or property income exceeding £30,000
• From April 2028: Those with annual business or property income exceeding £20,000

Your “qualifying income” refers to the total gross income from self-employment and property in a tax year. Moreover, if you’re both self-employed and receive property income, the threshold applies to the combined total from both sources.

Some groups are explicitly exempt from MTD requirements, including those who can demonstrate that it’s not reasonable or practical for them to use computers or the internet . Furthermore, the government has announced specific exemptions for customers with Power of Attorney, non-UK resident foreign entertainers and sportspeople with no other qualifying MTD income sources, and customers for whom HMRC cannot provide digital service.

How MTD changes tax reporting

Making Tax Digital fundamentally transforms the tax reporting process. Under the traditional system, businesses typically submitted a single annual tax return. In contrast, MTD introduces a more frequent, digital approach to tax management.

For Income Tax, MTD replaces the Self Assessment tax return with five new reporting obligations throughout and after the tax year. This includes four quarterly updates that must follow specific filing deadlines:

• Quarter 1 (April-June): Filing deadline August 7
• Quarter 2 (July-September): Filing deadline November 7
• Quarter 3 (October-December): Filing deadline February 7
• Quarter 4 (January-March): Filing deadline May 7

After these quarterly submissions, businesses must submit a final declaration to finalise their tax position for the year. Importantly, all submissions must be made through MTD-compatible software rather than HMRC’s online filing service.

This shift to quarterly reporting aims to help businesses stay on top of their tax affairs throughout the year rather than rushing to compile records at year-end. Consequently, this can reduce errors that commonly occur when working with outdated or incomplete information.

The MTD framework not only changes when you report but how you maintain records. Digital record-keeping becomes a legal requirement, ending the era of purely paper-based accounting systems. All transactions must be recorded digitally, forming the foundation of the quarterly updates submitted to HMRC.

For businesses already using digital tools, adapting to MTD may require relatively minor adjustments. Conversely, those relying on manual systems face a more significant transition but potentially greater long-term benefits from modernising their financial processes.

Check If You Need to Comply

Understanding whether your business needs to comply with Making Tax Digital (MTD) is essential for staying on the right side of HMRC regulations. The implementation timeline varies based on your income level and business type, with different requirements phasing in over several years.

Income thresholds and deadlines

The rollout of MTD for Income Tax Self Assessment (ITSA) follows a structured, phased approach based on your “qualifying income” – the total gross income from self-employment and property letting combined before any expenses are deducted.

Initially, MTD will apply to self-employed individuals and landlords according to this timeline:

• From 6 April 2026: Businesses with qualifying income exceeding £50,000
• From 6 April 2027: Businesses with qualifying income exceeding £30,000
• From 6 April 2028: Businesses with qualifying income exceeding £20,000

Importantly, HMRC determines whether you need to join MTD by looking at your most recently filed tax return. For the 2026/27 tax year (the first mandatory year), they’ll examine your 2024/25 tax return (due by 31 January 2026). Subsequently, for the 2027/28 tax year, they’ll look at your 2025/26 return filing.

Regarding qualifying income calculation, HMRC considers several components from your Self Assessment return, including self-employment turnover, UK property income, foreign property income, and other property-related income. Notably, if you have multiple income sources – such as both rental income and self-employment – these are combined when determining whether you exceed the threshold. For instance, someone with £16,000 of rental income plus £37,000 of sales from a sole trader business would exceed the £50,000 threshold and must comply with MTD from April 2026.

Who is exempt from MTD

Several categories of businesses and individuals are automatically exempt from MTD requirements and don’t need to apply for exemption:

• Trustees (including charitable trustees and trustees of non-registered pension schemes)
• Individuals without a National Insurance number (as of January 31 before the tax year starts)
• Personal representatives of deceased individuals
• Lloyd’s members (regarding underwriting business)
• Non-resident companies

Additionally, specific groups have been granted exemptions during the current parliamentary term:

• Ministers of religion
• Lloyd’s Underwriters
• Recipients of the Married Couples’ Allowance
• Recipients of the Blind Persons’ Allowance

For VAT-registered businesses already exempt from MTD for VAT, this exemption automatically extends to MTD for Income Tax – no additional application is necessary.

Essentially, if your qualifying income falls below the relevant threshold (currently £20,000), you remain outside the scope of MTD and aren’t required to comply.

How to apply for an exemption

Beyond automatic exemptions, you may qualify for an exemption if you meet specific criteria. The application process for MTD for Income Tax exemptions hasn’t officially opened yet, although HMRC has outlined what will be considered valid grounds for exemption.

