Making Tax Digital (MTD): A Simple Guide for UK Businesses

If you are new to running a business in the UK, you may have heard the term Making Tax Digital. It is one of the biggest changes to the UK tax system in a generation. While it might sound technical, its goal is to make tax administration simpler and more efficient.

This guide is written for beginners and explains in what MTD is, who it affects, and what you need to know as a new business owner. Whether you are based in Farnborough or elsewhere in the UK, understanding MTD is becoming increasingly important for all businesses.

What Is Making Tax Digital?

Making Tax Digital is a government initiative to move tax reporting online. The core idea is to replace traditional annual tax returns with a fully digital system where businesses keep digital records and send regular updates to HM Revenue & Customs (HMRC) using compatible software.

The main goals of MTD are to:

• Make it easier for businesses to get their taxes right.
• Reduce the amount of tax lost to avoidable errors.
• Modernise the tax system for the digital age.

For most businesses, this means moving away from paper records or simple spreadsheets and adopting software to manage their finances.

Who Does MTD Affect Now?

MTD has been introduced in stages. Currently, the main group of businesses affected are those registered for VAT.

Since April 2022, all VAT-registered businesses, regardless of their turnover, have been required to follow MTD rules. This means they must:

1. Keep digital business records.
2. Use MTD-compatible software to submit their VAT Returns to HMRC.

If you are not yet registered for VAT, these rules do not apply to you yet. However, they likely will in the future.

The Next Stage: MTD for Income Tax

The next major phase of MTD is MTD for Income Tax Self Assessment (ITSA). This will affect sole traders, partnerships, and landlords.

From 6th April 2026, individuals with a total annual income from self-employment and property of over £50,000 will be required to follow MTD for ITSA rules.

From April 2027, this requirement will be extended to those with an income of over £30,000.

Finally from April 2028 – Although not yet confirmed by the Government. It is rumoured that this could be reduced to £20,000.

Under MTD for ITSA, instead of filing one Self-Assessment tax return each year, you will need to:

• Keep digital records of your income and expenses using MTD-compatible software.
• Send quarterly updates of your income and expenses to HMRC.
• Submit a final declaration at the end of the tax year to confirm your figures and claim any allowances.

This is a significant change from the current annual system. It makes adopting digital record-keeping from day one a very sensible choice.

What Does ‘MTD-Compatible Software’ Mean?

This simply refers to accounting software that can connect directly to HMRC’s systems to send and receive information. There are many different software packages available, from simple apps for sole traders to more advanced systems for larger businesses.

These software packages help you keep digital records, categorise your income and expenses, and submit your tax information to HMRC in the correct format. They are designed to make the MTD process as smooth as possible.

How to Prepare for MTD

Even if MTD does not affect you right now, it is wise to prepare. The best thing you can do is start keeping digital records from day one.

• Choose a record-keeping app or software: Even a simple system is better than paper records.
• Keep your records up to date: Get into the habit of recording income and expenses as they happen, not at the end of the year.
• Open a separate bank account: This makes keeping track of your business transactions much easier.

By building these habits now, you will be in a strong position when MTD for ITSA applies to you.

When Getting Advice Can Help

Understanding which software to choose or how to get your records ready for MTD can feel overwhelming. You are not required to get professional advice, but it can be very helpful to ensure you are on the right track.

If you would like calm, practical support as your business develops, Penney’s Accountancy works with UK small businesses in Farnborough and the surrounding areas, helping owners choose the right software and prepare for a digital tax system with confidence.

Want to Learn More in Your Own Time?

For those who want to build their confidence and understand these topics in more detail, Penney’s Finance School offers an online, self-paced business and finance course. It covers everything from company setup to cash flow and tax, allowing you to learn at your own pace.

Important information

The information provided in this article is intended as general guidance for UK businesses only and reflects UK tax legislation and HMRC guidance as of February 2026.

Tax rules and business requirements can change, and individual circumstances vary. Before acting on any of the information above, we recommend speaking to a qualified accountant who can provide advice tailored to your specific situation.