Making tax digital – or MTD – is one of the biggest changes to the UK tax system in decades. Since April 2026, it’s become a reality for hundreds of thousands of small business owners, sole traders, and landlords.
If you run a small business in the UK, understanding the new system implemented by tax authorities could save you stress, penalties, and unnecessary costs.
“For landlords and small business owners this [new system] will undoubtedly create additional admin, and a new regime of penalty points to get to grips with,” says Charlene Young, senior pensions and savings expert at investment platform AJ Bell.
At its core, MTD is HMRC’s plan to move the tax system fully online.
What is Making Tax Digital (MTD)?
Instead of filing one annual self-assessment tax return using spreadsheets, paper receipts, or manual calculations, businesses now need to keep digital records and submit updates to UK tax authorities using compatible software throughout the year.
While tax payment deadlines remain largely the same, instead of one annual submission, businesses will need to send quarterly updates throughout the year and then complete a final declaration at year-end.
MTD was introduced for VAT-registered businesses in 2019, but this latest change concerns individuals filing income-tax self-assessment returns. Sole traders and landlords with qualifying income above £50,000 must now comply. The threshold to qualify will drop to £30,000 in April 2027, and to £20,000 from April 2028.
Qualifying income means gross income before expenses are deducted. PAYE salary, dividends, pensions, and partnership income generally don’t count toward the threshold.
So, for example, if someone earns £35,000 from freelance work and £20,000 from rental property income, their qualifying income is £55,000, meaning they will likely need to comply from April 2026. On the other hand, someone earning £80,000 from employment but only £15,000 from self-employment would not yet fall under the rules.
Businesses that keep records regularly often have better visibility over cash flow, tax liabilities, and profitability. Quarterly reporting may also reduce the shock of large year-end tax bills.
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How will MTD affect SME owners?
Under the new system, small business owners will need to keep digital records of income and expenses and use HMRC-compatible software.
HMRC doesn’t provide its own bookkeeping platform, so businesses must choose approved software. Popular options include Xero, QuickBooks, FreeAgent, Sage, and several lower-cost or free tools aimed at freelancers and sole traders.
Aftab Hussain, lead accounting and tax expert at business account company ANNA Money, recommends software that combines banking, bookkeeping and tax submissions in one place – to reduce mistakes and save time.
Of course, the right software depends on the complexity of the business. A freelancer with a handful of invoices per month may only need a simple mobile app, while a business with employees, VAT obligations, and inventory may require more advanced accounting systems.
The biggest practical change for small business owners is bookkeeping discipline, says Hussain. Businesses will need to maintain accurate digital records year-round rather than rushing to pull everything together before the January deadline, he explains.
Michael Lerman, a chartered accountant and director of accounting firm Halkin Lerman Davis, says that for business owners who already submit VAT tax returns, the pain will be minimal as they’re already used to the system.
“The MTD requirement will simply add another layer of administrative burden on them to ensure their accounting records are up to date each quarter,” he says.
But for sole traders still relying on spreadsheets and paper records, there may be a significant learning curve.
“It’s fair to say that [the new system] adds an administrative and costly burden for which many will not see any advantage,” he says.
Expert tips for navigating MTD
Business owners should separate business and personal finances, which will make their bookkeeping much easier, and keep their records updated regularly rather than retrospectively, says Hussain.
People should be more proactive in understanding which expenses can be claimed, he explains, as this can often cause unnecessary adjustments.
“Business owners should focus on recording transactions regularly, storing invoices and receipts digitally, reconciling bank transactions frequently and reviewing expense categories monthly,” he says.
HMRC will apply penalties for mistakes and delays. Those will start for all income tax self-assessment taxpayers from 6 April 2027. Penalties start at an initial £100, with added fines the longer the return goes unfiled.
Some taxpayers may be exempt, especially if they can show it’s not practical for them to use digital tools due to age, disability, location, or other exceptional circumstances. Limited companies are also not yet included in the new tax filing requirements.
For small business owners, setting themselves up right early on is essential, highlights Leman.
“Although penalties are not being imposed in the 2026-2027 tax year, it’s wise to become used to the system in order not to fall foul from 2027-2028 onwards,” he summarises, explaining: “Preparation is key.”