Making Tax Digital Costs: What Will MTD Cost You? [Breakdown]

Making Tax Digital (MTD) is one of the biggest changes to the UK tax system in decades. For freelancers, sole traders, landlords, and small business owners, it changes how taxes are recorded, reported, and submitted to HMRC.

From April 2026, most self-employed people and landlords will need to keep digital records and send quarterly updates to HMRC using compatible software. This will replace the previous process of preparing a Self Assessment return once a year.

But how much will MTD cost?

The reality is that the cost varies depending on your business, the tools you use, and whether you have an accountant you can rely on. By understanding the different types of expenses involved, you can get a realistic idea of what MTD might cost you.

This guide breaks down the real Making Tax Digital costs and explains what freelancers and small business owners should expect.

Key takeaways

• MTD will incur both one-off and ongoing costs
  Most businesses will face a one-time transition cost of about £280–£350 when moving to digital record-keeping, followed by ongoing annual costs of around £115.
• Software will be the main new expense for many businesses
  To comply with MTD, you must use compatible software to keep digital records and submit updates to HMRC. Basic tools typically cost £120–£180 per year, while bridging software for spreadsheets can cost £20–£60 annually.
• Your current bookkeeping method affects how much you’ll pay
  Businesses already using accounting software may see little or no additional cost. Spreadsheet users may need bridging tools or new software, while businesses using paper records will likely face the highest costs as they move to fully digital systems.
• The hidden costs are time and process changes
  Quarterly reporting means bookkeeping happens throughout the year, rather than once a year. However, once digital systems are in place, many businesses actually save time, with HMRC estimating that digital tools can reduce record-keeping by 20–39 hours per year.

An overview of Making Tax Digital costs

According to HMRC estimates, the average business affected by MTD will face two main types of costs:

• A one-off transitional cost
• An ongoing annual cost

The government estimates that businesses moving to MTD will incur around £280 to £350 in transitional costs, along with ongoing annual costs of around £115.

For many businesses, especially those already using accounting software, the costs may be minimal. However, those moving from paper records or spreadsheets may experience a slightly higher initial cost.

1. Software costs

The most obvious cost associated with MTD is accounting software.

Under the new rules, taxpayers must use MTD-compatible software to keep digital records and submit their quarterly updates to HMRC. Spreadsheets alone are no longer sufficient unless they are connected to bridging software.

Typical software pricing

The cost of accounting software varies widely depending on the features you need.

Common price ranges include:

• Free software: £0 per year
• Basic accounting software: around £120 to £180 per year
• Advanced accounting tools: £300+ per year

Some bridging software options that connect spreadsheets to HMRC may cost £20 to £60 per year, making them one of the cheapest ways to comply with MTD.

HMRC estimates that basic subscription software costs around £132 per year for VAT businesses and about £158 for income tax businesses.

However, the actual price you pay will depend on the platform you choose and the features your business requires.

2. Accountant fees

Many freelancers and small businesses rely on accountants to manage their taxes. With MTD introducing quarterly reporting requirements, accountants can expect their workload to increase.

This could lead to higher fees for some businesses.

Depending on the service level you require, additional accountancy costs may range from:

• £300 to £800 per year for ongoing support and quarterly reporting
• Higher costs for complex businesses with multiple income streams

3. Transitional costs when you first join MTD

The biggest financial impact for most people happens when they first transition to the new system.

These one-off costs can include:

• Setting up accounting software
• Migrating records from spreadsheets or paper
• Training or learning how to use new tools
• Updating bookkeeping processes

HMRC estimates that the average transitional cost is about £320 per business.

Businesses with simple finances may spend very little during this transition, while more complex businesses may need additional support to properly set up their systems.

4. The cost of your time

One cost that is often overlooked is the value of your time.

MTD requires quarterly reporting, meaning businesses will need to submit updates to HMRC four times a year rather than preparing a single annual return.

For businesses that previously organised their records only once a year, this may require:

• More frequent bookkeeping
• Regular record-keeping
• Periodic submission deadlines throughout the year

For some people, this means spending a few additional hours each quarter maintaining their records.

However, once digital systems are established, many businesses actually spend less time managing their finances because automated software reduces manual bookkeeping and calculation errors.

In fact, HMRC estimates that digital tools could save businesses 20 to 39 hours annually on record-keeping.

5. Equipment and infrastructure costs

Some businesses may also need to upgrade their equipment or digital infrastructure. This is more likely if you currently manage your accounts using paper records.

Potential costs may include:

• A computer or tablet for bookkeeping
• Reliable internet access
• Cloud storage or digital document management

For most modern businesses, these costs will be minimal because they already use digital tools for day-to-day operations.

6. Opportunity costs and business disruption

Another indirect cost of MTD is the time and effort required to adjust how your business manages its finances.

For small businesses, this period may temporarily disrupt routines while new systems are implemented.

However, once digital systems are in place, many businesses find that managing their finances becomes more efficient.