You can apply if:

• You’re considered “digitally excluded” – meaning it’s not practical for you to use software to maintain digital records or submit them digitally due to age, disability, remote location, or other legitimate reasons
• You’re a practicing member of a religious society whose beliefs are incompatible with using electronic communications or maintaining electronic records

When applying, you’ll need to explain specifically how these reasons apply to your individual circumstances. HMRC will review each application case-by-case, similar to the process already established for MTD for VAT exemptions.

Although the exact application timeline hasn’t been confirmed, it’s expected that applications for exemption will open around October 2025. Until then, you should continue filing your Self Assessment tax return as usual.

Once the process opens, if HMRC grants your exemption, you’ll receive written confirmation explaining alternative methods for submitting your returns. Unless your circumstances change, you won’t need to reapply. Nonetheless, should the reasons for your exemption no longer apply, you must notify HMRC within three months.

Get the Right Tools in Place

Selecting the appropriate software is crucial for your Making Tax Digital journey. With HMRC actively encouraging businesses to embrace digital record-keeping, finding tools that match your specific needs becomes a priority.

What is MTD-compatible software?

MTD-compatible software refers to digital tools officially recognised by HMRC that enable businesses to create and maintain digital records while submitting tax information directly to tax authorities. These solutions fall into two main categories:

1. Complete software packages that handle both digital record-keeping and submissions to HMRC
2. Bridging software that connects existing record-keeping systems (like spreadsheets) to HMRC’s platform

The key requirement is that your chosen software must be able to connect directly with HMRC’s systems through what’s called an Application Programming Interface (API). This secure connection allows for the seamless transfer of tax information without manual intervention.

For Income Tax, your software needs additional capabilities beyond VAT reporting. It must help you create digital records of business transactions, send quarterly updates, and submit your final tax return by the January 31 deadline. Indeed, some software packages can handle multiple tax obligations, whereas others specialise in specific areas like VAT or Income Tax.

Free vs paid software options

The market offers a range of solutions across different price points, from free options to comprehensive paid packages:

Free options like My Tax Digital provide basic MTD compliance, allowing VAT-registered businesses to submit returns regardless of turnover. These solutions typically offer core functionality, including:

• Digital record-keeping capabilities
• MTD VAT filing features
• Basic reporting tools
• Import/export functions for financial data

Paid solutions generally offer more robust features, better integration with other business systems, and enhanced support. When evaluating paid options, consider:

• Whether the software supports all your income sources (self-employment, UK property, foreign property)
• If it can handle your preferred accounting period
• The level of customer support provided
• Integration capabilities with existing systems

HMRC maintains an official list of approved software providers on their website, making it straightforward to identify solutions that meet compliance standards. Above all, your choice should align with your business complexity—sole traders with straightforward tax affairs may find basic packages sufficient, while businesses with multiple income streams might benefit from more comprehensive solutions.

📚 Guide to 7 Best MTD Compliant Software

Using spreadsheets with bridging tools

For those reluctant to abandon familiar spreadsheet-based systems, bridging software offers a practical compromise. This approach allows you to continue using Excel or similar spreadsheets for record-keeping while maintaining MTD compliance.

Bridging software works by creating a digital connection between your spreadsheet and HMRC’s systems. The software extracts the required tax information from your spreadsheet and formats it for submission to HMRC. Accordingly, you maintain your existing processes while satisfying the digital submission requirements.

For this approach to work, you must establish proper digital links between your records and the bridging software. HMRC accepts several methods as valid digital links:

• Linked cells within spreadsheets
• Emailing spreadsheets for digital import
• Transferring records via portable devices
• XML/CSV importing and exporting
• Automated data transfers

Importantly, HMRC has clearly stated that copying and pasting information or manually retyping data between programs does not qualify as a digital link . Furthermore, all VAT-registered businesses must now file digitally through Making Tax Digital regardless of turnover.

Many bridging solutions focus on making the transition as painless as possible. For instance, some don’t require specific spreadsheet formats, working with various file types (.xls, .xlsx, .ods, .numbers, CSV). Plus, they typically don’t require uploading your entire dataset—just the summary figures needed for tax submissions.

As a result, bridging software offers a viable option for those who prefer to maintain existing Excel-based systems while meeting MTD requirements. This approach particularly benefits small businesses seeking to minimise disruption to established processes.

Sign Up and Connect to HMRC

The practical journey to MTD compliance continues with registering your business and connecting your chosen software to HMRC’s systems. Once you’ve selected compatible software, these next steps establish the vital digital link between your business and tax authorities.

