Making Tax Digital for Small Businesses [A Complete Guide]

Making Tax Digital (MTD) requires businesses and individuals to keep digital tax records and submit updates to HMRC using compatible software.

Whether you're a sole trader, a landlord, or a small limited company, MTD will eventually affect how you manage your tax obligations.

In this guide, we explain what Making Tax Digital for small businesses actually means, who it applies to, what the key deadlines are, and how to make sure you're compliant without the stress.

Key points

• MTD for Income Tax is rolling out gradually from April 2026 🗓️
  Sole traders and landlords earning over £50,000 will join first in 2026, followed by those earning over £30,000 in 2027 and over £20,000 in 2028. The new system introduces quarterly updates instead of one annual tax return.
• Good record-keeping is essential under MTD 📂
  You'll need accurate digital records of income, expenses, purchases, invoices, and VAT information where applicable. HMRC can ask for evidence, so records should generally be kept for at least five years after the relevant tax year's filing deadline.
• Missing submissions can lead to penalty points and fines ⚠️
  HMRC uses a points-based penalty system for MTD for ITSA. Each missed deadline adds a point, and quarterly filers receive a £200 penalty once they reach four points, alongside possible late payment penalties.
• Using the right software makes MTD far easier to manage 🚀
  MTD-compatible tools can automate bookkeeping, track expenses, estimate taxes in real time, and send reminders for upcoming deadlines. ANNA helps small businesses stay compliant by handling bookkeeping, tax estimates, HMRC submissions, reminders, and tax savings all in one place.

What is Making Tax Digital?

Making Tax Digital is a government initiative designed to modernise the UK tax system, with the goal of making tax administration more accurate and efficient.

The main changes MTD brings to business owners are:

• Keeping digital records of their income and expenses
• Using HMRC-recognised software to submit tax information
• Reporting to HMRC more frequently than under the traditional annual system

HMRC's view is that digital record-keeping reduces errors caused by manual data entry and makes it easier for taxpayers to stay on top of what they owe throughout the year.

💡 Did you know?

HMRC estimates that avoidable tax errors cost the UK economy billions of pounds each year. MTD is designed to close what the government calls the 'tax gap' – the difference between the tax that should be collected and the tax that actually is collected.

Who does Making Tax Digital apply to?

MTD is being introduced in stages, covering different groups of taxpayers at different times.

Here's how it works:

MTD for VAT

MTD for VAT has been mandatory for all VAT-registered businesses since April 2022, regardless of turnover. If your business is VAT-registered, you should already be keeping digital VAT records and submitting your VAT returns online through MTD-compatible software.

If you're not doing this yet, you should start right away – HMRC can issue penalties for non-compliance.

💡 Did you know?

ANNA's VAT filing tool handles MTD-compliant VAT submissions directly, without the need for separate bridging software.

MTD for Income Tax Self Assessment

MTD for Income Tax Self Assessment (MTD for ITSA) is the biggest MTD change for sole traders and landlords.

Under the new MTD rules, you'll need to:

• Keep digital records of your income and expenses
• Submit quarterly updates to HMRC
• File an end-of-period statement and a final declaration annually

But not everyone is required to start with MTD for ITSA this year. The program will expand in the next two years based on income thresholds.

The current rollout timeline for MTD for ITSA is:

• April 2026: Sole traders and landlords with a qualifying income over £50,000
• April 2027: Sole traders and landlords with a qualifying income over £30,000
• April 2028: Sole traders and landlords with a qualifying income over £20,000

Qualifying income refers to your gross income from self employment and property combined, before any expenses are deducted.

🧠 Good to know

ANNA's Self Assessment service is built to handle every stage of MTD for ITSA, from keeping your records submission-ready throughout the year, to filing your quarterly updates and final declaration when the time comes.

And if you register now, ANNA will file your Self Assessment for the 2025/26 tax year for free. Even if you've already signed up elsewhere, ANNA will refund the filing fee when you switch.

What records do you need to keep digitally?

Under MTD, your digital records need to include:

You don't need to scan every paper receipt, but your digital records must accurately reflect the transactions and be kept in software that can link directly to HMRC's systems.

📝 Good to know

Most self employed individuals must keep records for at least five years after the 31 January submission deadline of the relevant tax year.

Good software makes all the difference here, and an ANNA business account keeps your income and expenses tracked in real time, so your records are always organised.

What software do you need?

You must use software that is recognised by HMRC for MTD submissions. Depending on your needs, you can pick between dedicated accounting platforms, bridging software (which connects spreadsheets to HMRC's systems), and all-in-one business finance tools.

When choosing MTD-compliant software, it's worth asking:

• Does it integrate directly with HMRC's MTD systems?
• Can it handle quarterly submissions as well as annual ones?
• Does it make bookkeeping and expense tracking easy on a day-to-day basis?
• Is it designed with small businesses in mind?

For many small businesses, the right software should also reduce admin by automating bookkeeping tasks that would otherwise take hours each month.

How do quarterly submissions work under MTD for ITSA?

One of the biggest adjustments for small businesses switching to MTD for ITSA is the shift from one annual tax return to four quarterly updates plus a final declaration.

Here's how the process works:

Quarterly updates are summaries of your income and expenses for each three-month period. They're more like check-ins that give both you and HMRC a picture of where your tax liability stands.

The four quarterly periods are:

The end-of-period statement is submitted after the tax year ends and allows you to make any adjustments, such as claiming allowances or correcting figures.

The final declaration replaces the traditional Self Assessment tax return and confirms your total income from all sources for the year.

What are the penalties for non-compliance?

HMRC has introduced a new points-based penalty system that applies to MTD for ITSA. Each missed submission earns one penalty point. When points reach the threshold for your submission frequency, a £200 penalty is applied.

For quarterly filers, the threshold is four points. Points expire after 24 months if you've returned to full compliance.

In addition to the points-based system, HMRC can also charge late payment penalties when tax is paid after the due date.

How to prepare for Making Tax Digital

Here's a practical MTD checklist to help you get ready:

• Confirm which rules apply to you: Check which phase of MTD applies to your income level and business type, and note your specific deadline.
• Choose your software now: Don't wait until the deadline. Getting comfortable with MTD-compatible software before you're legally required to use it makes the transition much smoother.
• Review your current record-keeping: If you currently use paper records, a basic spreadsheet, or nothing at all, now is the time to switch to a digital system.
• Understand the quarterly schedule: MTD for ITSA requires four submissions a year. Add these dates to your calendar as recurring reminders so they don't catch you off guard.

ANNA – The easier way to stay compliant, built for small businesses

MTD is easier to manage when your finances are already organised digitally throughout the year.

Here's how ANNA supports MTD compliance for small businesses:

• Automated bookkeeping: Categorise income and expenses automatically, keeping your records accurate and MTD-ready without manual data entry.
• Real-time tax estimates: See your estimated tax liability as your income changes, so there are no surprises when it's time to submit.
• Smart Money Pots: Set money aside for your quarterly tax obligations as soon as income arrives, so you're never caught short when a payment is due.
• Easy tax support: Get help with VAT, Self Assessment, and MTD-related questions directly through the app.
• Reminders and alerts: Stay on top of your MTD submission deadlines with built-in reminders, so penalty points are never a risk.
• 24/7 support: Get help whenever you need it, without waiting for office hours.

Try ANNA today, and stay MTD-ready without the spreadsheets, stress, or last-minute panic.