Do You Need MTD Software If You’re Not VAT-Registered?

Making Tax Digital (MTD) is one of the biggest changes to the UK tax system in a while. HMRC’s long-term goal is to move tax reporting away from manual processes and toward fully digital record-keeping and submissions.

For many business owners, freelancers, and landlords, the biggest question is simple: do you actually need Making Tax Digital software if you’re not VAT-registered?

The answer depends on several factors, including your income level, business structure, and the part of the MTD programme that applies to you.

This guide explains how the rules work, who needs MTD-compatible software, and when you might still benefit from using it even if you aren’t VAT-registered.

Key points

• Making Tax Digital requires digital records and software submissions 💻
  MTD replaces paper records and manual tax returns with digital record-keeping and submissions through compatible software.
• VAT-registered businesses already use MTD software ✅
  Since April 2022, all VAT-registered businesses are required to keep digital records and submit VAT returns using MTD-compatible software, regardless of turnover. This rule applies whether you registered voluntarily or exceeded the VAT threshold.
• MTD for Income Tax will expand to many freelancers and landlords 📈
  From April 2026, sole traders and landlords earning over £50,000 need to follow MTD rules for Income Tax. The threshold will drop to £30,000 in 2027 and to £20,000 in 2028.
• Some taxpayers may not need MTD software yet ⏳
  If your income is below the current thresholds, or if you mainly earn through PAYE employment or pensions, the MTD rules may not apply immediately.

Understanding Making Tax Digital

Making Tax Digital is HMRC’s initiative to modernise the UK tax system. The programme replaces paper records and manual submissions with digital record-keeping and automated reporting through compatible software.

Under MTD rules, taxpayers must:

• Keep digital records of their income and expenses
• Use compatible software to submit updates to HMRC
• Maintain digital links between systems where data is transferred

Instead of submitting one Self Assessment return per year, some taxpayers will need to send quarterly updates, followed by end-of-year submissions.

MTD has been introduced in phases, which is why the answer to whether you need software depends on which stage applies to you.

When is MTD software mandatory?

MTD software is mandatory when HMRC requires taxpayers to keep digital records and submit tax information electronically. Whether you must use MTD-compatible software depends on factors such as your VAT registration status, income level, and the type of tax you report to HMRC:

1. If you’re VAT-registered

If your business is VAT-registered, the answer is simple: you must use MTD-compatible software.

Since April 2022, all VAT-registered businesses must keep digital records and submit VAT returns using compatible software, regardless of turnover.

This applies whether you:

• Earn above the VAT threshold
• Registered voluntarily for VAT
• Run a sole trader business, partnership, or limited company

Once you’re registered for VAT, everything must go through MTD software.

2. If you earn above the MTD for Income Tax threshold

Even if you’re not VAT-registered, you may still need MTD software under the next phase of the programme: Making Tax Digital for Income Tax Self Assessment (MTD for ITSA).

From April 2026, the rules apply to sole traders and landlords earning over £50,000 annually from self-employment or property income. Then, from April 2027, the threshold will drop to £30,000, and in April 2028, further down to £20,000.

These taxpayers must:

• Keep digital records
• Submit quarterly updates to HMRC
• File an End of Period Statement and final declaration using software

So even if you’re not VAT-registered, you’ll still need MTD software if your income exceeds the threshold once the new rules apply.

When you may not need MTD software yet

You may not need an MTD-compliant software solution yet, if:

1. Your income is below the threshold

If you’re a sole trader or landlord earning below £50,000 in 2026, you aren’t required to join MTD for Income Tax immediately. You can continue using the existing Self Assessment system until the rules expand to lower income levels.

2. You’re not self-employed or a landlord

MTD for Income Tax currently applies mainly to:

• Sole traders
• Landlords with property income

If your income comes primarily from employment (PAYE), pensions, or investments, the new requirements don’t apply to you.

You would only need to follow MTD rules if you also have qualifying self-employment or property income above the thresholds.

3. You qualify for a digital exemption

Although MTD is designed to move tax reporting online, HMRC recognises that not everyone can use digital tools. In certain circumstances, taxpayers can apply for a digital exemption, which allows them to continue managing their tax obligations using alternative methods instead of MTD-compatible software.

You may be eligible for an exemption if using digital systems isn’t practically possible for you. This can include situations where you:

• Have a disability or health condition that makes it difficult or impossible to use digital devices or software
• Live in a location with limited or unreliable internet access, making online submissions impractical
• Hold religious beliefs that prevent the use of certain technologies

If you believe you may qualify, it’s important to contact HMRC and request an exemption before the relevant MTD requirements apply to you.

Can you still use spreadsheets?

Many small businesses already track their finances using spreadsheets. The good news is that spreadsheets can still be used under MTD in some cases.