How to register for MTD

The registration process varies depending on your tax obligations. Initially, you should determine if you need to register manually or if HMRC will handle registration automatically:

• For VAT: All VAT-registered businesses should now be signed up for MTD for VAT. HMRC automatically registers new VAT-registered businesses unless they’re exempt. If you’re registering for VAT for the first time, the MTD registration happens during that process.
• For Income Tax: Self-employed individuals and landlords must sign up before using MTD for Income Tax. You can sign up without having software in place first, though you’ll need to authorise software before submitting any information.

Primarily, the timing of registration matters. For VAT submissions, don’t sign up less than 7 days before your VAT return is due or less than 5 days after it’s due. This prevents accidental double payments. Once registered, you’ll typically receive confirmation from HMRC within 72 hours.

What information you’ll need

Beforehand, gather these essential details to streamline your registration:

• Your Government Gateway user ID and password (create one first if you don’t have it)
• Your VAT registration number (for VAT-registered businesses)
• The date you registered for VAT
• Your business entity type
• Your business email address
• Your latest VAT return

Additionally, depending on your business structure, you’ll need:

For sole traders:

• Your National Insurance number

For limited companies or registered societies:

• Company registration number
• Unique Taxpayer Reference (UTR)

For partnerships:

• UTR and postcode where registered for Self Assessment

Likewise, you’ll need to indicate which MTD-compatible software you’re using, as HMRC requires this information during the registration process.

📚Guide to Making Tax Digital for VAT

Linking your software to HMRC

Once registered, you must authorise your software to communicate with HMRC. This connection enables direct submission of tax information without manual intervention.

The authorisation process follows these steps:

1. Within your software, look for an option to connect to HMRC (often in settings or VAT sections)
2. The software launches what’s called the “grant authority user journey”
3. Sign in with your Government Gateway ID and password when prompted
4. Complete any required two-step verification
5. Grant authority for the software to interact with HMRC on your behalf
6. Receive confirmation that the connection is established

Typically, this authorisation uses the OAuth 2.0 standard, creating a secure digital link between your software and HMRC’s systems. Whenever you submit returns, your software uses this connection to transmit data directly to tax authorities.

Bear in mind that re-authorisation is required periodically, at minimum every 18 months. Following software upgrades or HMRC system changes, you might need to reconnect sooner. This simply involves repeating the authorisation process with your Government Gateway credentials.

The exact connection process varies between software providers. Some might require you to enter specific details in settings sections, whereas others guide you through a step-by-step setup wizard. If you’re uncertain about the process for your specific software, contact your provider for detailed instructions.

After successful connection, you’ll be ready to submit VAT returns and other tax information directly through your software, fulfilling your MTD obligations while maintaining the secure digital link required by HMRC.

Start Recording and Submitting Digitally

Once registered for MTD, your focus shifts to maintaining proper digital records and establishing regular submission routines. The digital approach transforms not just how you file taxes, but fundamentally changes your record-keeping practices.

What records you must keep

Making Tax Digital requires creating and storing specific business information electronically. For self-employment and property income, you must keep digital records of:

• Amount of each transaction
• Date when income was received or expenses incurred
• Category of income or expense (using the same categories as Self Assessment)

Importantly, you must maintain separate digital records for each source of self-employment income. For property, your UK properties are treated as one “UK property business”, while non-UK properties form one “foreign property business.” Furthermore, you’re not required to digitally record transactions that aren’t related to your self-employment or property income, such as dividend or savings income.

After creating a digital record, you mustn’t manually move it within your software or to other programs. Instead, establish proper “digital links” between software through methods like linked spreadsheet cells, XML/CSV imports/exports, or API transfers.

📚Guide to Making Tax Digital for Income Tax

How quarterly updates work

Throughout the tax year, you’ll submit quarterly updates summarising your business activities. These updates include income and expense totals from your digital records for each three-month period.

You can choose between two quarterly reporting schedules:

• Standard quarters (aligned to the tax year): ending July 5, October 5, January 5, and April 5
• Calendar quarters: ending June 30, September 30, December 31, and March 31

For standard quarters, deadlines fall one month after each period ends (August 5, November 5, February 5, and May 5). Following 2026, this deadline extends to the 7th of the month.

Even if you had no income or expenses during a period, you must still submit an update. After submission, you’ll receive an estimated tax bill based on your information so far.

