Making Tax Digital (MTD) is the government’s initiative to digitalise the tax system. The main aim is to reduce the “tax gap” – the difference between the amount of tax that should be paid to HMRC and the amount it receives.
According to the most recent government figures, the tax gap was 4.8%, equating to £39.8 billion in absolute terms, in the 2022/23 tax year.
The government believes that maintaining and submitting digital records could help sole traders and landlords to submit more accurate tax returns and reduce this discrepancy.
HMRC is introducing MTD in phases, with MTD for VAT already mandatory for some businesses.
If you’re a business owner, keep reading to learn more about MTD for Income Tax and discover three practical ways to prepare for this change.
From April 2026, your business may need to follow MTD requirements for Income Tax
Since April 2019, most VAT-registered businesses with a taxable income over the current annual threshold for VAT – £90,000 (2024/25) – have been required to file their VAT returns using a digital system.
From 6 April 2026, MTD will also apply to Income Tax for some businesses.
If you are registered for self-assessment and receive a total gross income above £50,000 a year from self-employment or property (£30,000 from April 2027), you may need to comply with the following MTD requirements for your next accounting period following 6 April 2026:
- Keep digital records
- Use MTD-compliant software
- Submit updates every quarter.
If your business is eligible, you can sign up for MTD for Income Tax on the government website.
Once you’re set up, MTD could make managing your business taxes less complicated and more efficient.
3 practical ways to prepare your business for Making Tax Digital for Income Tax
Understanding the new rules and restructuring your record-keeping processes could take time, so it’s worth preparing for MTD well ahead of April 2026.
1. Work out if and when you may need to use MTD for Income Tax
From 6 April 2026, you’ll need to comply with MTD for Income Tax if:
- You’re an individual registered for self-assessment
- You receive an income from self-employment, property, or both
- You have a “qualifying income” of more than £50,000 in the 2024/25 tax year (this will fall to £30,000 from April 2027).
Your qualifying income includes your gross income (before you deduct expenses), from all relevant sources in the previous tax year.
For example, if you earned £50,000 from self-employment and £30,000 from rental income in the 2024/25 tax year, your total qualifying income would be £80,000. As such, you would most likely need to use the MTD service to report your income to HMRC from 6 April 2026.
2. Set up MTD-compliant software
You’ll need to keep your digital records using commercial software that is compatible with HMRC systems. Popular choices include:
- Sage
- QuickBooks
- Xero
Provided that you meet all the MDT requirements – such as submitting quarterly updates – you can choose whichever platform suits your needs and preferences. This could mean that you use a single piece of software or multiple products.
When choosing which software to use, it might help you to consider:
- The software’s capabilities for creating digital records – Some products may allow you to manually enter your business income and expenses, others may be able to capture data by connecting directly to your online business bank account.
- Whether you wish to continue using your existing spreadsheets – If so, you may want to choose bridging software that can connect to your current spreadsheets or accounting software.
- How the software submits your records to HMRC – You’ll need to submit both quarterly updates and your annual tax return. Some software can do both, but others will only do one. So, it’s important to check this before paying for a new system.
- The software’s capabilities for reporting all business income sources – Not all products will have the functionality to report on multiple income sources. HMRC recommends that you make sure your software can report on all business and personal income sources.
- Compatibility with your accounting period – If your accounting periods runs from 1 April to 31 March, you’ll need to choose software that supports calendar update periods.
3. Review and update your financial reporting processes
If you’re used to only reporting your income annually through a self-assessment tax return, you’ll need to adapt your process to ensure that HMRC receives quarterly updates.
The level of detail you need to include when submitting your reports remains the same as under the current self-assessment system. So, it’s important that you – or your accountant – is prepared to meet the quarterly deadlines.
According to the Institute of Chartered Accountants in England and Wales (ICAEW) the deadlines for quarterly updates are:
- 7 August
- 7 November
- 7 February
- 7 May
These apply, irrespective of your business’s accounting period.
After you’ve submitted your fourth quarterly update, you’ll need to submit a final declaration to clarify your tax position.
It’s crucial that you’re prepared for this new schedule of reporting as you could incur penalties for late or missing submissions.
Get in touch
As you can see, if you qualify for MTD for Income Tax, there’s a lot to think about ahead of April 2026. Getting all your ducks in a row as early as possible could ensure that your business finances are compliant when the time comes.
If you need some help getting your business – and personal – finances in order, we’d love to hear from you.
To find out more, please get in touch. Email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Approved by Best Practice IFA Group Ltd on 11/02/2025
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
