What is Making Tax Digital?

Key takeaways

• Making Tax Digital changes how you report tax, not how much you pay, by requiring digital records and regular updates to HMRC.

• It already applies to all VAT-registered businesses and will be phased in for sole traders and landlords from 2026 onwards.

• You’ll need HMRC-compatible software, though some business bank accounts now include built-in MTD tools.

• Getting organised early can reduce stress, errors and costs, whether you manage MTD yourself or use an accountant.

What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is a UK government initiative that is changing the way individuals and businesses keep records and report tax to HM Revenue & Customs (HMRC). Its aim is to make the tax system more efficient, more accurate and easier to manage by moving away from paper records and manual returns.

Under Making Tax Digital, taxpayers are required to keep digital records of their income and expenses and use HMRC-compatible software to submit information to HMRC. Instead of relying solely on an annual tax return, relevant taxpayers send regular updates throughout the year, giving HMRC a more up-to-date picture of their tax position.

MTD applies across different taxes, including VAT and income tax. While it does not change how much tax you pay, it does change how and when information is reported, encouraging better record-keeping and reducing the risk of errors.

Why has the Government introduced Making Tax Digital?

The Government introduced Making Tax Digital (MTD) to modernise the UK tax system and reduce errors caused by paper records and manual reporting.

By requiring digital record-keeping and more regular updates to HMRC, MTD aims to improve accuracy, make it easier for people to keep on top of their tax affairs, and close the tax gap between what is owed and what is actually collected.

Who does MTD apply to right now?

Making Tax Digital is being introduced in stages, partly depending on how much revenue you are earning. It currently applies to the following:

• Sole traders with qualifying income from self-employment above the relevant thresholds

• Landlords with qualifying rental income above the relevant thresholds

• Individuals with a combination of self-employment and property income that exceeds the thresholds

• VAT-registered businesses, regardless of turnover

Find out if and when you need to use Making Tax Digital for Income Tax.

Who MTD does not apply to currently

• Individuals on PAYE only. MTD does not currently apply to people whose income comes solely from Pay As You Earn (PAYE) employment or pensions. 

• Lower income earners. If your self-employment and rental income total £20,000 or less, you are currently not in scope of MTD for income tax.

• Limited companies and partnerships. MTD for Income Tax does not yet apply to limited companies (they pay corporation tax) or partnerships under current rules. 

• Other groups with exemptions. Certain taxpayers can be exempt (for example, those unable to use digital tools for practical reasons or without a National Insurance number), but exemptions must be confirmed by HMRC.

When do I need to comply?

MTD for Income Tax Self Assessment is being introduced in phases based on income thresholds* from self-employment and/or property rental:

*Qualifying income means gross income from self-employment and/or property before expenses are taken off.

All businesses that are registered for VAT must already use MTD for VAT, keep digital VAT records and submit VAT returns using HMRC-compatible software.

Which taxes are covered?

Making Tax Digital covers several UK taxes, although not all are fully in scope yet.

VAT

VAT is a tax charged on most goods and services. MTD already applies to all VAT-registered businesses, which must keep digital records and submit VAT returns using compatible software.

Income Tax (Self Assessment)

Income Tax is paid on earnings such as self-employment profits and rental income. MTD for Income Tax is being phased in for sole traders and landlords above certain income thresholds, replacing the traditional annual Self Assessment return.

Corporation Tax

Corporation Tax is paid by limited companies on their profits. It is not yet covered by MTD, although HMRC plans to bring it into the system in the future.

PAYE and other personal taxes

PAYE Income Tax (from employment and pensions), Capital Gains Tax and Inheritance Tax are not currently covered by MTD.

How does MTD change how I submit tax returns?

Traditionally, most people submitted an annual Self Assessment tax return to HMRC, often using paper forms or a single online submission.

Making Tax Digital (MTD) changes this by requiring digital record-keeping throughout the year and submitting tax information more regularly using HMRC‑compatible software.

This aims to make your tax reporting more accurate and up to date, rather than relying on one big annual return.

