Making Tax Digital – what you need to know

The Making Tax Digital (MTD) system for income tax becomes mandatory for many smaller companies next year – and some may be in for a shock.

As of April 2026, small businesses, self-employed people, and landlords with an annual income of more than £50,000 will need to comply, with the threshold dropping to £30,000 in April 2027 and £20,000 in April 2028. A new points-based penalty system is being introduced for late or missing updates, and repeated delays can lead to fines.

"MTD for Income Tax is the most significant change to the self-assessment regime since its introduction in 1997," says Craig Ogilvie, HMRC’s director of Making Tax Digital. 

"It will make it easier for self-employed people and landlords to stay on top of their tax affairs and help ensure they pay the right amount of tax."

Around 900,000 sole traders and landlords are set to enter the system in 2026. However, according to the government's Administrative Burdens Advisory Board (ABAB), fewer than half of small businesses are 'aware or very aware' of the looming changes. And while HMRC is currently writing to those that it knows will fall in scope next year, any businesses that haven't yet filed their 2024-25 tax return won't get the letter. 

So, what will small businesses be expected to do?

For a start, it's important to realise that the MTD threshold is based on gross income – the total amount you bring in before expenses like tools, rent, or supplies –  not your profit, meaning that more small firms may be affected than it might at first appear. 

"The risk is that many small traders and landlords assume they’re under the threshold because their profits are modest, when in reality their turnover makes them eligible next April," warns George Holmes, Managing Director of business finance specialists Aurora Capital. 

"With penalties for missed filings rising under the new system, it’s essential that people check their gross income now and not wait until the last minute.”

Those now in scope will have to use a digital record-keeping system – one of a specific set of accounting software packages or apps – and will no longer be able to use the online portal or submit a tax return on paper. They'll also need to submit quarterly updates to HMRC as well as a final declaration at the end of the tax year, rather than a single annual tax return as at present.

This increased administrative burden is causing concern for many. More than 40 per cent of respondents to the ABAB survey reckon that both quarterly updates and digital record keeping will result in a significant rise in costs, and around a third expect that they'll increase time pressures. Almost two-thirds said they didn't expect the changes to have any benefits for their business at all. 

Meanwhile, according to HMRC's own figures, businesses will face transitional costs of around £280 per business and ongoing software expenses of about £160 million a year. An average of around six hours' familiarisation and training will be needed, it says.

The government has published a list of MTD-compliant software packages. Some allow you to create digital records by linking to your business bank account to import transactions automatically, scanning receipts and invoices or manually entering your income and expenses. Others, known as bridging software, will connect to existing records kept in spreadsheets or other accounting tools, allowing you to continue using your existing system.

Compliant packages are available from a number of suppliers, including Sage, Xero, QuickBooks, Zoho Books, and FreeAgent. Most start at under £10 a month for a sole trader, rising to more than £150 a month for more sophisticated capabilities.

While free options are available, these tend to be interim solutions aimed primarily at sole traders, with more limited functionality than the paid-for packages.

The Federation of Small Businesses (FSB) is calling on the government to review the pricing of Making Tax Digital-compliant software and, if needed, introduce regulation to limit price increases. 

It's also calling for HMRC to become easier to contact, with three in five small business owners saying that dealing with HMRC has raised their personal stress levels.

Unsurprisingly, there's been a bit of a backlash against the MTD changes, with a recent petition calling for the changeover to be halted hitting more than 18,000 signatures.

HMRC, though, is refusing to budge. "Making Tax Digital delivers value for money by increasing the amount of tax collected. This ensures that more money can go to funding vital public services, like the NHS, and supporting growth across the UK,” it responded. 

"The government understands this is a big change for many taxpayers and agents, and it is committed to supporting them through the transition." 

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