How to Prepare Your Business for Making Tax Digital
The way UK businesses handle tax is changing, and if you're a sole trader, landlord, or small business owner, you’ll want to be ready. The shift to Making Tax Digital (MTD) is part of HMRC’s push to modernise tax administration, replacing traditional paperwork with streamlined digital processes.
MTD is rolling out in phases, with Income Tax next on the list. So let’s walk you through what it is, how it affects your business, and how to stay ahead of the curve.
What is Making Tax Digital (MTD)?
Making Tax Digital is HMRC’s long-term strategy to digitise the UK’s tax system. It’s designed to make taxes more accurate, efficient, and easier for individuals and businesses alike. The move away from manual processes aims to reduce common errors and encourage more frequent engagement with your tax responsibilities.
MTD started with VAT in 2019, requiring VAT-registered businesses to keep digital tax records and submit their returns using compatible software. The next phase targets Income Tax Self Assessment (ITSA), with Corporation Tax set to follow further down the line.
What is MTD for Income Tax?
MTD for Income Tax applies specifically to self-employed individuals and landlords earning income through sole trading or property rentals. Instead of completing one big Self Assessment at the end of the year, you’ll be required to submit quarterly updates plus a final declaration using MTD-compatible accounting software.
Here’s the government’s planned rollout:
April 2026: If your annual income exceeds £50,000
April 2027: If your annual income exceeds £30,000
If your income falls within these thresholds, you’ll be required to keep digital records, file updates every three months, and confirm your final tax position at the end of each tax year.
How Does MTD Impact Your Business?
Moving to MTD for business will likely require a few changes to how you manage your accounts, but it doesn’t have to be complicated.
Here’s what you’ll need to know:
MTD requires all income and expenses to be recorded digitally using compliant software.
Submit quarterly updates to HMRC via your chosen MTD-compatible platform. These updates reflect your business activity every three months.
File a final declaration after the tax year ends, confirming your total income and accounting for any reliefs or adjustments.
With these regular updates, you’ll gain a real-time view of your tax position, making it easier to plan and manage your cash flow.
You’ll also enjoy more efficient collaboration with your accountant, as they’ll have access to accurate and up-to-date figures all year round.
What Are the Requirements for MTD?
If you're preparing to comply with Making Tax Digital, it's important to understand what’s expected. If you’re a sole trader, landlord, or small business owner, MTD introduces a set of digital requirements designed to modernise your approach to tax compliance in the UK.
Let’s explore what these requirements mean in practice and how to meet them confidently.
Digital Record-Keeping
Under MTD for business, keeping your records in a notebook or spreadsheet just won’t be sufficient anymore.
You’ll be required to:
Maintain digital records of all income and allowable expenses.
Keep a separate ledger for each business or property income stream
Store these records securely for at least 5 years, as HMRC may request access.
Quarterly Submissions
One of the biggest changes under MTD for income tax is the move from annual tax returns to more frequent reporting.
Here’s what you’ll need to do:
Submit quarterly updates to HMRC every three months, summarising your income and expenses.
Filing deadlines usually fall in August, November, February, and May, based on your accounting period.
These updates are submitted via your MTD-compliant software, not manually through GOV.UK.
Final Declaration
Although quarterly submissions keep HMRC in the loop throughout the year, you’ll still need to confirm the full picture with a final declaration.
This replaces the traditional Self Assessment return and requires you to:
Submit a comprehensive summary of your income for the full tax year.
Include any reliefs, adjustments, or business expenses that apply.
Confirm your final tax liability and pay any outstanding tax.
Use of HMRC-Recognised Software
To participate in MTD, you must use HMRC-recognised MTD software. This software will handle everything from record-keeping to sending updates directly to HMRC without the need for manual input or spreadsheets.
Some of the most trusted MTD software UK solutions include:
Sage Accounting: Ideal for SMEs that need robust accounting tools.
Xero Accounting: Popular for its user-friendly interface and smart automation.
Step-by-Step Guide to Prepare for MTD
If you’re wondering where to begin with Making Tax Digital, you’re not alone. With a clear plan in place, the transition to digital tax reporting can be surprisingly smooth, even empowering.
Here’s a simple, step-by-step guide to help you prepare for Making Tax Digital
Step 1: Assess Your Business Readiness
The first step is to check whether MTD applies to you, and when.
Start by reviewing your annual turnover. If your self-employment or property income exceeds £50,000, you’ll be required to follow MTD for income tax rules from April 2026. The threshold drops to £30,000 in 2027 and is expected to fall to £20,000 by 2028.
To be certain, use the HMRC MTD eligibility checker online, and keep an eye on official correspondence. HMRC may notify you by letter or email when it’s time to register.
