How to Prepare for Making Tax Digital: Step-by-Step Guide

Preparing for Making Tax Digital (MTD) means setting up digital record-keeping, choosing compatible software, and getting ready to submit quarterly updates instead of a single annual tax return.

For sole traders, landlords, and small businesses, this shift changes tax from a once-a-year task into an ongoing process. The key to staying compliant is getting ready in advance. This guide on how to prepare for Making Tax Digital has all the information you need to get started.

Key points

• MTD turns tax into a year-round process 📊
  Instead of one annual return, you’ll need to keep digital records and submit quarterly updates, so staying organised throughout the year becomes essential.
• Digital record-keeping is the foundation 🧾
  Keeping your income, expenses, and receipts up to date in a digital format is the most important step. Small, regular updates are far easier than last-minute catch-ups.
• The right software makes or breaks your experience 🖥️
  MTD-compatible tools vary widely. Choosing software that is simple and reduces manual work can save hours of admin and lower the risk of errors.
• Consistency helps you avoid stress and penalties 📅
  Staying on top of deadlines, reviewing your finances regularly, and building a routine will help you stay compliant and avoid mistakes under the new system.
• Automation is the easiest way to stay compliant with less effort 🚀
  Tools like ANNA handle bookkeeping, tax estimates, and MTD submissions automatically, so you don’t have to manage records, deadlines, or filings yourself.

What is Making Tax Digital?

Making Tax Digital is a UK government initiative designed to modernise the tax system. It requires businesses and individuals to:

• Keep digital financial records
• Use MTD-compatible software
• Submit updates to HMRC more frequently

For many self-employed people, the biggest change comes with MTD for Income Tax Self Assessment (MTD for ITSA).

Instead of filing one annual Self Assessment, you’ll need to:

• Submit quarterly updates
• Keep records updated throughout the year
• File a final declaration at year-end

This means tax is no longer something you deal with once a year – it becomes part of your regular workflow.

MTD for ITSA will apply to:

• Sole traders
• Landlords
• Self-employed individuals

In April 2026, MTD for ITSA rolled out for those earning above £50,000. This threshold will drop to £30,000 in April 2027, and then further to £20,000 in 2028.

Even if you’re not required to join yet, preparing early is a smart move. It gives you time to adjust your habits gradually instead of rushing when deadlines arrive.

Why preparation matters

MTD introduces more frequent reporting and stricter rules. Without knowing enough about MTD, you may face:

• Missed deadlines
• Errors in submissions
• Penalties under the new points-based system
• Increased admin workload

But with the right setup, MTD can actually make your finances easier to manage. You’ll have:

• Better visibility of your income and expenses
• Real-time tax estimates
• Fewer surprises at year-end

How to prepare for MTD: A step-by-step checklist

The goal in preparing for MTD is to spread the work out and simplify it.

Here’s how to do it, step-by-step:

Step 1: Move away from spreadsheets

While spreadsheets are still allowed, they require additional bridging tools to connect with HMRC systems.

For beginners, this can quickly become complicated.

Common challenges with spreadsheets include:

• Manual data entry, which increases the risk of errors
• Version control issues (multiple files, outdated copies)
• Extra steps needed to submit data to HMRC

Switching to dedicated accounting software simplifies this process. It allows you to:

• Keep all records in one place
• Reduce manual input
• Ensure your data is stored in a compliant format

Step 2: Choose the right MTD-compatible software

Choosing software is one of the most important steps in preparing for MTD.

All MTD-compatible tools must allow you to:

• Store digital records
• Submit updates directly to HMRC

Beyond basic compliance, there are big differences in how these tools work.

When comparing options, consider these factors:

• Ease of use: Is the interface beginner-friendly?
• Level of automation: Does it reduce manual tasks?
• Features included: Can you manage invoicing, expense tracking, and reporting?
• Support and guidance: Is help available if you get stuck?

Some software is designed for accountants and may feel complex if you’re new to bookkeeping. Other solutions are built specifically for small businesses and self-employed users, with simpler workflows.

Take advantage of free trials where available, so you can test how the software fits your needs before committing.

