Making Tax Digital for Income Tax: Q&A for Small Businesses

Here’s our Q&A on Making Tax Digital (MTD) for Income Tax. It covers upcoming HMRC regulations, key questions you might ask, recommended software (with indicative costs), and how we can assist with fixed-fee support. Let’s dive right in:

1. What is Making Tax Digital (MTD) for Income Tax?

MTD for Income Tax is HMRC’s initiative to digitise the way sole traders and landlords report their self-employment and property income. Instead of submitting a single end-of-year return, taxpayers must now keep digital records and send quarterly updates via HMRC-approved software, culminating in an annual final declaration.(totallandlordinsurance.co.uk, Quality Company Formations, British Business Bank, Xero)

2. Who does it affect and when do the rules apply?

• From 6 April 2026, sole traders and landlords with total annual income from self-employment or property over £50,000 must comply.(GOV.UK, totallandlordinsurance.co.uk, Quality Company Formations, Xero)
• From April 2027, the income threshold lowers to £30,000.
• From April 2028, it further drops to £20,000.(QuickBooks, Xero, Quality Company Formations)
• These thresholds are measured against your income for the tax year 2 years prior. For example, if your 2024/25 income is relevant for the 2026/27 MTD regulations.
• Currently, participation is voluntary for those below thresholds, but early adoption is possible.(Quality Company Formations, www.rossmartin.co.uk)

3. What are my reporting obligations under MTD for Income Tax?

If you’re impacted, you must:

1. Keep digital records of self-employment and property income and expenses using MTD-compatible software.
2. Submit four quarterly updates to HMRC summarising income and expenses. These updates are due just over 1 month after the quarter end, on 7th August, 7th November, 7th February and 7th May.
3. File a final declaration (tax return) after the end of the tax year and by 31st January. This needs to include any other income or reliefs that are not reported via MTD. (GOV.UK, Xero, totallandlordinsurance.co.uk, Quality Company Formations, British Business Bank)

4. How can I comply?

A. Using MTD-compliant software

HMRC requires commercial, approved software capable of:

• Creating/storing digital records or integrating with your existing spreadsheets (via bridging software).
• Sending quarterly updates and the final declaration.(GOV.UK, Xero)

Popular compatible solutions include:

• QuickBooks
• Xero
• Sage Business Cloud Accounting
• FreeAgent
• FreshBooks
• Zoho Books
• GoSimpleTax
• TaxCalc

Some key highlights:

• GoSimpleTax: Great for straightforward annual filings; pricing starts at £64.99/year for individuals, with additional tiers for residency or partnership returns.(TechRadar)
• Others like Sage, QuickBooks, Xero, FreeAgent, etc., offer comprehensive cloud tools with bank feeds, invoicing, dashboards, and automated bookkeeping.(TechRadar, Xero, QuickBooks)

B. Typical software costs

• Standard small-business accounting packages range from £15 to £35/month (~£180–£420/year).(Fairmans)
• Dedicated tax-only software like GoSimpleTax offers tax-year pricing (e.g. ~£65/year).(TechRadar)

5. Why is HMRC moving to MTD?

MTD aims to:

• Reduce errors and administrative burden.
• Encourage real-time tax awareness and planning.
• Modernise the tax system by encouraging digital record-keeping.(British Business Bank, Xero, Quality Company Formations)
  It’s part of a broader initiative following MTD for VAT (since April 2022).(British Business Bank, Xero)

6. What if I miss a deadline?

• You will be given 1 penalty point each time you miss a deadline
• On reaching 4 or more penalty points you will receive a £200 penalty
• Penalty points stay on your record for 2 years.

7. Can your accountancy firm can help?

We offer fixed-fee packages for both quarterly submissions and final annual declarations under MTD:

• We manage your MTD compliance from end to end.
• You can rely on our fixed fees, with no surprises (see Pricing on our site).(CloudBook Online Accountants Ltd)
• Our services include selecting and configuring MTD-approved software, maintaining digital records, submitting updates, and final submissions.
• We save you time, reduce risk, and help you plan your tax liability throughout the year.

8. Can you Summarise MTD Income Tax?

Final Thought

MTD for Income Tax marks a significant shift—but you’re not alone. With the right software and our fixed-fee support, you can make the transition smoothly and confidently. Check our fixed-fee packages on our Pricing page.