Making Tax Digital: What UK Businesses Need to Know

Making Tax Digital (MTD) is HMRC's digital transformation project that requires all but the smallest businesses to file tax returns online using compatible software — no more spreadsheets submitted manually to HMRC. If you run a business, are self-employed, or employ staff, you need to understand who's affected, what software you need, and when the deadlines arrive. This guide cuts through the jargon and gets you ready.

What is Making Tax Digital?

Making Tax Digital is HMRC's move to digital record-keeping and filing. Instead of calculating tax offline and uploading a single return file, you'll use approved software to log transactions in real time, pull VAT or income reports at the push of a button, and submit them directly to HMRC. The goal: reduce errors, speed up refunds, and catch underpayment earlier.

The system doesn't stop you filing annually — you'll still submit one return a year — but HMRC sees your records throughout the year. If you're VAT-registered, MTD for VAT has been mandatory since April 2019. Income tax and corporation tax filing have been rolling out since 2024, with different compliance dates depending on business size and turnover.

Who Needs to Comply, and When?

This depends on your business structure and income.

VAT-registered businesses (mandatory since April 2019): All VAT-registered businesses must use MTD for VAT-compatible software. If your taxable turnover exceeds £90,000 (the 2025/26 threshold), you're likely registered. Turnover below that is voluntary, and voluntary registrants are also required to use MTD. There's no delay here — this is already live. Use our sales tax calculator to check the impact on your business.

Self-employed (income tax MTD): Income tax MTD went live in April 2024. From 6 April 2025, all self-employed people with turnover above £10,000 must use MTD-compatible software to file their tax return. If you're below £10,000, filing is optional but encouraged. Deadline: 31 January, as always.

Limited companies (corporation tax MTD): Corporation tax MTD also went live in April 2024. From 1 April 2025, all companies (with rare exemptions) must file using MTD. If you're a limited company director, your accountant will likely handle this, but you should know it's happening and that your tax software costs may increase. Read more on calculating your corporation tax liability to understand your MTD obligations.

Employees (PAYE): If you're a salaried employee, your employer handles PAYE and most of the MTD compliance for them. You don't need to do anything — check your payslip and tax code are correct. The standard tax code 1257L means you get £12,570 tax-free; read about tax-free allowances to understand if yours might be different. If you're also self-employed, you'll file your own return on top of PAYE. Our payroll tax guide has the details on what your employer should be deducting.

What Software Do You Need?

HMRC publishes a list of MTD-compatible software providers. Options range from free basic tools to premium integrated packages costing £50–200+ per month.

For VAT: Common MTD-compatible VAT software includes Xero, FreeAgent, Kashflow, Wave, and QuickBooks. All have built-in VAT calculators and scheduling. If you're small, Wave is free. If you need invoicing plus VAT bundled, Xero (starts £10/month) or FreeAgent (£20/month) are common picks. Many accountants use Sage or other enterprise tools.

For self-employed income tax: The same platforms work for income tax. Xero, FreeAgent, Wave, and Kashflow all support MTD-compatible filing. One platform handles both VAT and income tax, so you're not juggling multiple tools.

For limited companies: You'll typically use integrated accountancy software — Xero, FreeAgent, Sage, or a professional accountant's software. Many accountants have already migrated to MTD-compatible systems. Confirm with your accountant that they're MTD-ready.

Spreadsheet users: If you currently file via spreadsheet and accountant-prepared returns, you'll need to switch to approved software. HMRC's full software list has 100+ providers; many are free or under £30/month for small business.

How to Prepare Your Business for MTD

Start now, even if your deadline isn't until April 2026.

Step 1: Check if you're affected. Self-employed above £10,000 turnover? Limited company? VAT-registered? If yes, MTD applies to you. Use HMRC's interactive guide for your business type.

Step 2: Choose software. Don't just pick the cheapest. Test a free trial. You'll be using this for invoicing, expense tracking, VAT reconciliation, and filing. It needs to fit your workflow. Many accountants will recommend software they're already trained on — listen to them. If you use an accountant, check they're MTD-ready before January 2026.

Step 3: Migrate your records. If you're switching from spreadsheets or older accounting software, export your data and import it into the new system. This takes a few hours to a day. Test the import — don't discover missing transactions in January.

Step 4: Digitise your books. MTD requires you to keep records in digital form. You don't need receipts scanned and filed perfectly, but you need to be able to evidence your income and expenses. Bank feeds (automated download of transactions from your bank) make this easy. If you're using Xero, FreeAgent, or similar, connect your bank and most reconciliation is automatic.

Step 5: Plan for accountant fees. If you use an accountant, ask about MTD. Some charge a small one-off setup fee, others fold it into their annual fee. Clarify costs upfront — fees often rise slightly as accountants spend more time ensuring compliance.

