The Startup’s guide to Making Tax Digital (MTD)

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) will soon become mandatory for the self-employed and landlords who cross over the initial £50,000 turnover threshold. This is due to start from April 6th this year.

If that sounds soon, don’t panic, there’s still plenty of time for you to understand what that means for you, and to get ready. What’s crucial to understand is that MTD is actually a positive change for taxpayers. It’s trying to move recording and paying tax away from one big end-of-year pressure point into a more modern and fluid approach.

To comply with MTD for ITSA, you need to be recording all your transactions as digital records in HMRC-approved software: our recommendation is to use the best accounting software for small business owners. We’ve been advising small businesses for over two decades now, so take a deep breath, and let’s go over everything you need to know to get MTD-ready.

What Does Making Tax Digital mean?

Making Tax Digital is a government scheme that was brought in to try and modernise how business tax is recorded and paid, by making it a fully digital process. The idea was to move away from a single, end-of-year tax return, and make it a more dynamic, real-time approach that better fits modern technology.

It was also intended to close the “tax gap” in the UK, which is the amount HMRC expects to collect and what actually gets paid. It’s not just about making sure taxpayers are being honest though, it creates an overall more favourable system for business owners: you’ll get a much clearer understanding of your finances year round, and most likely will find it easier doing your small business accounts.

MTD began in April 2019 with businesses registered for VAT, but come April 2026, it will no longer just be for VAT-businesses. It’s now going to apply to high-earning sole traders (and landlords), and in a few years’ time it will apply to the vast majority of them. Here’s what you need to know.

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA)

This is the next stage of MTD, due to come into effect from April 6th this year, and will apply to self-employed individuals and landlords whose taxable turnover exceeds £50,000 per year (for the tax year 2024/2025).

So if you’re unsure, check your Self Assessment tax return for the year 2024/2025, if your annual income from self-employment and property is over £50,000, then you’ll be part of Making Tax Digital for Income Tax this year.

Making Tax Digital thresholds (2026 – 2028)

As explained above, sole traders and landlords whose taxable income exceeds £50,000 per year will be the first to be inducted into MTD for ITSA, but HMRC plans to then lower this threshold after each year. Here’s the key dates you’ll need to keep in your calendars as sole traders or landlords:

This is the current plan, and while it could be subject to change, HMRC hasn’t indicated these threshold dates will be altered.

Is MTD even possible for sole traders with tiny turnovers (e.g., £15k)?

Understandably, there might be some anxiety from sole traders with very small turnovers that don’t want to have to get used to a whole new system. Right now the lowest planned threshold for MTD is £20,000 in 2028, but this could be subject to change later on.

For now though, sole traders with tiny turnovers don’t have to worry, however, it is something they might want to prepare for.

MTD rules & need-to-knows

For sole traders and landlords, MTD means there are some new rules and regulations you’ll need to follow. These apply to record keeping and the specific software you’ll need to use. This isn’t optional: these are requirements that you absolutely must follow or potentially face fines from HMRC. Let’s breakdown all the new rules for MTD ITSA:

Digital record keeping and approved software

A digital record is defined as any record of your income or expenses that is created and stored by MTD-ready software. This is a core aspect of MTD, and basically, it means pen-and-paper and spreadsheets aren’t going to cut it any longer.

You need software that’s capable of storing digital records, and that’s approved by HMRC. You can find a complete list of approved software through HMRC’s finder tool. Our recommendation is to use one of the best accounting software platforms for the self-employed.

Full accounting software, like Sage, can help make your bookkeeping more efficient, as well as making sure you’re MTD-ready. Source: Startups.co.uk

By using a full cloud accounting software platform that’s MTD-ready, you can perform all the required actions from a single software. This means keeping and storing digital records and submitting them directly to HMRC.

You can technically use multiple different pieces of software to achieve this, but you’ll have to use what’s called ‘bridging software’ to connect the outdated system to one that’s capable of keeping digital records and submitting to HMRC. This isn’t the ideal option, however, and using full accounting software will be more straightforward.

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Which records do I need to keep?

It’s also important to note that you need to continue to keep records as you normally do for your Self Assessment. The types of records that you need to keep digitally, to be MTD-compliant, will be:

• All your self-employment income (this will include your sales, takings, and any fees)
• Your self-employment expenses (e.g. travel costs, cost of stock, office costs, and financial costs)
• Income from property (such as rent, premiums for the grant of a lease, reverse premiums, and inducements)
• Property expenses (this should include rent, repair costs, maintenance, and other services)

When you make a recording of these types of income and expenses in your software, you will need to always include:

1. The amount
2. The date the income was received (or the date when expenses were incurred)
3. The category (this depend on the type of business you run)

The categories for income and expenses will be the same as the one’s used for Self Assessment.

UK and foreign property businesses

If you own UK property and foreign property businesses, you’ll need to create separate digital records for each. Any UK properties you own should be treated as a single UK property business and any non-UK properties should be considered one “foreign property business”.

