Making Tax Digital (MTD) 2026: The Complete Guide for UK Businesses

Making Tax Digital (MTD) is HMRC's programme to move UK tax records and submissions online. MTD for VAT is already mandatory for all VAT-registered businesses. MTD for Income Tax rolls out from April 2026 for sole traders and landlords earning over £50,000 – expanding to £30,000 in 2027 and £20,000 in 2028.

If you run a business in the UK, Making Tax Digital (MTD) affects you. Either it already does – or it will soon.

MTD is HMRC's programme to move the UK tax system online. The goal is simpler, more accurate tax reporting through digital records and software. For VAT-registered businesses, it's been mandatory since 2022. And from April 2026, it's expanding to Income Tax too.

This Making Tax Digital guide covers everything UK businesses and sole traders need to know – what MTD is, who it applies to, the key deadlines, and how to make tax digital work for your business.

What is Making Tax Digital (MTD)?

Making Tax Digital is HMRC's initiative to digitise the UK tax system. Instead of paper records and manual submissions, businesses and sole traders use HMRC-compatible software to keep digital records and file returns directly.

MTD has two main strands:

MTD for VAT – already in force for all VAT-registered businesses
MTD for Income Tax – rolling out from April 2026 for sole traders and landlords

The aim is to reduce errors, cut admin, and give HMRC (and you) a clearer, more up-to-date picture of your tax position throughout the year.

MTD for VAT: requirements for all registered businesses

If your business is registered for VAT, you're already required to comply with Making Tax Digital for VAT. Making VAT digital has been mandatory since April 2022 for all VAT-registered businesses, regardless of turnover.

The Making Tax Digital requirements for VAT are:

You must keep VAT records in a digital format – paper records and manual spreadsheets that aren't linked to HMRC-compatible software don't count
You must use HMRC-compatible software to submit your VAT returns – the old HMRC portal is no longer an option
Your records must include the date, value, and VAT rate for every transaction you make and receive
There must be a digital link between your records and the software you use to submit – copying figures by hand from one spreadsheet into another isn't compliant
If you're still keeping records on paper or submitting via the old HMRC portal, you're non-compliant and at risk of penalties.

Popular MTD-compatible options for VAT include Xero, QuickBooks, Sage, and FreeAgent. If you prefer spreadsheets, bridging software can connect your existing records to HMRC's systems – more on that below.

MTD for Income Tax: what changes in 2026?

This is the big one for many UK businesses and self-employed people.

MTD for Income Tax replaces the annual Self Assessment tax return for sole traders and landlords. Instead of filing once a year, you'll submit four quarterly updates to HMRC, plus a Final Declaration at the end of the tax year.

Thresholds and deadlines: April 2026, 2027 and 2028

MTD for Income Tax is being rolled out in stages, based on qualifying income. Qualifying income means your gross income from self-employment and/or property – before any expenses are deducted.

Phase	Start date	Who's affected
Phase 1	6th April 2026	Sole traders and landlords with qualifying income over £50,000
Phase 2	6th April 2027	Sole traders and landlords with qualifying income over £30,000
Phase 3	6th April 2028	Sole traders and landlords with qualifying income over £20,000

A few things worth noting:

HMRC uses your 2024/25 Self Assessment return to determine if you're in the first wave (April 2026)
If you have both self-employment and property income, both are combined for the threshold test
It's your gross income that counts, not your profit – so you can't deduct expenses before checking

For example, a freelance designer earning £35,000 from client work and £20,000 from a rental property has qualifying income of £55,000. They're in from April 2026.

Partnerships, limited companies, and those earning below £20,000 are not yet within scope, though HMRC has signalled these groups may be included in the future.

The 4 quarterly updates: what you'll need to submit

Under MTD for Income Tax, you'll submit four updates to HMRC each year – roughly every three months. Each update is a summary of your income and expenses for that period. They don't calculate your final tax bill; they keep HMRC informed throughout the year. At the end of the tax year, you submit a Final Declaration – this replaces the old Self Assessment return and confirms your total figures, including any other income not covered by the quarterly updates.

The four quarterly deadlines are:

7th August (for the period 6th April – 5th July)
7th November (for the period 6th July – 5th October)
7th February (for the period 6th October – 5th January)
7th May (for the period 6th January – 5th April)

A 12-month soft landing period applies from April 2026, meaning late-filing penalties will be waived during that first year while businesses get up to speed.

A 12-month soft landing period applies from April 2026. HMRC won't issue penalty points for late quarterly updates during that first year while businesses get up to speed. However, this doesn't extend to the Final Declaration or to late tax payments – both are penalised as normal from day one.