Step 2: Choose the Right MTD Compliant Software
Next, you’ll need to select MTD-compliant software that suits your business setup.
There are plenty of options out there, so take your time comparing:
Features: Does it support multiple income sources, bank integrations, and real-time reports?
Pricing: Is it cost-effective for a sole trader or small business?
Support: Will you get help if something goes wrong?
Step 3: Set Up Digital Bookkeeping
Once you’ve chosen your software, it’s time to set up your digital records.
Here’s what to do:
Migrate existing data from spreadsheets or paper into your new system.
Categorise transactions accurately, including income, expenses, and deductions.
If you have multiple income streams (e.g. rental income and freelance work), create separate ledgers or tabs within the software.
Step 4: Train Your Team
If you’ve got others helping with your finances, whether that’s an in-house bookkeeper or an admin assistant, make sure they’re on board with your new system.
Here’s what to cover:
How to use the software effectively
What permissions do they need to access or edit records
Who’s responsible for what (data entry, reconciliations, submissions)
Step 5: Register for MTD
Once you’re confident with your system and record-keeping, it’s time to register for MTD.
To register through the GOV.UK, you’ll need:
Your National Insurance number
Your accounting method (cash basis or traditional accrual)
Details of your business income sources
Your chosen software is connected and ready
If you're working with an accountant, they can register you using their Agent Services Account (ASA) and manage submissions on your behalf.
Step 6: Establish Internal Processes
Finally, to stay organised year-round, set up a repeatable system to keep you on track.
This might include:
A checklist for each quarter (e.g. upload receipts, reconcile bank feed, review figures)
A calendar with reminders for submission deadlines
Clear roles and responsibilities if others are involved
Alerts and reports from your software to flag missing data or upcoming obligations
What We Think?
Making Tax Digital may feel like a big shift, and in many ways, it is. But it’s also a welcome step towards a more modern, accurate, and stress-free way of managing your business taxes.
By switching to paperless tax records and embracing cloud bookkeeping, you’ll not only meet HMRC’s new requirements but also gain better visibility over your income, expenses, and liabilities throughout the year.
Early preparation is the key. Getting set up now means you’ll avoid disruption later, and you’ll be in a much stronger position to manage your finances and plan for the future.
Get MTD-Ready with Barnstone Accountancy
Trying to cope with the transition to Making Tax Digital doesn't have to be overwhelming. Barnstone Accountancy offers comprehensive MTD services designed to make your journey as smooth as possible, supporting you through every aspect of HMRC MTD registration and ongoing compliance.
Our services include complete setup and onboarding with MTD software UK solutions, ongoing management of your quarterly updates and year-end declarations, expert cloud bookkeeping support, and tailored training to help you make the most of your new digital systems.
We also provide specialist advice on choosing the right MTD software for your specific business needs, along with comprehensive support for payroll and pensions, company formation, and new business startup services, ensuring complete tax compliance across all aspects of your business.
If you're a sole trader, landlord, or growing business owner, we understand that every business has unique requirements. Our experienced team can help you understand exactly how MTD for income tax affects your situation and develop a tailored plan to ensure full compliance whilst maximising the benefits of digital reporting.
Get in touch today for a free 30-minute consultation to discuss how Barnstone Accountancy can support your MTD journey and meet your wider financial needs.
FAQs
Who needs to sign up for MTD?
If you’re a sole trader or landlord with annual income over £50,000, you’ll need to follow MTD for Income Tax rules from April 2026. This threshold drops to £30,000 in April 2027 and £20,000 by 2028.
2. Who cannot sign up for MTD?
Not everyone is eligible to sign up for Making Tax Digital voluntarily just yet. You cannot register for MTD for Income Tax if any of the following apply:
You have an active payment plan with HMRC
You’re a partner in a business partnership
You claim Married Couple’s Allowance or Blind Person’s Allowance
You’re currently bankrupt or insolvent, or expect to be
You’re an MP, minister of religion, or a Lloyd’s underwriter
You receive income from fostering or a shared lives scheme
You have income from a trust
You’re undergoing a compliance enquiry
You use income averaging schemes (common among farmers, writers, and artists)
You’re trying to sign up on someone else’s behalf, unless you’re an authorised agent (e.g., an accountant). This restriction includes:
Insolvency practitioners
Nominees
Solicitors
3. What are the deadlines for MTD for Income Tax?
April 2026: If your income is over £50,000
April 2027: Income over £30,000
April 2028 (expected): Income over £20,000
HMRC sets these dates as part of the phased MTD rollout.
4. What are the benefits of MTD for Income Tax legislation?
Improved tax accuracy and fewer errors
Less admin through automation
Real-time insight into tax liabilities
Better financial planning and collaboration with your accountant
Less last-minute pressure when tax deadlines approach