Making Tax Digital (MTD) for Income Tax represents one of the most significant changes to UK tax administration in decades. Starting in April 2026 for sole traders and landlords with qualifying income over £50,000, this digital transformation will fundamentally change how small businesses manage their tax obligations.
At S&B Accountants, we’re helping dozens of small businesses prepare for this transition. This comprehensive guide covers everything you need to know about Making Tax Digital 2025, from understanding the requirements to choosing the right software and ensuring compliance.
What is Making Tax Digital for Income Tax?
Making Tax Digital for Income Tax is HMRC’s initiative to digitise the UK tax system. The key requirement for all businesses falling within the MTD for Income Tax regime will be to keep records digitally, make quarterly submissions and complete an annual tax declaration.
This system replaces traditional paper-based record keeping and annual Self Assessment returns with:
- Digital record keeping using HMRC-approved software
- Quarterly update submissions to HMRC
- Digital final tax return submission through software
Who Must Use Making Tax Digital in 2025-2026?
Mandatory Requirements
If HMRC reviews your return and finds your qualifying income for the 2024 to 2025 tax year is over £50,000, they’ll write to you and confirm that you must start using Making Tax Digital for Income Tax by 6 April 2026.
You must use MTD if you’re:
- A sole trader with qualifying income over £50,000
- A landlord with property rental income over £50,000
- Both a sole trader and landlord with combined qualifying income over £50,000
What Counts as Qualifying Income?
Qualifying income includes:
- Self-employment profits
- Property rental income
- Both UK and foreign income (for UK tax residents)
Important: Qualifying income is calculated before expenses and allowances. Even if your net profit is below £50,000, you may still need to use MTD if your gross income exceeds the threshold.
Exemptions from MTD
An individual will be exempt from MTD for Income Tax if on 31 January before the start of the tax year, that person does not have a National Insurance Number.
Other exemptions may include:
- Individuals where it’s “not reasonably practicable” to comply
- Those winding down businesses with very low profits
- Specific care providers (foster care, shared lives care)
The process for claiming exemption has not yet been confirmed by HMRC, but it is expected that it will be possible to make an application for exemption from October 2025.
Key MTD Requirements for Small Businesses
1. Digital Record Keeping
MTD requires digital record‑keeping via HMRC‑approved software. Excel or paper no longer acceptable.
Your digital records must include:
- All business income and expenses
- Bank transactions
- Invoices and receipts (digital copies)
- Asset and depreciation records
- VAT records (if VAT registered)
2. Quarterly Update Submissions
You must submit quarterly updates to HMRC showing:
- Income and expenses for the quarter
- Any adjustments or corrections
- Additional information HMRC specifies
Quarterly deadlines:
- Q1 (April-June): Due by 5 August
- Q2 (July-September): Due by 5 November
- Q3 (October-December): Due by 5 February
- Q4 (January-March): Due by 5 May
3. Annual Digital Tax Return
MTD software will be the default route for Final Declaration (digital tax return). Annual Self Assessment return will be submitted through your MTD software, not the traditional HMRC online portal.
Choosing the Right MTD Software
Most software products will let you both send quarterly updates and submit your tax returns to HMRC. Some of the software that creates digital records also let you connect to your existing records in other software.
Types of MTD Software
1. Full-Service Accounting Software
- Complete accounting solution
- Handles record keeping, quarterly updates, and tax returns
- Best for: Established businesses wanting comprehensive functionality
2. Record-Keeping Software with API Connection
- Creates and maintains digital records
- Connects to existing spreadsheets or accounting tools
- Best for: Businesses wanting to keep current systems
3. Bridging Software
- Connects existing records to HMRC
- Sends quarterly updates and tax returns
- Best for: Businesses with established record-keeping systems
Popular MTD Software Options
Cloud-Based Solutions:
- QuickBooks Online
- Xero
- FreeAgent
- Sage Business Cloud Accounting
- KashFlow
Desktop Solutions:
- Sage 50cloud
- VT Transaction+
- TaxCalc
Free Options: HMRC have said that they expect some free products to be available from commercial software providers in due course. However, free options may have limited functionality and support.