MTD compliance checklist: how to set up Making Tax Digital in 5 steps

Whether you're coming into scope in April 2026 or planning ahead for 2027, these are the steps to get compliant.

Check your threshold. Look at your 2024/25 Self Assessment return. Add up your gross income from self-employment and property. If it's over £50,000, you need to be ready by April 2026. Over £30,000? You have until April 2027.
Choose HMRC-compatible software. You'll need software that's recognised by HMRC for MTD. Full accounting packages like Xero, QuickBooks, Sage, and FreeAgent are the most common options. If you prefer spreadsheets, bridging software is a valid and cheaper alternative. HMRC also offers a free tool for sole traders with simple affairs, though it has limited features.
Sign up via HMRC. You'll need to register for MTD for Income Tax through your HMRC online account. It's worth doing this two to three months before your start date to allow time to set everything up properly.
Authorise your software. Once you've chosen your software, you'll need to authorise it to connect to HMRC's systems. This is usually a straightforward process within the software itself.
Start keeping digital records. From your MTD start date, all income and expenses must be recorded digitally. That means logging transactions as they happen – not writing them down on paper and entering them later.

Choosing the best Making Tax Digital software

There's no single right answer – the best option depends on how you work, your transaction volume, and your budget.

Full cloud accounting software

The best digital VAT software for small businesses combines MTD compliance with day-to-day accounting. Packages like Xero, QuickBooks, Sage, and FreeAgent handle everything in one place: invoicing, bank feeds, expense tracking, VAT returns, and MTD for Income Tax submissions. Most cost between £10 and £25 a month.

They're the best fit if you have a high volume of transactions, employ staff, are VAT-registered, or want your accountant to access your records in real time.

Bridging software and spreadsheets

If you currently use Making Tax Digital spreadsheets and don't want to change how you keep records, bridging software is a legitimate route to MTD compliance. It sits on top of your existing spreadsheet and handles the HMRC submission.

This is often the cheapest option – some bridging tools cost just a few pounds a month. But it does require more manual effort, and as your business grows it can become time-consuming.

Bridging software vs full accounting software: a comparison

Feature	Bridging software	Full accounting software
Cost	Low (often £2–£10/month)	Medium (£10–£25/month)
MTD VAT compliant	Yes	Yes
MTD Income Tax compliant	Yes	Yes
Bank feeds	No	Yes
Invoicing	No	Yes
Real-time reporting	No	Yes
Suitable for high transaction volumes	No	Yes
Learning curve	Low	Medium
Good for	Simple affairs, spreadsheet users	Growing businesses, VAT-registered traders

A note on spreadsheets: standalone spreadsheets – where you manually re-key figures into the HMRC portal – are no longer compliant for VAT and won't be for Income Tax either. You need a digital link between your records and your submission. Bridging software provides that link.

MTD roadmap: key dates at a glance

Here's a quick overview of when each group comes into scope:

Date	What happens
April 2022	MTD for VAT: mandatory for all VAT-registered businesses
6th April 2026	MTD for Income Tax: mandatory for sole traders and landlords with income over £50,000
April 2026 – March 2027	Soft landing period: late penalties waived while businesses adapt
6th April 2027	MTD for Income Tax extends to those with income over £30,000
6th April 2028	MTD for Income Tax extends to those with income over £20,000
TBC	Partnerships and other business types – no confirmed date yet

What happens if you don't comply?

HMRC uses a points-based penalty system for late submissions. Each missed quarterly update earns a penalty point. Reach the threshold – four points for quarterly filers – and you'll receive a £200 fine, with further fines for each additional missed update after that.

Late payment penalties are separate. If you pay your tax bill late, HMRC can charge interest and additional penalties on top of any submission penalties.

The soft landing period runs from April 2026 to March 2027, but it only covers late quarterly updates – no penalty points during this window. It doesn't cover the Final Declaration or late tax payments, which carry normal penalties from day one. Record-keeping requirements also apply from day one – the soft landing doesn't excuse poor records.

Do you need to upgrade your systems?

For many businesses, making the move to MTD means investing in new software or updating existing processes. That might mean:

Subscribing to cloud accounting software for the first time
Upgrading from a basic bridging tool to a full accounting package
Bringing on a bookkeeper or accountant to manage quarterly submissions
Improving how your business tracks income and expenses day to day

These are real costs – but they're also investments that tend to pay off in time saved and fewer errors.

If you need to fund a system upgrade as part of your MTD transition, flexible business finance can help spread the cost. Apply for a business loan to cover your digital transition costs, or work out your monthly repayments with our instant small business loan calculator.