You’ll also need to keep digital records if you used the Rent-a-Room scheme and also listed income from another UK property on your last Self-Assessment tax return. This also applies if you didn’t receive other UK property income, but the income you got from the Rent-a-Room scheme was higher than the £7,500 threshold.

Do I need to sign up to Making Tax Digital for Income Tax?

Yes, you absolutely need to sign up for Making Tax Digital for Income Tax. This is a critical detail that can easily be overlooked: unlike MTD for VAT, where businesses are automatically enrolled, sole traders and landlords need to manually sign up for MTD for ITSA. 

You can do this directly through HMRC using the same user ID and password you got when you first signed up for Self Assessment.

Just make sure you do this well ahead of the April 6th deadline as it’s not something you should leave to the last minute! You’ll need to answer some questions about your business and you may need to confirm your identity.

The quarterly updates

Under MTD for ITSA you will be required to send four updates throughout the tax year to HMRC. The key thing to note here is that these are not as involved as a Self Assessment tax return.

A fear amongst business owners in regards to MTD was that it would be like having to do four tax returns throughout the year instead of just one: this isn’t the case. The quarterly updates are more abridged and simple.

What should the quarterly updates include?

Your digital records in the quarterly updates should include:

• Self-employment and property income and expenses from the previous three months
• Any digital records that you’ve made since the start of the tax year, including the corrections you’ve made to them

You still need to send a quarterly update if you haven’t received income or incurred expenses during the last update period, just to notify HMRC that’s the case. You can find a detailed list of the information categories in HMRC’s update notice.

These updates must be sent to HMRC every three months through your approved software. Your accounting software should compile your digital records, create totals for the income and expense categories. It should also be able to notify you about when, and how, to send the updates (each software will have a slightly different method).

For the first year of MTD for ITSA (tax year 2026/2027) these are the dates you’ll be submitting your quarterly reports on:

• Q1 (April to July): Due 7 August
• Q2 (July to October): Due 7 November
• Q3 (Oct to Jan): Due 7 February
• Q4 (January to April): Due 7 May 

Once you’ve sent a quarterly update to HMRC you should be able to view an estimate of your tax bill in your accounting software. 

Year-end

While you’ll be sending updates every three months, there’s still a year-end process to finalise data and relief claims. The only difference is you won’t be using the old HMRC portal to do this anymore but going directly through your accounting software.

You should be checking and adjusting your digital records throughout the year to ensure they’re accurate. When you’ve sent your fourth update for the year, you will be shown your income and expenses for the entire tax year.

Before you finalise your position and submit your tax return you may need to make a couple of adjustments, like:

• Removing any disallowable expenses
• Adjusting for prepayments or accruals
• Claiming for reliefs or allowances

Benefits for Startups of MTD: make your business more efficient

If that all seems a little overwhelming, don’t worry. Once you get in the practice of submitting quarterly returns, it should become second nature and, overall, have a positive impact on your workflow. Here’s six clear benefits MTD will have for your business:

1. Real-time cashflow

By recording your income and expenses as you go, you will have a much clearer look at your finances. You’ll have a better understanding of how much money is going in and out which will make for more reliable business planning.

2. Reduction in errors

You can catch any problems or mistakes early, and have time to correct them before submitting your tax return, as well as not having to manually input any data. You’ll be fixing errors as you go, not at the end, so you won’t end up overpaying on your tax bill.

3. Seek funding faster

By having a clearer look at your finances month-by-month, this will make it much easier to pitch for funding from investors, as you’ll have more detailed and specific data to impress with. 

4. Less stress

By keeping records up to date every three months, this will take the pressure off the usual stressful year-end tax return scramble. Most of the work will have already been done!

5. More secure records

By switching to a digital record keeping system, you can be confident all your important info is safely and securely stored in the cloud. You won’t find yourself digging around for lost documents either, as everything will be stored in your digital records.

6. No surprises

You’ll get an estimated look at your tax bill at the end of each quarter, avoiding any nasty surprises that might have caught you off guard. Being able to view an estimated version of your tax bill at any point in the year means you can plan ahead more easily.

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Common Pitfalls to Avoid

For the most part, MTD for ITSA is pretty straightforward but that doesn’t mean there aren’t a few points you can trip up on. For example, separating your self-employment income and your property income. Here are the main mistakes to avoid:

Not using separate reporting

In accordance with HMRC guidelines, you can’t declare your property income and your employment income in a single submission. If you’re getting money from a property you own, and you also do work as a sole trader, you need to provide two separate submissions for each income. 

Using non-HMRC approved software

This is a point you don’t want to slip up on as it could have some dire consequences. Not all accounting software is approved by HMRC, which means you won’t be able to submit reports if you choose the wrong one.

You don’t want to waste time and money purchasing and setting up a software that isn’t MTD-compatible, so make sure you’ve triple-checked your chosen software is HMRC-approved (you can do this by checking with HMRC directly).

Not signing up to MTD for ITSA

We covered this earlier in the article, but its worth going over again as it can be a major point to miss. Businesses are automatically enrolled into MTD for VAT, but you need to sign up for MTD for ITSA. HMRC doesn’t sign you up on your behalf. 