For example:

Traditional method

If you were a sole trader or landlord, you might have kept records in spreadsheets or on paper and only filled out a Self Assessment form once a year. You’d calculate your total income, allowable expenses, and tax owed, then submit everything in one go, usually just before the 31 January deadline.

With Making Tax Digital

Under MTD, you’ll keep digital records of income and expenses as you go. Instead of a single annual return, you submit quarterly updates through HMRC‑approved software.  
 
These updates give HMRC a running view of your income and tax position. At the end of the year, you still submit a final declaration, but much of the work is already handled through the regular submissions.

Does MTD change how often I have to make payments?

No, Making Tax Digital does not change how often you pay your tax. Your payment deadlines for Income Tax, VAT, and other taxes remain the same. MTD only changes how and when you report your income and expenses digitally to HMRC, not the actual timing of payments.  
 
You still need to make payments by the usual dates, even if you are submitting quarterly updates under MTD.

Making Tax Digital software

Can I use my business bank account for Making Tax Digital without paying for additional accounting software?

Yes, you may be able to manage Making Tax Digital (MTD) directly through your business bank account without paying for additional accounting software, but it depends on the bank you choose and how simple your tax situation is. Examples of business bank accounts that include built‑in MTD features for VAT and Income Tax, include:

• Starling Bank: Has integrated MTD‑ready tools in the app to help sole traders and small businesses manage digital records and submissions. It typically integrates with external accounting too but offers embedded support.

• Monzo Business: Will offer a built‑in file‑to‑HMRC tool powered by Sage that lets sole traders and landlords submit tax information (including quarterly updates and year‑end returns) directly from the Monzo app.

• Lloyds Bank Business: Is launching an integrated MTD for Income Tax tool within online banking that lets customers categorise income/expenses and submit quarterly updates to HMRC alongside their VAT submissions.

• Tide Business: Offers HMRC‑recognised MTD tools for VAT now and will support MTD for Income Tax in its app, combining banking and tax compliance in one place without needing separate software.

Note that even with built‑in tools, you still need to keep your digital records accurate and ensure your transactions are categorised correctly. The bank’s software helps submit them to HMRC, but you’re responsible for the data.

Can someone else do this for me?

Yes, a bookkeeper or accountant can manage your Making Tax Digital submissions, preparing and sending VAT or Income Tax information to HMRC on your behalf.

To do this, you’ll need to give them authorised access to your HMRC online account and, in some cases, register them as an agent so they can submit digitally for you.

Even with a professional handling submissions, you must keep your own records accurate and up to date and provide all the necessary information, as they can only work with the data you supply.

What happens if I don’t comply?

If you don’t comply with Making Tax Digital (MTD) requirements, HMRC can take action. Initially, they may issue reminders or warnings, especially if it’s your first time missing a submission or filing incorrectly. However, continued non-compliance can lead to:

• Penalties and fines: HMRC can charge fixed penalties for late or missing submissions, and additional penalties if errors are not corrected.

• Interest on unpaid tax: If your digital submissions are late and tax remains unpaid, interest may accrue.

• Loss of certain allowances or benefits: Incorrect reporting could affect eligibility for schemes tied to accurate tax filings.

Even if you use an accountant or MTD-enabled software, you remain legally responsible for keeping records up to date and ensuring accurate submissions.

Frequently asked questions

Making Tax Digital can feel confusing at first, especially as it’s a change being imposed rather than chosen – but the sooner you get to grips with it, the better. Getting organised early can save you stress, improve visibility over your finances and, in many cases, save you money in the long run.

Costs don’t have to be high: there are affordable software options, and spending a little time understanding the basics of tax and record-keeping can reduce the need to outsource everything. That said, if you’d rather focus on running your business, using an accountant or bookkeeper remains a perfectly valid option.

Compare MTD-compliant business accounts with MoneySuperMarket

If you’re looking for the right business account, MoneySuperMarket makes it easy to compare options side by side.

You can review key features like interest rates, monthly fees, overdraft availability, and any restrictions, helping you find an account that suits your business needs.

By comparing multiple providers in one place, you can make a more informed choice, ensuring you get the best combination of cost, flexibility, and functionality for your sole trader, landlord, or small business requirements.