Making Tax Digital for Small Businesses: Full 2026 Guide

Making Tax Digital (MTD) is HMRC’s programme to bring UK tax reporting online. It is no longer a future concept — MTD for VAT is fully in force, and MTD for Income Tax Self Assessment (MTD ITSA) starts mandatory rollout in April 2026. If you are a sole trader, landlord or small business, this guide explains exactly what MTD means for you, what software to use and how to prepare.

What is Making Tax Digital?

MTD is a legal requirement to keep digital records and submit certain tax information to HMRC using compatible software. The change is fundamentally about three things:

1. Digital records — your books are kept in software, not on paper or in a spreadsheet (with some narrow exceptions).
2. Digital links — data flows from your records to HMRC without manual retyping; spreadsheets are allowed but only with “bridging software” connecting them.
3. More frequent reporting — for MTD ITSA, you submit quarterly updates to HMRC, not just a once-a-year return.

MTD for VAT: where things stand

All VAT-registered businesses, regardless of turnover, are within MTD for VAT. You must:

• Keep digital VAT records (date, value, VAT rate of each transaction).
• Submit VAT returns through MTD-compatible software, not via the old HMRC online portal.
• Maintain digital links — exporting a spreadsheet figure and typing it into another spreadsheet manually is not allowed.

Penalties for missed VAT deadlines now operate under a points-based system: each late submission earns a point, and once you hit a threshold (4 points for quarterly filers) a £200 penalty applies, with further penalties for each late submission until points are cleared.

MTD for Income Tax Self Assessment (MTD ITSA): the 2026 timeline

This is the change that affects sole traders and landlords. The mandatory dates:

Date	Who must comply
6 April 2026	Self-employed and landlords with gross income over £50,000
6 April 2027	Self-employed and landlords with gross income over £30,000
TBC	Sole traders/landlords with income £20,000 – £30,000 (under consultation)
Deferred	Partnerships and very small businesses (announced separately)

“Gross income” is the total from self-employment plus property income, before deducting expenses. Combine your sole trader turnover with your rental income to test the threshold.

What MTD ITSA actually requires

If you are within scope from April 2026, you must:

1. Keep digital records of business income and expenses (and separately for property income).
2. Submit quarterly updates to HMRC — summary totals of income and expenses for each three-month period, due roughly one month after the quarter ends.
3. Submit a final declaration by 31 January after the tax year (replacing the current Self Assessment return), confirming the year’s figures and any other taxable income.

The quarterly updates are not full tax returns — they are summary totals. The final declaration is where adjustments, reliefs, capital allowances and other income are reported.

Digital records: what you must actually keep

A common misunderstanding is that MTD just means “file online”. It does not — the legal requirement is to keep your records digitally at source. For each business and each property, you must record, in compatible software:

• the date of every transaction;
• the amount; and
• the category (the type of income or expense).

You can keep digital copies of invoices and receipts, but the underlying figures must live in software rather than on paper or in a manually-totalled notebook. If you use a spreadsheet, you need bridging software so the data flows to HMRC through a “digital link” — copying a total and retyping it elsewhere breaks the chain and is not compliant. Getting your bookkeeping onto bank feeds and receipt-capture now is the single best preparation step.

MTD ITSA vs the current Self Assessment system

	Current Self Assessment	MTD ITSA (from April 2026)
Records	Any format, incl. paper	Digital, in compatible software
Filing frequency	One annual return	4 quarterly updates + 1 final declaration
Deadline	31 January	Quarterly (~1 month after quarter end) + 31 January final
Penalties	£100 fixed for late return	Points-based for each late submission
Income covered	Reported once a year	Summarised every quarter, finalised annually

The headline change is rhythm: tax becomes a quarterly habit rather than a January scramble. For many sole traders that is actually easier to manage — provided the bookkeeping is kept current.