What to do at year-end

After your final quarterly update, several additional steps are required. You’ll need to:

1. Check if adjustments to your business income are needed
2. Report any other income sources (dividends, savings interest, employment income)
3. Submit information about expenses eligible for tax relief
4. Report any losses
5. Complete a final declaration that replaces the traditional Self Assessment tax return

This final declaration must be submitted by January 31 following the tax year end. Importantly, while reporting frequency changes under MTD, payment deadlines remain unchanged—payments on account and balancing payments still follow the current schedule with the final payment due by January 31.

Digital records must be preserved for at least 5 years after the January 31 submission deadline for the relevant tax year.

Finexer: Simplifying Digital Recordkeeping for MTD Compliance

Staying compliant with Making Tax Digital — whether for VAT or Income Tax — hinges on maintaining timely, accurate records. That’s where Finexer helps.

As an FCA-authorised Open Banking provider, Finexer enables UK businesses and accountants to connect directly to 99% of UK bank accounts. Instead of relying on manual uploads or client-supplied statements, you can pull real-time transaction data into your MTD-compatible software, ready for review and filing.

Why Finexer Works for MTD

Feature	How It Helps
99% UK bank coverage	Instantly access live transaction data — no need to request PDFs or CSVs from clients
Real-time feeds	Keep books up to date ahead of quarterly or VAT return deadlines
Usage-based pricing	No setup fees or minimums — only pay for what you use
Fast onboarding	Connect client accounts in days, not months
White-label options	Offer clients access to live data under your own firm’s branding
UK-hosted and compliant	All data flows through secure UK infrastructure, fully FCA-regulated

Save Time and Reduce Errors

Manually entered data is not only time-consuming, it also increases the risk of mistakes. With Finexer, cleared transactions arrive automatically, allowing your team to focus on review and coding rather than chasing statements or typing in figures. That means:

• Faster VAT submissions
• Fewer missed entries
• Cleaner quarterly updates
• Less rework at year-end

Whether you’re a small firm or scaling your client base, Finexer supports your move to MTD with flexibility, speed, and confidence.

Avoid Common Mistakes and Penalties

Navigating the penalties for non-compliance with Making Tax Digital can be costly if you’re unprepared. First and foremost, understanding these penalties helps you avoid unnecessary expenses while maintaining proper MTD compliance.

Late filing and payment rules

HMRC has introduced a points-based penalty system that applies to both MTD for VAT and Income Tax. Points accumulate differently based on your submission frequency:

• Annual submissions: Threshold of 2 points
• Quarterly submissions: Threshold of 4 points
• Monthly submissions: Threshold of 5 points

Once you reach these thresholds, you’ll face a fixed penalty of £200. Yet these points aren’t permanent—they expire after 24 months if you remain below the threshold. To reset your points to zero, you must submit all returns on time for a specified period (24 months for annual filers, 12 months for quarterly filers).

Alongside filing penalties, late payment triggers separate charges. No penalty applies if you pay within 15 days of the due date. Nevertheless, if tax remains unpaid after day 15, you’ll incur a 2% penalty on the outstanding amount . This increases to 4% if payment is delayed beyond 30 days. From day 31, an additional daily penalty accrues at 4% per annum on the remaining balance.

How to fix errors in submissions

In the event you discover errors in your MTD submissions, act quickly to minimise penalties. For VAT returns, you can correct errors in your next return if they’re £10,000 or less. Similarly, errors between £10,000 and £50,000 can be corrected in your next return if they represent less than 1% of your total sales value.

For larger errors (over £50,000 or over 1% of sales if more than £10,000), you must inform HMRC separately. As a consequence, failing to correct errors, especially deliberate ones, may result in penalties up to 100% of the VAT owed.

Keep detailed records of any corrections, including the date discovered, how the error occurred, and the amount involved. In fact, recording errors immediately in your VAT records helps avoid additional penalties.

Wrapping Up

Making Tax Digital changes how UK businesses handle tax by requiring digital records and more frequent submissions. This shift reduces manual errors and gives better financial visibility year-round.

Understanding your obligations based on income and business type is key, especially with MTD for Income Tax starting in April 2026 for those earning over £50,000. Choosing the right MTD-compatible software early helps avoid last-minute issues.

Quarterly reporting may seem complex, but it spreads your workload across the year. Timely submissions also help you avoid penalties under HMRC’s new points-based system.

Whether you use full accounting software or bridging tools with spreadsheets, setting up proper digital links with HMRC is essential. Most users find the process straightforward once they begin, so starting early is the best way to ensure smooth, compliant reporting.