23 July 2026
Table of contents
Table of contents
Making Tax Digital, or MTD for short, is an initiative actioned by HMRC to create a simpler, more efficient tax system for everyone involved. The scheme significantly changes the way businesses record and report tax information in the hope of streamlining the process.
MTD rules are rolling out in stages. VAT-registered businesses are already covered by the rules, and some landlords and sole traders have started using MTD Income Tax.
Although the transition period may be annoying – after all, change isn’t always easy or fun – HMRC’s plan to introduce Making Tax Digital was made with good intentions:
Tax is horribly complicated, so MTD sets out to make reporting your taxes and financial information simpler and more accessible. This will hopefully help users to reduce the potential for errors.
It’s also expected to minimise instances of tax avoidance too, which will make things fairer for everyone.
Requiring businesses to submit their financial information digitally (rather than by post, for example) is also a move to reduce paper usage. This is more cost-effective and environmentally sustainable.
It also means the process is faster, and has fewer opportunities for data loss or inputting errors.
Making tax recording and reporting simpler and more efficient reduces mistakes and missing information. Errors can be costly to resolve – and horribly stressful!
Under Making Tax Digital rules businesses are required to record and store financial data digitally, and then use compliant software (like Pandle!) to share this information with HMRC on a quarterly basis.
Don’t worry, this doesn’t mean you’ll need to submit four separate tax returns every year. You’ll just need to share your bookkeeping figures with HMRC every three months and then submit a confirmation at the end of the tax year.
It might sound like a whole lot of extra work right now but once you get the hang of it, it’s pretty simple. Plus, working with regular milestones like this will help keep your bookkeeping and financial reporting in check.
MTD will help you avoid nightmare situations like landing a bigger tax bill than you were expecting, whilst also minimising the risk of submitting errors (and the penalties that follow).
VAT-registered businesses are already subject to Making Tax Digital requirements. So, if your business is registered for VAT, it’s a legal requirement that you keep digital records of all the transactions which happen in your business.
You’ll also need to submit this information to HMRC via MTD-compatible software or, if it doesn’t have that function, with bridging software.
MTD applies to all VAT-registered businesses regardless of your turnover or whether you registered for VAT on a voluntary basis.
Failure to comply with MTD rules will result in a penalty, alongside the points-based penalty system for overdue submissions and payments.
The existing system for Self Assessment will gradually be replaced by MTD for Income Tax.
From April 2026, Making Tax Digital started for self-employed individuals and landlords whose total income from trading and/or property was more than £50,000 in the 2024/25 tax year. It will be introduced for those with income over £30,000 from April 2027, with the threshold reducing to £20,000 from April 2028.
If you’re unsure about your MTD eligibility and compliance, check in with an accountant who will be able to steer you in the right direction.
HMRC confirmed MTD won’t be rolling out to businesses paying Corporation Tax too, although there are likely to be other changes to the system in the future.
For now, Corporation Tax is calculated and paid once a year when a business submits its Company Tax Return.
Using digital bookkeeping software is a big part of MTD compliance, but has lots of other benefits for businesses too. If you’re yet to make the transition, it’s well worth moving your accounts over to online accounting software as soon as possible. This will help ensure that you’re compliant once the time comes, but also means you can start to make your business more efficient.
For example, automating more of your recordkeeping by connecting your bank account to your software, rather than spending a lot of time on data entry.
If you’re already part of the digital revolution, then double-check that your current provider is MTD compatible (or will be by the time the MTD rules come into play for you).
VAT-registered businesses are automatically registered for MTD these days, but MTD IT customers will need to register separately, even if you’re already signed up to send a tax return.
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A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible.
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