Step 3: Start keeping digital records now

One of the biggest adjustments under MTD is the need to keep your records organised throughout the year.

If you’re used to taking care of everything at the end of the tax year, this will require a change in your usual workflow.

Start building these habits early:

• Record income as soon as you receive it
• Log expenses regularly rather than in bulk
• Store receipts digitally (photos or uploads)
• Keep notes on business-related transactions where needed

This doesn’t have to take long – even a few minutes per week can make a huge difference. By the time MTD for ITSA becomes mandatory for you, you’ll already have a routine in place, making the transition much easier.

Step 4: Understand quarterly reporting and MTD deadlines

Under MTD for ITSA, you’ll need to send updates to HMRC every three months.

Each quarterly update includes:

• A summary of your income
• A summary of your allowable expenses

These updates aren’t final tax bills, but they provide HMRC with a regular snapshot of your financial activity.

To prepare for quarterly reporting:

• Learn the submission deadlines for each period
• Keep your records up to date throughout the quarter
• Set aside time to review your figures before submission

With MTD, you’ll have multiple deadlines throughout the year instead of just one.

These typically include:

• Four quarterly submission deadlines
• A final declaration at the end of the tax year

Missing deadlines can lead to penalties, so organisation is key.

To stay on track:

• Add important dates to your calendar
• Set reminders in advance
• Review your records regularly

Building a consistent routine reduces the chance of anything being overlooked.

Step 5: Separate your business and personal finances

Keeping your business and personal finances separate isn’t a strict MTD rule, but it makes compliance much easier.

If your transactions are mixed, you’ll need to:

• Identify which expenses are business-related
• Separate personal spending from your records
• Spend more time reviewing and correcting entries

Opening a dedicated business account can simplify this significantly. It allows you to:

• Track business income and expenses more clearly
• Reduce the risk of mistakes
• Save time when preparing updates

Even for sole traders, this separation can make your financial records much easier to manage.

Step 6: Automate wherever possible

Because MTD involves more frequent reporting, reducing manual work becomes increasingly important.

Look for ways to streamline your processes:

• Connect your bank account to your software for automatic transaction imports
• Use tools that categorise expenses based on past behaviour
• Set up recurring entries for regular income or costs

Automation doesn’t just save time – it also reduces the likelihood of errors.

If you’re currently doing everything manually, even small improvements can have a big impact on your workload.

Step 7: Review your process regularly

Preparing for MTD isn’t just about meeting requirements – it’s about creating a system that works for you.

Take time to assess the following:

• Are your records accurate and up to date?
• Are your current tools saving you time or creating extra work?
• Do you feel confident about submitting updates?

If something feels overly complicated, it may be worth adjusting your approach or exploring different tools.

The goal of MTD is to make taxes more efficient and transparent. With the right setup, it can become a straightforward part of running your business rather than a source of stress.

Simplify your MTD for ITSA preparation with ANNA – for free

Instead of managing bookkeeping and compliance yourself, ANNA handles everything automatically. There’s no setup, no accounting knowledge required, and no ongoing admin to stay on top of.

With ANNA, you get:

• Free 2025/26 Self Assessment submission: Your annual return is completed and filed at no extra cost once you’re connected to HMRC, saving time and eliminating additional filing fees. If you’ve already registered with someone else, we’ll refund the filing fee when you switch.
• Automated bookkeeping: Your income and expenses are recorded and categorised in real time, so your records stay accurate and up to date without manual input or end-of-month catch-ups.
• Live tax estimates: Your tax is continuously calculated as your finances change, giving you clear visibility of what you owe and helping you plan ahead with confidence.
• MTD-ready submissions: Quarterly updates and final declarations are prepared and submitted directly to HMRC, removing the need to manage filings or worry about compliance requirements.
• Built-in UK business account: Your banking, bookkeeping, and tax are fully connected in one place, keeping your cash flow and records aligned without switching between tools.
• Smart reminders: Important deadlines are tracked automatically, with timely notifications, so you can take action and avoid missing submissions.
• 24/7 support: Help is available whenever you need it, whether you are looking for guidance or just have a quick question, without relying on an accountant.

If you want to get ready for MTD with confidence and ease, sign up with ANNA today.