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Making Tax Digital: What Small Business Owners Need to Know
If you’re self-employed, running a small business, or juggling work as a solopreneur, you’ve probably heard the phrase Making Tax Digital floating around for a while now. You may have ignored it, or quietly hoped it won’t apply to you. Spoiler alert: it probably will.
The good news is, Making Tax Digital (often shortened to MTD) doesn’t have to be daunting or complicated. In fact, once you’re all set up, it can actually make managing your business finances easier.
Here’s our plain English guide to what’s changing and when.
What is Making Tax Digital?
Making Tax Digital is a government initiative led by HM Revenue & Customs to modernise the UK tax system.
In simple terms, it means:
- Keeping your business records digitally
- Using compatible software to submit tax information
- Sending updates to HMRC more regularly
The aim is to reduce errors, improve accuracy, and help business owners stay on top of their finances throughout the year — rather than scrambling at tax return time.
Why is MTD being introduced?
Traditionally, many business owners only look at their numbers once a year. MTD encourages you to keep your accounts up to date, which has some real benefits:
- You can see how your business is performing in real time
- Cash flow issues are easier to spot early
- It puts an end to the annual last-minute January panic
- You’ll make fewer mistakes caused by rushed or estimated record-keeping
While it may feel like more admin at first, many businesses find it actually saves time in the long run.
The MTD timelines: When do the changes happen?
In April 2022, MTD became mandatory for all VAT-registered businesses, regardless of turnover. Here’s how Making Tax Digital is being rolled out from 2026 onwards.
April 2026 – MTD for Income Tax (over £50k)
Self-employed individuals and landlords earning over £50,000 will need to follow MTD for Income Tax rules.
April 2027 – Threshold lowers to £30k
MTD for Income Tax will apply to those earning over £30,000.
April 2028 – Threshold lowers to £20k
MTD for Income Tax will apply to those earning over £20,000.
If you’re self-employed or earn income from property, it’s very likely MTD for Income Tax will affect you in the next few years.
MTD for VAT: What's already in place?
MTD for VAT was the first phase of the rollout.
Since 1 April 2022, all VAT-registered businesses must:
- Keep VAT records digitally
- Submit VAT returns using MTD-compatible software
If you register for VAT now, you’re automatically signed up for MTD — there’s no separate registration process.
VAT registration is required if your turnover exceeds £90,000, but many businesses choose to register voluntarily below this threshold.
MTD for income tax: The big change
From 6 April 2026, the traditional annual self-assessment tax return will be replaced for many people.
Instead of one yearly submission, you’ll need to:
- Send four quarterly updates of income and expenses
- Submit a final declaration at the end of the tax year
This applies to:
- Sole traders
- Self-employed individuals
- Landlords with qualifying property income
The rules are being phased in based on total business and property income, starting with those earning over £50,000.
HMRC will use the information from your 2024/25 tax return to let you know if you need to start complying with the Making Tax Digital rules from April 2026. However, tax experts – including the Low Incomes Tax Reform Group (LITRG) – strongly suggest preparing early if you think you might be affected, to give you enough time to choose your software and get set up. For more info, see Gov.uk or LITRG's Making Tax Digital guidance.
Choosing the right Making Tax Digital software
Spreadsheets alone will no longer be enough. The changes mean you need to get MTD-compatible accounting software that can keep digital records and submit updates direct to HMRC.
HMRC are not producing their own software for users to create digital records or file quarterly updates. Additionally, HMRC’s existing online filing service for self-assessment tax returns will no longer be available for those within Making Tax Digital when they need to file the end-of-year tax return. So, it’s essential you get the right software in place. There are lots of options out there – so how do you choose the right one for you?
HMRC have developed a tool that can help you choose Making tax Digital compliant software to suit your needs. It will be up to you to decide which product suits you best, but it’s a good starting place. It’s also worth doing your own further research. Always check the software provider’s website for all the details before committing to a particular product. Switching providers mid-year could be problematic if the two aren’t compatible in terms of transferring information.
Several UK business bank accounts offer built-in, HMRC-compatible Making Tax Digital solutions, including Natwest, Starling and Monzo.
If you already use accounting software, it’s worth checking whether it’s MTD-ready.
What happens if I don't comply?
If MTD applies to you and you don’t sign up, miss submission deadlines or fail to keep digital records, HMRC may issue late submission penalties or compliance notices.
The system is designed to encourage regular reporting, so staying organised and submitting on time will be more important than ever.
How can I prepare for Making Tax Digital now?
Even if MTD for Income Tax doesn’t apply to you yet, there are a few smart steps you can take now:
- Start keeping records digitally if you don’t already
- Get comfortable reviewing your finances quarterly
- Speak to an accountant or bookkeeper about MTD
- Choose software well before deadlines loom
Preparing early means fewer surprises — and far less stress — when the rules kick in.
Less panic, more clarity
Making Tax Digital is a big change, especially for small business owners who already wear a lot of hats. But at its heart, MTD is about clarity, consistency, and keeping you better informed about your own business.
With the right tools and a bit of preparation, it doesn’t have to feel overwhelming. And you can rest assured that many business owners find that, once they’re set up, they feel more in control than ever.
If you’re unsure how MTD will affect you, now’s the perfect time to start getting organised — with your bank, accountant or software provider. Your future self will thank you.
Are you a business owner in Devon or Somerset? Would you like some free advice on any of the areas covered in this article, or on any other business challenges you’re facing? We’re here to help. Take a look at our current business support programmes here to see what’s available right now and to check your eligibility.
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