Making Tax Digital explained in plain English

Making Tax Digital, usually shortened to MTD, is HMRC’s move towards digital record keeping and digital tax submissions. In simple terms, it means some businesses and landlords need to keep certain records in software and send information to HMRC digitally instead of relying on older manual methods. For VAT, this is already in place for all VAT registered businesses. For Income Tax, it starts in phases from 6 April 2026 for some sole traders and landlords.

For a lot of business owners, the phrase sounds more complicated than it really is. The aim is not to make life harder. It is to move tax reporting into software that helps keep records tidier and gives a clearer view of what is going on during the year. MTD for Income Tax will involve keeping digital records, sending quarterly updates and then submitting end of year information through compatible software.

What Making Tax Digital means for VAT

If your business is VAT registered, MTD for VAT already applies. All VAT registered businesses should now be signed up, and new VAT registered businesses are signed up automatically unless they are exempt or have applied for exemption. You must keep VAT records digitally and submit VAT Returns using compatible software.

That does not necessarily mean you need a full bookkeeping system with every extra feature under the sun. What it does mean is that your records and VAT return process must be digital and your software must be able to communicate with HMRC. HMRC’s VAT guidance states the software must be able to keep and maintain the required records, prepare VAT Returns from those records and communicate with HMRC through its digital system.

What Making Tax Digital means for Income Tax

This is the part many sole traders and landlords are now asking about.

MTD for Income Tax is a new way for certain sole traders and landlords to report income and expenses to HMRC using compatible software. It becomes mandatory in phases, depending on your qualifying income from self-employment and property.

The current timetable is:

From 6 April 2026, it applies if your qualifying income is over £50,000 for the 2024 to 2025 tax year.
From 6 April 2027, it applies if your qualifying income is over £30,000 for the 2025 to 2026 tax year.
From 6 April 2028, the government has said it will extend to sole traders and landlords with qualifying income over £20,000.

So, if you are a sole trader, a landlord, or both, this is the bit to pay attention to. If you only have employment income and no relevant self-employment or property income, this is not the same change.

For businesses and landlords who fall into MTD for Income Tax, the basic practical steps are:

Keep digital records in software.
Send quarterly updates to HMRC through that software.
Submit the end of year information and final declaration using compatible software.

That is the part that often worries people, especially the quarterly updates. In reality, the process is meant to build on bookkeeping that should already be happening. If your records are up to date during the year, the reporting side becomes much easier.

Do you still need software?

HMRC is clear that compatible software is required for MTD. It does not provide the software for MTD for Income Tax, so businesses and landlords need to choose software that works with the service and suits their needs. For VAT, the same principle applies. You need compatible software to keep digital VAT records and file returns. This is one reason many small business owners are moving to cloud accounting systems. It helps keep records in one place and usually makes VAT, bookkeeping and year end work much less painful.

The biggest misunderstandings we hear

One common misunderstanding is that MTD is only about VAT. It is not. VAT is already within MTD, but Income Tax is the next big step for many sole traders and landlords.

Another is that MTD means sending four tax returns a year. That is not really the best way to think about it. For Income Tax, you keep digital records, send quarterly updates, and then complete the end of year process through software.

A third is that this only affects larger businesses. It does not. The thresholds mean many ordinary sole traders and landlords will come into scope over the next few years.

What should you do now?

If you are VAT registered, make sure your records and VAT return process are already fully digital and that your software is MTD compatible.

If you are a sole trader or landlord, check whether your qualifying income means you are likely to fall into MTD for Income Tax from April 2026, April 2027 or later. HMRC has an eligibility checker and sign up guidance for this.

It is also a good time to review your bookkeeping. If records are behind, spread across spreadsheets, paper files and bank downloads, MTD will feel like a bigger change than it needs to. Getting tidy now usually makes the transition much smoother.

How we help make MTD feel manageable

At Fairbook Accounting Solutions, we keep this simple.

We help business owners keep accurate digital records, stay on top of VAT, understand what MTD means for you and use software in a way that feels practical rather than overwhelming. If you need Bookkeeping for small businesses, VAT returns and VAT registration, Making Tax Digital support, Accounting software setup and training or an Accounts tidy ups and clean ups service, we can help you get organised before deadlines become stressful.

The good news is that MTD does not have to be a headache. With the right setup, it can actually make your records clearer and help you avoid last minute panic.

FAQs

Is Making Tax Digital already compulsory

For VAT registered businesses, yes. All VAT registered businesses should now be signed up for MTD for VAT unless exempt. For Income Tax, compulsory use begins in phases from 6 April 2026 for some sole traders and landlords.

Who will need Making Tax Digital for Income Tax first

Sole traders and landlords with qualifying income over £50,000 for the 2024 to 2025 tax year will need to start from 6 April 2026

Will I need to use software?

Yes, if MTD applies to you, you need compatible software for both MTD for VAT and MTD for Income Tax.

Can I be exempt?

Possibly. HMRC allows exemptions in some circumstances, including digital exclusion for VAT and certain automatic or applied exemptions for Income Tax.

Can we help you get ready?

Yes. We can help you understand what applies to your business, get your records in order and set up the right systems so MTD feels much easier to manage.