Making Tax Digital: Our guide on everything you need to know

HMRC first announced plans for Making Tax Digital (MTD) in 2015, and after years of planning, the initiative will finally go ahead this year. 

Its introduction is to simplify the way you file your self-assessment, through using new software and submitting quarterly updates. 

Depending on your turnover, the changes will come into effect as soon as April for sole traders in the UK.

With that date just on the horizon, here’s everything you need to be well-equipped for MTD.

1. What is MTD? 

MTD is the new system that replaces manual tax returns with digital records and is designed to simplify tax and bookkeeping reporting. 

MTD is also in place for businesses, but for the rest of this blog, when we refer to MTD, we’re talking about income tax. 

One major change is the new quarterly income tax updates, in addition to the annual self-assessment return on January 31.  

With MTD, income tax updates will need to be submitted by the 7th of the month after the end of each quarter. This would mean that to update from July 6 to October 5, you’ll need to file your update by November 7. 

It aims to: 

• Report tax returns more accurately

• Make information easier to share with clients, accountants and HMRC

• Keep your records more organised

MTD applies if you: 

• Are a sole trader or landlord who is registered for self-assessment

• Receive income through self-employment, your property or both

There are various thresholds to meet, set by the government, which dictate when you will need to be compliant with the new system.

2. What software do I need? 

To comply with the new law, you’ll need software that can log your income, business expenses, and VAT information. 

The software has to be HMRC-recognised, and there are plenty of software providers out there. So, depending on the size of your business and what level of accounting features you prefer, take some time to pick the software you prefer. 

There’s an HMRC software finder to assist you with your choice, with free providers and paid-for options available. Free versions tend to have limited features compared with paid alternatives.

But if you want to keep managing your business records with your spreadsheet, do not panic. You can use bridging software, which imports tax information from your spreadsheet and sends it to HMRC in just a few minutes. 

3. When do I need to be ready? 

Most sole traders who pay income tax through self-assessment will need to be MTD-ready to ensure they are complying with the law. 

If your gross income (total turnover before expenses) from self-employment is: 

• Over £50,000 for the 2024/25 tax year, the date to have everything ready is April 6, 2026. 

• Over £30,000 in the 2025/26 tax year, you need to be compliant from April 6, 2027, or 

• Over £20,000 in the 2026/27 tax year, the Government plans to be MTD compliant by April 6, 2028

However, there are a small number of reasons you might be exempt from the new system. 

You are exempt if: 

• Your qualifying income is £20,000 or less 

• Due to disability, religion or accessibility, you are digitally excluded 

• You’re a trustee filing from someone who has died 

Should you be exempt based on your annual turnover, this will automatically be actioned; otherwise, you’ll need to let HMRC know the reason why. 

 4. What if I do not comply with MTD? 

There are penalty charges for not complying with the new system on time. MTD uses the same points method as for users filing their VAT returns. 

For example, you’ll be fined £200 if you reach four points, but you could be charged up to £3,000 if you continue to not use the HMRC-approved software. 

These differ from late payment fees, where interest is added to your payment as soon as it becomes late, with further charges added after 16 and 31 days. This accrues until you clear the outstanding balance. 

To avoid any penalties and keep your peace of mind, try to stay as organised as possible with your digital records.