Making Tax Digital (MTD) represents one of the most significant changes to the UK tax system in recent years. If you’re self-employed, these changes will affect how you keep records and submit your tax information to HMRC. Here’s everything you need to know to stay compliant and prepared.
What is Making Tax Digital?
Making Tax Digital is HMRC’s initiative to modernise the tax system by making it fully digital. The goal is to make tax administration more efficient, reduce errors, and help taxpayers get their tax right first time.
For self-employed individuals, MTD means:
- Keeping digital records of your income and expenses
- Using compatible software to maintain these records
- Submitting quarterly updates to HMRC through your software
- Filing your End of Period Statement and final declaration digitally
Who Does MTD Affect?
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) affects:
Self-employed individuals with annual business or property income above £50,000 (originally £10,000 threshold)
Landlords with property income above the threshold
Partnerships where the partnership’s total qualifying income exceeds the threshold
If your income is below these thresholds, you can continue using traditional methods, though you may choose to join MTD voluntarily.
Key Deadlines and Timeline
The rollout of MTD for Income Tax has been phased:
- April 2026: Mandatory for self-employed individuals and landlords with qualifying income over £50,000
- April 2027: Expected to extend to those with qualifying income over £30,000
- Future phases: May eventually include all self-employed individuals
It’s important to note that these dates apply to the tax year, not calendar year, so plan accordingly based on your accounting period.
What Changes in Practice?
Digital Record Keeping
You must maintain digital records of your:
- Income and sales
- Expenses and purchases
- VAT records (if VAT registered)
- Assets and liabilities
These records must be kept digitally from the start - you can’t maintain paper records and transfer them to digital format later.
Quarterly Updates
Instead of submitting one annual Self Assessment tax return, you’ll need to:
- Submit quarterly updates of your income and expenses (four times a year)
- Submit an End of Period Statement after your accounting period ends
- Make a final declaration to confirm everything is complete
The quarterly updates are summaries, not full submissions. Your final tax bill is still calculated once a year.
Compatible Software
You must use MTD-compatible software to:
- Keep your digital records
- Submit your quarterly updates
- Complete your End of Period Statement and final declaration
HMRC maintains a list of compatible software providers, ranging from free basic options to comprehensive accounting packages.
Benefits of Making Tax Digital
While the change requires adjustment, MTD offers several advantages:
Fewer errors: Digital records and software validation reduce calculation mistakes
Better visibility: Quarterly updates give you a clearer picture of your tax position throughout the year
No surprises: You’ll know your approximate tax bill ahead of time, making it easier to budget and save
Easier record keeping: Once set up, digital systems can be faster than manual methods
Reduced penalties: Digital systems help you stay compliant and avoid late filing penalties
How to Prepare for MTD
1. Choose Your Software
Research MTD-compatible software that suits your needs and budget. Consider:
- Cost (including whether you need to pay monthly or annually)
- Features you need (invoicing, expense tracking, bank feeds, etc.)
- Ease of use and learning curve
- Customer support and training resources
- Integration with your bank and other tools
2. Set Up Your Digital Records
Start maintaining digital records now, even if MTD doesn’t apply to you yet:
- Photograph receipts immediately or use a scanning app
- Record expenses as they occur
- Set up bank feeds if your software supports them
- Create categories for different types of income and expenses
3. Understand Your Obligations
Know your specific requirements:
- When do you need to submit quarterly updates?
- What information must be included?
- What are the deadlines?
- How does this interact with your VAT obligations (if applicable)?
4. Consider Professional Help
If you’re unsure about any aspect of MTD:
- Consult with an accountant or tax advisor
- Attend HMRC webinars and training sessions
- Join online communities of self-employed individuals
- Take advantage of software provider training and support
5. Practice Good Habits
Develop systems that make compliance easier:
- Set a regular schedule for recording transactions
- Reconcile your accounts monthly
- Keep digital copies of all supporting documents
- Back up your data regularly
Common Questions About MTD
Can I still use spreadsheets?
Spreadsheets alone won’t meet MTD requirements unless they’re connected to bridging software that can submit updates to HMRC. Most people find dedicated accounting software easier.
What if I’m late with a quarterly update?
HMRC can charge penalties for late submissions. The quarterly updates are legally required submissions with specific deadlines, so treat them as seriously as your old annual tax return.
Do I still complete a Self Assessment tax return?
The traditional Self Assessment tax return is being replaced by the End of Period Statement and final declaration. The overall process is similar, but the method of submission changes.
What if my income fluctuates significantly?
Quarterly updates reflect your actual income and expenses for that quarter. If you have a particularly good or bad quarter, this will be reflected in your submission for that period.
Can I opt out of MTD?
If you’re above the income threshold, MTD is mandatory. If you’re below it, you can continue using traditional methods, though you may find digital record keeping beneficial anyway.
Integrating MTD with Your Business Planning
MTD doesn’t exist in isolation from your wider business planning. The quarterly cycle actually creates natural checkpoints to:
- Review your financial performance
- Adjust your business plan based on actual results
- Update your cash flow forecasts
- Make informed decisions about investments and expenses
- Plan for your tax payments more effectively
Consider aligning your business planning reviews with your MTD quarterly submission schedule. This creates a regular rhythm of financial awareness that can improve your business decision-making.
Getting Started
If MTD applies to you soon, don’t wait until the last minute:
- Sign up for MTD now through your HMRC online account
- Choose and implement your software with plenty of time to learn it
- Clean up your existing records to ensure a smooth transition
- Run parallel systems for a period if it helps you adjust
- Seek help early if you encounter difficulties
The Bottom Line
Making Tax Digital represents a significant shift in how self-employed individuals manage their tax affairs. While it requires initial setup and adjustment, the system is designed to make tax administration easier and more accurate in the long run.
The key to success is preparation: choose your software early, develop good digital record-keeping habits, and stay informed about your obligations and deadlines.
Remember, thousands of businesses have already successfully transitioned to MTD for VAT, and the lessons learned from that rollout have helped shape MTD for Income Tax. With the right preparation and tools, you can navigate this change confidently and even find that it improves your overall financial management.
If you’re planning your business finances and want to stay on top of tax obligations, integrating your tax planning with your wider business plan is crucial. Good planning helps ensure you’re not just compliant, but also making the most tax-efficient decisions for your business.