Silver lining: Tax relief on MTD costs

There is some good news – most expenses related to MTD compliance are tax-deductible.

This means that the following costs can typically be deducted from your taxable profits:

• Accounting software subscriptions
• Accountant fees
• Training and bookkeeping tools
• Hardware purchased for business use

As a result, the real cost of MTD may be lower than initially expected. For example, if a freelancer spends £180 per year on accounting software and pays basic rate income tax, the effective cost after tax relief may be closer to £144 per year.

How costs differ depending on your situation

The total cost of MTD varies significantly depending on how your business currently manages its accounts:

• Businesses already using accounting software: If you already use digital accounting software, you may experience little or no additional cost, as many existing platforms will simply update their systems to enable MTD submissions.
• Spreadsheet users: If you currently rely on spreadsheets, you may need to purchase bridging software or switch to dedicated accounting software. In most cases, the annual cost ranges from around £20 to £180, depending on the solution you choose.
• Paper record users: If you still rely on paper records, you’ll probably experience the biggest transition. You may need to purchase accounting software, digitise your records, and learn new digital bookkeeping processes, which is where most transitional costs typically arise.

The wider Making Tax Digital costs

Across the UK economy, the financial impact of MTD is significant.

The government estimates that the programme’s overall lifecycle cost for businesses and taxpayers will be around £2.9 billion.

However, HMRC also believes that the benefits will outweigh the costs through:

• Reduced tax errors
• Improved compliance
• Better financial visibility for businesses

The programme is expected to generate £6.2 billion in total economic benefits over time.

Reducing your MTD costs

There are several practical ways to minimise the cost of transitioning to Making Tax Digital. While the rules require digital record-keeping and regular submissions, the actual financial impact often depends on which systems you use and how efficiently your bookkeeping runs.

Here’s how to reduce your MTD costs:

1. Start early

One of the simplest ways to reduce your MTD costs is to start preparing now.

Switching to digital record-keeping early gives you time to understand how the system works and adjust your processes gradually. It gives you time to test software, organise your records, and identify any gaps in your bookkeeping.

Starting early also spreads out the learning curve. Rather than trying to adapt your entire accounting system in a few weeks, you can slowly transition to digital record-keeping throughout the year.

For many freelancers and sole traders, this also means better understanding their finances. Regular digital record-keeping provides better visibility into income, expenses, and tax obligations. Over time, this can make quarterly reporting feel like a routine rather than a disruption.

2. Choose the right software

Not all accounting tools are designed the same way. Some are built primarily for accountants and require significant setup, manual bookkeeping, and technical knowledge.

For small businesses, freelancers, and landlords, this complexity can increase the cost of MTD. If software requires hours of manual work each month, the real expense becomes the time spent managing it.

When choosing an MTD-compatible tool, it helps to look for platforms that automate as many tasks as possible, including:

• Recording transactions
• Categorising expenses
• Calculating tax estimates
• Preparing submissions to HMRC

Automation reduces the number of manual steps required to stay compliant. Instead of constantly editing spreadsheets or entering data line by line, your records can update automatically as your business operates.

This not only reduces administrative effort but also lowers the risk of mistakes that could lead to penalties or incorrect tax calculations.

3. Keep records up to date

Under MTD for Income Tax Self Assessment, taxpayers will need to submit quarterly updates to HMRC. This means bookkeeping can no longer be left until the end of the year.

However, when income and expenses are recorded throughout the year, quarterly updates take only a few minutes to submit. Waiting until a deadline approaches often leads to rushed bookkeeping, missing receipts, and unnecessary stress.

Regular record-keeping also improves financial awareness. Instead of discovering your tax bill months after the end of the tax year, you can track your obligations in real time and plan accordingly.

This allows you to set money aside gradually, rather than facing a large unexpected tax payment.

How ANNA can help you save on MTD costs

We’ve explored the financial and time-related costs of MTD, but here’s the good news: ANNA can help you save on both.

MTD is FREE with ANNA – and for a limited time only, you can get your 2025/26 Self Assessment filed for free when you sign up for an ANNA account. Already filed your return using different software? We’ll refund you the cost when you join ANNA.

ANNA handles MTD automatically with Auto Accountant – an AI-based service trusted by thousands of UK businesses and designed specifically for the UK tax system. Here’s what Auto Accountant can do to make the transition to MTD as smooth as possible for your business:

• MTD updates are prepared automatically and ready to file quarterly
• Year-end Self Assessment filed
• 2025/26 Self Assessment filed for free (link your HMRC account to unlock)
• Auto Accountant manages your bookkeeping
• 24/7 Auto-Accountant support, with jargon-free replies
• Automatic VAT Return calculation and direct filing with HMRC
• Invoicing with card payments
• Easy payment for one employee through payroll
• Personalised tax calendar for your business

Get started with ANNA today, and get ready for MTD with ease, confidence, and some extra money saved. If you have questions, we’re ready to help 24/7 in the ANNA app.