What this means in practice

Take a Reigate landlord with two rental properties earning £55,000 a year and small expenses. From April 2026 they will move from filing one Self Assessment return per year to:

• Four quarterly property income updates per year, each due roughly one month after quarter end.
• One final declaration by 31 January after the tax year.

That is five MTD submissions per year, plus their personal Self Assessment final declaration — instead of one annual return.

MTD-compatible software comparison

For small businesses and sole traders, common MTD-compatible packages include:

Software	Typical price	Best for
Xero	£15–£59/mo	Limited companies, growing businesses, multi-user
QuickBooks Online	£12–£60/mo	Self-employed and small businesses, strong app
FreeAgent	Free with NatWest/Mettle business account	Freelancers, contractors, one-person companies
Sage Accounting	£15–£40/mo	Larger SMEs, traditional bookkeeping users
Hammock	£12/mo	UK landlords specifically — built around MTD ITSA
Coconut	£6–£25/mo	Sole traders and self-employed
FreshBooks	£15–£40/mo	Service businesses, freelancers

HMRC also lists “bridging software” — tools that connect Excel spreadsheets to HMRC for MTD purposes. These are accepted for MTD VAT and will be accepted for MTD ITSA, but you still need digital links between cells.

See HMRC’s list of MTD ITSA software for the official current list.

How to get ready for MTD ITSA before April 2026

1. Check your income. Total self-employment turnover plus gross rental income. If over £50,000, you are in from April 2026.
2. Pick software. Choose now and start using it well before April so you have a clean opening balance and have built habits.
3. Get bookkeeping under control. Bank feeds, receipt capture and proper expense categorisation are essential. The old “shoebox of receipts” approach does not work under MTD.
4. Decide on quarterly periods. Standard quarters end 5 July, 5 October, 5 January, 5 April. You can elect calendar quarters (30 June, 30 September, 31 December, 31 March) which align with most bookkeeping software defaults.
5. Talk to your accountant. Many practices are moving clients to bookkeeping retainers under MTD because the workflow is fundamentally quarterly now, not annual.

MTD ITSA penalties

The new penalty regime for late MTD submissions and payments has been confirmed:

• Late submission: points-based, same as MTD VAT. 4 points = £200 penalty.
• Late payment: 0% for the first 15 days, 3% for days 16–29, 10% per annum after day 30 (annualised, charged daily).
• Interest on unpaid tax continues to accrue at the standard HMRC rate.

This is significantly tougher than the old Self Assessment £100 fixed penalty.

Frequently asked questions

Do I need MTD if my turnover is below £50,000? Not yet for income tax. From April 2027 the threshold drops to £30,000. Below £30,000 you remain outside MTD ITSA for now, but you can opt in voluntarily. MTD VAT continues to apply if you are VAT-registered regardless of turnover.

Can I still use a spreadsheet? Yes, but only with bridging software that creates the “digital link” to HMRC. You cannot manually type a spreadsheet total into HMRC’s portal — that is no longer allowed.

What about partnerships? Partnerships have been deferred and a separate timetable will apply. Watch HMRC announcements.

Will my accountant submit on my behalf? Yes. Most accountants act as your agent under MTD and submit quarterly updates and the final declaration. You still need digital records though — your accountant cannot reconstruct from receipts in a shoebox under MTD.

How does MTD affect Making Tax Digital for VAT? MTD for VAT continues unchanged. If you are VAT-registered and within MTD ITSA, both apply — but the digital records overlap (sales, expenses) so most software handles both with the same data.

Get help with MTD setup

We help small businesses, sole traders and landlords get ready for MTD: software selection and setup, opening balances, bookkeeping training, and ongoing MTD-compliant submissions. If you are over the £50,000 threshold and not yet on software, April 2026 is closer than it looks — start now.

Read more about our Making Tax Digital services, book a free consultation, or read more on our blog about VAT registration and self assessment.

For the official MTD guidance, see GOV.UK: Making Tax Digital.