10 Essential Insights About Making Tax Digital

The UK’s tax reporting system is changing. HMRC’s Making Tax Digital (MTD) for Income Tax will affect sole traders, landlords, and some businesses.

This means your business must keep records using MTD-compatible software, and submit updates to HMRC quarterly.

Most sole traders and landlords are aware that MTD is coming, but here are 10 critical tips for preparing your business.

1. Making Tax Digital is rolling out gradually – know your timeline

For sole traders and landlords, MTD starts rolling out from April 2026. When you need to start depends on your income from employment and/or rental in the previous year:

You need to start MTD on:

• 6 April 2026, if your income is over £50,000
• 6 April 2027, if your income is over £30,000
• 6 April 2028, if your income is over £20,000

2. Quarterly updates change the rhythm of tax reporting

Under MTD, you’ll send HMRC more regular updates on your income and expenses – every three months, straight from your software. Typically this will be by 7 August, 7 November, 7 February, and 7 May.

There are more updates, but less admin. If you’re logging information as you go along, these updates can be done at the touch of a button.

The change in reporting frequency also gives you the benefit of better cashflow visibility. Each quarter, HMRC will provide your predicted tax bill, so there will be no surprises at the year-end.

3. You’ll still submit an annual tax return under Making Tax Digital

An annual tax return is still required under MTD. However, digital bookkeeping tools can pull your quarterly updates into an end-of-year return, which means less form-filling.

Before submitting, you can make any adjustments. For example, you may need to include other income sources such as bank interest or pensions, and any tax relief claims.

In your first year of using MTD, you’ll still need to fill out a self-assessment return for the previous year as usual, since you won’t have made quarterly updates covering that time.

4. Keep separate records for different income streams

If you earn income through self-employment and rent, you’ll need to keep separate records for both.

You’ll send separate quarterly updates for each type of income. Accounting software that links directly with your business banking – such as My Business Finances¹, powered by Sage – is especially useful in these circumstances to help you keep track.

5. Making Tax Digital doesn’t replace professional support

If you use an accountant for your taxes, you may still find this helpful under MTD. Your accountant can provide guidance on your finances and the best software solution, and may submit updates via MTD on your behalf.

Equally, using an accountant is not a replacement for MTD – your MTD obligations remain.

6. MTD for VAT and MTD for Income Tax are separate

All VAT-registered businesses are already using MTD. They need to keep records of VAT charged and input VAT claimed, submitting these via MTD-compliant software. This system has been mandatory since 2022.

7. Digital banking and accounting software make the transition easier

Accounting software embedded within your business bank account cuts down further on admin and helps you stay organised.

With My Business Finances, powered by Sage, you can manage your finances and accounting all in one place.

Available to existing Small Business Banking Account² and Business Banking Account customers only. Charities and NBFIs are not eligible.

8. You can sign up for Making Tax Digital at any time

There’s no need to wait to start forming good habits. You can sign up for MTD before the relevant deadline for your income. If you plan to use MBF for your MTD Income Tax filing, make sure you’ve signed up for MTD with HMRC first.

9. You can use Making Tax Digital to build better business finances

MTD-compliant software won’t just enable you to stay compliant, by submitting quarterly updates in just a few clicks. It also offers you the chance to stay on top of your finances and plan ahead.

With My Business Finances, powered by Sage, you can:

• create records from sales invoices, bank feeds, receipt scans, or manual uploads
• calculate and manage your income and expenses
• create copy-and-paste totals to complete your self-assessment return
• reduce paperwork
• see real-time data to better understand your business performance
• keep track of funds and view who owes you money
• get more time back to focus on your business.

10. Some businesses are exempt

Some people will be exempt from Making Tax Digital. The main exemptions are for those who:

• have a qualifying income of less than £20,000
• are digitally excluded and cannot use digital software, for example because of your age, disability, health condition or location

Check the full list and find out how to seek an exemption if you think you qualify. As MTD expands to include future groups, such as limited companies, these exemptions will continue to apply where relevant.

FAQ

What makes Making Tax Digital for income tax different?

The main changes between MTD and the current system are:

• digital records: you keep accounting records on an MTD-compliant software system
• frequent updates: instead of just one annual return, you send quarterly digital reports to HMRC, which feed into your year-end return
• tax visibility: HMRC gives you projections for your tax bill based on the quarterly updates.

Do I need accounting software if I’m under the income threshold?

If your qualifying income is under £50,000, you don’t need to use MTD-compliant software.

However, you may find accounting software more efficient than paper records. It will also future-proof your business if your income rises, or if the government lowers the MTD threshold in future.

Can I keep paper records for some parts of my business?

Digital bookkeeping tools offer time-saving, user-friendly features, but you can still use paper records or spreadsheets if you prefer. However, you’ll need ‘bridging software’ to ensure your system works with Making Tax Digital.

How does connecting my business bank account help with MTD compliance?

My Business Finances, powered by Sage, is embedded directly within your HSBC Business Bank Account. Stay compliant with Making Tax Digital for Income Tax by sending quarterly updates and filing tax directly to HMRC from HSBC.

Can I sign up for MTD voluntarily?

Yes – you can get a head start by signing up early. If you want to use MBF for your MTD Income Tax filing, you must ensure you’ve signed up for MTD with HMRC beforehand.