You must use HMRC-compatible software for MTD. Free software options tend to cover basic record-keeping and allow for standard quarterly updates. Paid options add enhanced features such as invoicing, business bank account integration and expense tracking.
Making Tax Digital: your no-fuss step-by-step guide to MTD
Making Tax Digital: a step-by-step guide
You may need to follow MTD rules if you earn income from self-employment or property, or if you are VAT-registered.
Key takeaways
You keep all tax records digitally and use compatible software to update HMRC on your earnings and outgoings
You send updates electronically, whether reporting VAT or income tax, with set deadlines
You avoid penalties by staying compliant, choosing the right software and keeping accurate digital records
What is Making Tax Digital (MTD)?
MTD is the new self-assessment and VAT system from HMRC that replaces manual tax returns with software-based digital records and electronic updates.
Designed to simplify and modernise bookkeeping and reporting tax, MTD should help you to:
Keep your records organised
Reduce errors
Report more accurately
File your income and expenses in a timely fashion
Share information more easily with accountants, clients and HMRC
Do I need to follow MTD?
All businesses manage their tax affairs differently – some may prefer manual spreadsheets while others may work with the latest accounting software or in collaboration with an accountant or tax advisor.
MTD looks to streamline the process, guiding every business to file in a standard way with the use of digital technology. So, if you run a business or rent out property, the chances are you’re going to need to tweak your approach to tax admin in the coming year or two.
Who it applies to
You must follow MTD for income tax if all of the following apply
You are a sole trader or a landlord registered for self-assessment
You receive income from self-employment, property or both
Your qualifying income exceeds the threshold set by the government
Qualifying income
Qualifying income covers any income from self-employment and/or property.
This can include new businesses – if you begin a new self-employed activity or start letting out property partway through the tax year, you must use MTD once your annual gross income goes over £20,000.
When do I have to start?
The exact start date depends on your level of qualifying income for the tax year you’re reporting on:
If your gross income from self-employment and/or property was over £50,000 for the 2024/25 tax year, you must comply with MTD from 6 April 2026
If your gross income goes over £30,000 in the 2025/26 tax year, you must comply with MTD from 6 April 2027
If your gross income goes over £20,000 in the 2026/27 tax year, planned legislation brings you into MTD from 6 April 2028
MTD for VAT extended to all VAT-registered businesses back in April 2022.
Who doesn’t have to comply?
Most sole traders and landlords who pay income tax through self-assessment are going to have to comply with MTD eventually to remain within the law, but there are a few exceptions. Reasons for exemption include:
Your qualifying income is £20,000 or less
You are digitally excluded – perhaps due to disability, your inability to access the internet or because of your religion/belief
You’re a trustee filing for someone who has died or you don’t have a National Insurance number
You can see a full list of exemptions and how to apply for one through HMRC here.
How MTD works
Keep digital records
You need to track all your income and expenses digitally for your self-employment or property let, instead of using paper records. HMRC has no plans to release its own software or app to facilitate this, so you need to choose software that is compatible with HMRC’s requirements. Popular commercial providers include Sage and Xero.
Send quarterly updates
You must submit a summary of your income and expenses every quarter via your digital accounting software. The standard periods are:
6 April to 5 July (due by 7 August)
6 April to 5 October (due by 7 November)
6 April to 5 January (due by 7 February)
6 April to 5 April (due by 7 May)
You may opt to use calendar quarters instead – for example, 1 April to 30 June – if your software allows, but the submission due-by date remains the same.
Final declaration at the end of the year
You finalise your tax position at the end of the tax year via your chosen software. At this point, you can make any adjustments, include other taxable income and submit a final declaration that completes your tax return.
Once you submit your final declaration, you’re all done. The traditional self-assessment filing method for that income no longer applies.
Deadlines to be aware of
Quarterly update deadlines – Each update is due by the 7th of the month following the end of the quarter – for example, 6 April to 5 July is due by 7 August
Final declaration deadline – This aligns with the normal self-assessment tax return deadline for the tax year. This is 31 January 2027 for the 2025/26 tax year
Start-date deadline – If you cross the income threshold, you must sign up and start MTD from 6 April after the tax year in which you exceeded it. For example, if you go over the £30,000 threshold at any point in the 2025/26 tax year, you start MTD from 6 April 2027.
Payment dates – Payment for any tax due remains the same – so 31 January and 31 July (if you make payments on account)
MTD and VAT
MTD already applies to most VAT-registered businesses. If you’re registered for VAT, you must keep digital records and submit your VAT returns through MTD-compatible software. This applies whether you registered voluntarily or passed the VAT threshold.
You record your sales, purchases and VAT calculations digitally and your MTD software sends each return directly to HMRC. If you still use spreadsheets, you can remain compliant by linking them to HMRC through bridging software.