Common MTD Questions

Can I still use my accountant? Yes. MTD doesn't replace accountants — it changes how they receive your data. Instead of sending them a spreadsheet or shoebox of receipts, you'll give them read-only access to your MTD-compatible software, and they can pull reports in seconds. Many accountants now require this.

What if I miss the deadline? Penalties begin on day one of late filing. HMRC charges £100 for late filing (up to 3 months late), then £10 per day for delays beyond 3 months, up to £900. Interest also accrues on any underpaid tax. Don't miss it — set a reminder for 20 January.

Do I need to buy expensive software? No. Wave, Manager, and other free platforms are MTD-compatible. Paid software (Xero, FreeAgent) adds invoicing, expense tracking, and accountant integrations, which save time. For a solo self-employed person, free is fine. For a multi-employee business, paying for integration is worth it.

What about dividends? If you're a limited company taking dividends, your dividend tax is separate from corporation tax. MTD covers corporation tax filing; you still declare dividends on your personal tax return. See our guide on dividend tax for the detail.

Is my data safe? Yes. MTD software is held to the same security standards as online banking — HMRC uses APIs and encrypted connections. Your data never leaves the software provider's secure servers. Choose established providers (Xero, FreeAgent, Sage) with strong reputations.

What if I'm below the MTD threshold? You can still file voluntarily via MTD software. It's optional but encouraged — easier for you and HMRC sees fewer spreadsheet errors. Our guide on Limited Company vs Sole Trader compares the admin and tax costs of each structure, which helps you decide if MTD software is worth it at lower turnover.

Can I change software later? Yes, but it's a hassle. Choose your first platform carefully, but switching is possible — you export data from one system and import to another. Avoid switching mid-tax-year.

What records do I need to keep for MTD? Digital records of all income and expenses — invoices, receipts, bank statements. You don't need physical paper, but you must be able to evidence what you claim. HMRC can enquire up to 4 years back (6 years if carelessness is suspected, 20 years for deliberate evasion). Learn how HMRC handles enquiries and keep organised backups.

Frequently Asked Questions

Q: When exactly does my business need to be MTD-compliant? A: If you're VAT-registered, you're already required (since April 2019). If you're self-employed with turnover above £10,000, you must file via MTD from January 2026 (tax year 2024/25 onwards). If you're a limited company, corporation tax MTD is mandatory from 1 April 2025 onwards. Check HMRC's timeline for your specific business type.

Q: Do I have to change my accountant? A: No, but your accountant must be MTD-ready. Ask them directly: "Are you set up to accept MTD-compatible software?" If they say no or you're unsure, ask if they can recommend a software provider and how they'll integrate it. If they refuse, you may need to switch to a firm that's MTD-capable.

Q: Will MTD cost me more in accountancy fees? A: Possibly slightly, but not necessarily. Some accountants charge the same and absorb the extra work. Others charge a one-off setup fee (£50–200) to migrate your records. Others build a small fee increase into the annual charge. Ask upfront and get it in writing.

Q: What if I'm part-time or a side business below the £10,000 threshold? A: Filing is optional. You don't need to use MTD, but you still need to file a tax return if you're self-employed and earned any taxable income. MTD-compatible software makes it easier and is often free, so consider using it anyway.

Q: Can I use my personal bank feeds in my MTD software? A: Yes, most MTD software has automatic bank feeds. You connect your business bank account to your software, and transactions download automatically each day. This is the easiest way to keep records up to date and minimize reconciliation at year-end.

Q: Will my accountant handle all MTD compliance for me? A: Mostly yes, if they're MTD-ready. They'll typically reconcile your accounts, prepare your tax return, and submit it for you. However, you're responsible for keeping accurate records in your MTD software. Your accountant can't create data that doesn't exist in your system, so the onus is on you to record income and expenses as they happen.

Q: What if I have multiple businesses? A: If you have multiple self-employed businesses or operate alongside employment, you'll file one tax return covering all income. Each business should have its own MTD records, but you'll consolidate them on a single return. Ask your accountant how they handle multi-business filing — good software supports this.

Q: What's the easiest way to stay on top of MTD without an accountant? A: Use an integrated MTD platform (Xero, FreeAgent, Wave) with bank feeds enabled. Spend 30 minutes a week reconciling transactions. File 6 weeks before your deadline rather than the week before. Many small business owners do this solo without issue — the software does most of the heavy lifting.

Next Steps

1. Confirm your deadline. Check HMRC's Making Tax Digital timeline for your business type.
2. Choose or trial MTD software. Start with a free trial from Xero, Wave, or FreeAgent.
3. Speak to your accountant. Confirm they're MTD-ready and agree on the handover process.
4. Migrate and test. Export old records, import to new software, verify data integrity.
5. Set calendar reminders. File before 31 January (self-employed) or 31 March (companies).

If you're a limited company, our corporation tax calculator can help you forecast next year's bill. For self-employed or VAT-registered businesses, our sales tax calculator shows VAT liability in real time.