Key Software Selection Criteria
- HMRC Recognition: Ensure software is HMRC-approved for MTD
- Your Business Needs: Single vs multiple income sources
- Integration Capabilities: Bank feeds, receipt scanning, payroll
- Support Level: Training, help documentation, customer service
- Cost: Monthly/annual fees, setup costs, additional user charges
- Scalability: Can grow with your business
Step-by-Step MTD Implementation
Phase 1: Assessment (Now – October 2025)
- Calculate Your Qualifying Income
- Review 2024-25 tax year income
- Include all self-employment and property income
- Consider growth projections for 2025-26
- Check MTD Status
- Wait for HMRC notification letter
- Verify income calculations
- Understand your obligations start date
Phase 2: Preparation (October 2025 – March 2026)
- Choose and Purchase Software
- Research HMRC-approved options
- Consider free trials
- Factor in training time
- Digitise Existing Records
- Scan physical receipts and invoices
- Upload historical data to software
- Set up bank feeds and integrations
- Sign Up for MTD
- Complete HMRC registration process
- Authorise your software to communicate with HMRC
- Set up quarterly obligation reminders
Phase 3: Go-Live (April 2026 onwards)
- Start Digital Record Keeping
- Input all transactions in real-time
- Maintain digital copies of all documents
- Regular data backups
- Submit Quarterly Updates
- Prepare and review quarterly summaries
- Submit by required deadlines
- Keep records of submissions
- Annual Compliance
- Prepare digital tax return through software
- Review and finalise annual position
- Submit by 31 January deadline
Common MTD Challenges and Solutions
Challenge 1: Multiple Income Sources
If you have more than one source of income for which you need to file quarterly updates, for example, two separate self-employments or a self-employment and a rental property, you will need to keep separate digital records for each source.
Solution: Choose software that handles multiple business streams or consider separate software for different income sources.
Challenge 2: Software Costs
Free software may not meet all business needs, and paid solutions can be expensive for small businesses.
Solution:
- Compare total cost of ownership (software + time)
- Consider the value of automated features
- Look for software that grows with your business
Challenge 3: Learning New Systems
Moving from spreadsheets or paper records to digital software requires time and training.
Solution:
- Start transition early (6+ months before deadline)
- Use software training resources
- Consider professional setup assistance
Challenge 4: Data Migration
Moving historical data from old systems to new software can be complex.
Solution:
- Plan data migration strategy early
- Clean up existing data before transfer
- Consider professional data migration services
MTD Compliance Checklist
Before April 2026:
- Confirm MTD obligation status
- Choose and purchase HMRC-approved software
- Set up digital record-keeping system
- Migrate historical data
- Sign up for MTD with HMRC
- Authorise software for HMRC communication
- Test quarterly submission process
Ongoing Compliance:
- Maintain real-time digital records
- Submit quarterly updates on time
- Keep digital copies of all supporting documents
- Review and reconcile accounts regularly
- Submit annual digital tax return
- Maintain software backups and security
Getting Professional Help
Making Tax Digital represents a significant change for many small businesses. Consider professional assistance if:
- Your business has complex income streams
- You’re unsure about software selection
- You need help with data migration
- You want ongoing MTD compliance support
At S&B Accountants, we provide comprehensive MTD preparation services, including:
- MTD eligibility assessment
- Software selection guidance
- System setup and data migration
- Ongoing quarterly compliance support
- Annual tax return preparation
Looking Ahead: Future MTD Developments
While April 2026 marks the start of MTD for Income Tax, HMRC continues developing the system:
- Additional business types may be included
- The £50,000 threshold may be reduced over time
- New software features and integrations
- Enhanced HMRC digital services
Staying informed about these developments ensures your business remains compliant as MTD evolves.
Key Takeaways
- MTD is mandatory from April 2026 for sole traders and landlords with qualifying income over £50,000
- Digital record keeping replaces paper-based systems and spreadsheets
- Quarterly updates must be submitted to HMRC through approved software
- Software selection is crucial – choose based on your business needs and budget
- Early preparation reduces stress and ensures smooth transition
- Professional support can help navigate complex requirements
Making Tax Digital represents the future of UK tax administration. While the transition requires effort and investment, it ultimately provides better insight into your business finances and more efficient tax compliance.
Need help preparing for Making Tax Digital? Contact S&B Accountants today for expert guidance tailored to your business needs.
Phot Credit: Photo by Artem Podrez: https://www.pexels.com/photo/content-woman-using-laptop-on-floor-4492129/