However, there’s an important condition: the spreadsheet must connect to HMRC using bridging software that creates a digital link between your records and HMRC’s system.

This means you can’t just copy and paste numbers into an online form – the data must be transferred digitally.

While this approach works, many businesses eventually switch to full accounting software because it simplifies compliance.

How to choose the right MTD software

If you decide to start using MTD-compatible software, it’s worth choosing a platform that does more than simply send updates to HMRC. The best tools act as a central hub for your business finances, helping you stay organised, reduce admin time, and avoid costly mistakes.

Because MTD requires consistent digital record-keeping throughout the year, the software you choose should make daily financial tasks easier.

Below are some of the most useful features to look for when comparing MTD software.

1. Automated expense tracking

Keeping accurate records of business expenses is essential under MTD. Instead of manually entering everything into a spreadsheet, good software should automatically capture and categorise your expenses.

Many platforms connect directly to your bank account and import transactions in real time. From there, the software can suggest categories such as travel, software subscriptions, or office costs. Some tools also allow you to upload receipts by taking a photo with your phone, which helps ensure your records stay complete and organised.

Automated expense tracking saves time and reduces the risk of missing deductible expenses that could lower your tax bill.

2. Real-time tax estimates

One of the biggest challenges for freelancers and sole traders is not knowing how much tax they owe until the end of the tax year. MTD software can solve this problem by estimating your tax liability as your income and expenses are recorded.

Real-time estimates help you see how much you may need to set aside for Income Tax, National Insurance, or VAT if you’re registered. This visibility can make financial planning much easier and reduce the stress that often comes with large tax bills.

3. Invoice creation and management

If you regularly bill clients, invoicing features can make a significant difference to your day-to-day workflow. Many MTD-compatible platforms include built-in invoicing tools that allow you to create and send professional invoices in just a few clicks.

Good invoicing systems also let you:

• Track which invoices have been paid
• Send automatic payment reminders
• Accept online payments
• Keep client records in one place

4. Digital record storage

MTD requires businesses to maintain digital records of income and expenses, which means keeping everything organised in a secure digital format.

Accounting software should store transaction histories, receipts, invoices, and financial records in one place so that you can easily access them if needed. This is especially important if HMRC ever requests supporting documentation.

5. Bank account integration

Bank integration is one of the most useful features modern financial tools offer. By connecting your business bank account to the software, transactions can be imported automatically and updated regularly.

This connection allows you to see your income, expenses, and balances in real time. It also reduces the need for manual data entry, which helps prevent errors and keeps your records aligned with your actual bank activity.

Some platforms also offer additional features such as automatic transaction categorisation, bank reconciliation tools, and cash flow insights that help you understand how money moves through your business.

6. Quarterly submission support

Under the new system, many sole traders and landlords will need to submit quarterly updates to HMRC rather than a single annual return.

MTD software should make this process straightforward. Instead of preparing reports manually, the platform should be able to generate and submit updates directly to HMRC using the required digital connection.

7. A system that works together

While each of these features is valuable individually, the greatest benefit comes from using software that combines them into a single, connected system.

When your bank transactions, expense tracking, invoicing, and tax reporting all work together, your financial data stays consistent.

For busy freelancers, sole traders, and landlords, software that integrates these tools can significantly reduce the administrative burden of managing finances.

How ANNA simplifies Making Tax Digital – for free

Instead of juggling multiple tools to stay compliant with MTD, ANNA brings everything together in one automated system. Rather than requiring manual bookkeeping or complicated setup, most of the work happens in the background.

ANNA also offers free Self Assessment filing for the 2025/26 tax year once you connect your account to HMRC. If you’ve already filed elsewhere, ANNA will even refund your filing fee when you switch.

Here’s what you also get with ANNA:

• Automated bookkeeping: Automatically records and categorises transactions, removing the need to manually log income and expenses
• Real-time tax estimates: Continuously updates your estimated tax bill, helping you avoid surprises at the end of the year
• Smart tax pots: Automatically sets aside money for tax as you earn, making it easier to prepare for HMRC payments
• Built-in invoicing: Lets you create and send professional invoices, track payments, and organise client records
• UK business account connected to your records: Automatically syncs spending and bookkeeping so transactions appear in your financial records
• Automated Income Tax Self Assessment filings: Submits required reports directly to HMRC without the need for complicated tax software
• Reminders and 24/7 support: Sends automatic reminders to help you meet deadlines and provides professional support over live chat whenever you need it

Unlike traditional accounting tools that require extensive setup or accounting knowledge, ANNA is designed to ensure everything runs smoothly. There’s no complicated software to learn, no manual logs to maintain, and no need to hire an accountant.

So try ANNA today and stay on top of your MTD obligations with ease.