The rules for VAT continue alongside the newer MTD requirements for income tax, so you may need to manage both within the same software if you run a business and also file self-assessment.
Choosing and using software
With MTD, you record everything digitally and send updates to HMRC through your chosen software directly. The options vary in cost and available features, so it helps to understand how each one works before you decide.
HMRC-recognised software: free vs paid
You must use HMRC-compatible software for MTD. Free software options tend to cover basic record-keeping and allow for standard quarterly updates. Paid options add enhanced features such as invoicing, business bank account integration and expense tracking.
Integrated tools vs bridging software
Integrated tools store and send all your digital records from one place. Bridging software links a spreadsheet to HMRC, so you can submit your quarterly updates without switching systems. If you’re used to manual bookkeeping and don’t want to change too much, this might be the simplest option.
All-in-one business accounts
Some banks offer a business account with built-in accounting tools, usually for a fee. This enables you to manage payments and your digital records from one account – often with its own app – which reduces admin and keeps everything in sync.
HMRC-recognised software: free vs paid
Integrated tools vs bridging software
Integrated tools store and send all your digital records from one place. Bridging software links a spreadsheet to HMRC, so you can submit your quarterly updates without switching systems. If you’re used to manual bookkeeping and don’t want to change too much, this might be the simplest option.
All-in-one business accounts
Some banks offer a business account with built-in accounting tools, usually for a fee. This enables you to manage payments and your digital records from one account – often with its own app – which reduces admin and keeps everything in sync.
What counts as digital records?
Digital records include the date, amount and category of each business or property transaction. You keep this information directly in your software of choice, or in a spreadsheet that connects to HMRC through bridging software.
When it comes to proof of expenses, the good news is you don’t necessarily need to scan or upload every individual receipt. You only need accurate digital records of the transactions. That said, it’s a good idea to keep any receipts separately, in case HMRC asks for evidence of them later.
Getting started step-by-step
Here’s how you can get up and running with MTD in no time.
Check whether you qualify and when you need to start
Confirm you’re a sole trader or landlord with qualifying income above the threshold for the specific tax year.
Pick your software
Choose HMRC-recognised software that works for you and your budget. Decide between an integrated tool or a spreadsheet with bridging software. Make sure it supports quarterly updates and a final declaration, in line with MTD requirements.
Sign up with HMRC
Sign in to your Government Gateway account and sign up for MTD for income tax. Have your Unique Taxpayer Reference (UTR), National Insurance number and business email to hand to speed up this process.
Connect your software
Authorise your chosen software to access your HMRC account. Link each income source (business and/or property), check your settings and test a sample entry before your first quarterly update to make sure everything’s working as it should.
Penalties and compliance
MTD for income tax uses the same points-based system as MTD for VAT.
Each late quarterly update or late final declaration earns a penalty point. When you reach four points, you receive a £200 fine. Any points you get only expire after a period of compliant filing. You can also face a penalty of up to £3,000 if you fail to keep proper digital records or don’t use compatible MTD software.
Late payment penalties work separately from submission penalties, and interest starts the day your tax becomes overdue. Further penalties apply at 16 days and again at 31 days if the payment remains outstanding. Interest then continues to accrue until you clear the outstanding balance.
To avoid these penalties, it pays to be organised. You should keep accurate digital records, file each update on time and pay any tax due by the deadline.
Your next steps with MTD
Making Tax Digital can feel like a big shift, but once you choose your software and get into a routine, the process should become much more straightforward.
If you want to dig deeper, explore our other guides:
If you’re a sole trader, check out our dedicated guide and checklist to MTD for business income
If you’re a landlord, read our guide to MTD for property income
FAQ
Will Making Tax Digital really start in 2026?
Yes – the new rules begin from 6 April 2026 if your total gross income from self-employment and/or property exceeded £50,000 in the 2024/25 tax year. After that, the rules extend to gross incomes over £30,000 from 6 April 2027, with planned legislation to widen the scope to incomes over £20,000 from 6 April 2028.
What if I earn money from self-employment and property?
You must comply with MTD if your combined gross income from self-employment and property goes over the qualifying threshold. You should keep separate digital records for each income source, but you can manage everything through the same MTD-compatible software. HMRC expects you to send separate quarterly updates for each income source and bring them together in one final declaration at the end of the tax year.
Is Making Tax Digital only for VAT?
No. MTD started with VAT, but it now also applies to income tax for sole traders and landlords, once you pass the qualifying income threshold. If your income is above the threshold, you should keep digital records, send quarterly updates to HMRC and complete a final declaration through MTD-compatible software.
About Kyle Eaton
Kyle is a finance writer specialising in all things related to small and medium enterprises (SMEs). He has over ten years' experience working in financial services.