Not understanding the ‘digital links’ rule

Essentially, from the moment you start recording a transaction in your software, all further transferring or amending of that data needs to be done digitally. This includes:

• Making corrections
• Submitting your quarterly updates
• Filing your tax return

Everything you do in regards to your MTD software needs to have a clear digital audit trail. This means manual typing and copying and pasting is not allowed as per HMRC guidelines. HMRC does accept the following as digital links:

• Linked cells in a spreadsheet
• Using a flash drive or memory stick, which is then handed to another person to upload to HMRC-approved software
• XML, CSV import and export, and downloading or uploading files
• APL transfer

This is a big part of Making Tax Digital, so it’s crucial to understand it.

Not working with an accountant

Tax can get complicated. For the most part, MTD for ITSA is going to make it easier for the average sole trader to file their tax returns, but there’s still going to be some niche areas which require expertise.

It could well be worth engaging the services of a tax specialist to ensure you’re remaining compliant and paying the right amount of tax. Remember, if you’re feeling unsure or have some niche questions relating to specific scenarios, a tax specialist can help. If you’re not sure how to engage these kinds of services, you can use our guide to finding an accountant.

Not having a business bank account

If you don’t have a separate bank account for your business transactions, untangling your personal purchases from your business-related ones will be a nightmare. This is because you’ll be using the bank feeds feature on your accounting software which pulls through all the transactions from your bank account for fast and simple categorisation.

Except, it won’t be fast and simple if you’re having to go through and remove all your personal transactions from your bank feed. Make sure you avoid this mistake by having a dedicated business bank account set up.

What about limited companies?

Although there are plans to roll out Making Tax Digital to limited companies, and limited liability partnerships (LLPs) at some stage in the future, no set date has been confirmed yet.

In 2025, HMRC confirmed that they were scrapping the proposed plans for Making Tax Digital for Corporation Tax but there could well be a change to how CT600 forms are filled in the future.

Limited company founders, for now, only need to worry about MTD for VAT or personal income from a side-hustle or property.

Top tips

Hopefully by this stage, you’re feeling a little more confident about MTD and the benefits it can bring you, but here are some of our key tips for getting the most out of MTD for Income Tax:

Find the right software

A key aspect of MTD to get right is choosing the software that’s the best fit for your needs. All of the top accounting software options will be solid choices, but it’s about selecting the option that suits how you prefer to operate.

For instance, your side-hustle might be rapidly growing to the point of becoming a full-time business. If you think this applies to you, you should focus your search on accounting software platforms that support long-term growth. Xero, for example, has a clear upgrade path of well balanced plans. So you won’t need to bother learning a new software if you outgrow your current plan.

Plan time to set up your software

Don’t leave setting your accounting software up until the last minute. Most of the top options will be intuitive and easy-to-use, but they still take time to get used to like any complex software. Make sure you’ve left yourself plenty of runway to get up to speed before the deadline. 

Accounting software, such as Zoho Books, can be very intuitive, but you should still make sure you have allocated enough time to get to grips with it. Source: Startups.co.uk

Be mindful of free plans

It’s always tempting to save as much cash as possible as a business owner, but free plans might not always be worth it in the long run. Yes, there are some strong free options for an accounting software plan but while these might be fine for limited or short-term use, you may find them to be restrictive further down the line. For example, a lot of free plans have limited caps on invoices.

Additionally, many free plans are missing out on the AI accounting tools that are currently optimising a lot of bookkeeping tasks. These tools, which can help prepare and submit your tax returns, can be invaluable to a lot of entrepreneurs and therefore worth the extra cash.

The joint-property income rule

If you’re a landlord that is a joint-owner of a property – let’s say you own a rental home with a partner – you’re only required to keep records and submit updates in relation to your share of the property. You don’t need to keep records and submit updates for the total income of a joint-owned property.

Don’t forget about the end-of-year final declaration

Remember that it’s not just quarterly updates that make up MTD for ITSA: you also need to submit your end-of-year declaration. This is in place of the old-style Self Assessment Tax Return. It’s the confirmation of your tax position, based on the four updates you’ve sent throughout the year (including income, expenses, and reliefs).

Join up for MTD early

If you’re not due to be mandated into MTD for ITSA until next year, or the year after, there’s nothing to stop you joining up early. You can enroll in the testing phase, which is a great way to get used to the system before you’re required to be in it.

Summary: how to be confident on MTD for Income Tax

MTD for ITSA might seem like a lot, but just remember these core points: you need to use HMRC-compliant software, you need to keep digital records of income and expenses, and you need to send updates to HMRC every three months. As long as you follow those key points, it should be smooth sailing.

And remember, this won’t be the same as sending four tax returns in a year. It’s much simpler than that and by keeping on top of your tax quarterly, you’ll have a richer understanding of your business.

Your immediate next step is to check your tax return for 2024/2025. If your turnover was over £50,000, you’ll need to start getting ready for April 6th. If you’re feeling stressed about the deadline, don’t worry: just use our MTD 90-day readiness checklist.

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