Making Tax Digital: Everything That You Need to Know

Making Tax Digital (MTD) is the most significant change in UK tax rules in decades, transforming how individuals and businesses record, report, and pay their tax bills.

For freelancers, contractors, small business owners, and sole traders, this changes how accounts are kept and how businesses interact with His Majesty’s Revenue and Customs (HMRC).

Understanding MTD can feel overwhelming, especially with evolving rules, deadlines, and requirements. This guide explains everything you need to know to comply with ease.

Key points

• MTD is shifting the UK tax system to continuous digital reporting 💻
  MTD replaces the traditional once-a-year Self Assessment process with ongoing digital record-keeping and regular submissions.
• Different taxes have different MTD rules and timelines 🧾
  MTD for VAT has been mandatory for most VAT-registered businesses since April 2019. MTD for Income Tax will roll out gradually, starting in April 2026 for sole traders and landlords earning over £50,000, expanding to £30,000 in 2027 and £20,000 in 2028.
• Digital record-keeping means structured financial data 📊
  HMRC requires records to be stored in compatible software that tracks transactions digitally and sends data directly via secure APIs.
• MTD introduces more frequent reporting but keeps most deadlines the same 📅
  Businesses must submit quarterly updates that summarise income and expenses, followed by an end-of-period statement and final declaration. While reporting becomes more frequent, payment deadlines remain unchanged.

What is Making Tax Digital?

Making Tax Digital is a UK government initiative designed to modernise the tax system by requiring most taxpayers to keep digital records and submit tax information electronically using compatible software.

Instead of sending a single Self Assessment tax return at the end of the year, businesses and individuals now have to update HMRC periodically throughout the year.

Why MTD was introduced

The UK tax system traditionally relied on annual returns drafted by individuals or accountants. This system was developed long before cloud computing, real-time transaction data, and automated reporting were possible.

With these technological advancements, the tax system needed an upgrade – and MTD was introduced as the solution.

MTD brings many advantages to both taxpayers and HMRC, such as:

1. Fewer errors: Manual entry, lost receipts, and inconsistent ledgers are major causes of incorrect tax filings. Digital records help reduce these mistakes.
2. Real-time data: HMRC can see up-to-date financial information, helping taxpayers understand their tax position throughout the year.
3. Improved compliance: Frequent reporting encourages better record-keeping and reduces the likelihood of surprise bills or penalties.
4. Future-proofing the tax system: Cloud integrations, automation, and software ecosystems allow the regime to scale with business needs.
5. Greater efficiency: By eliminating redundant forms and consolidating reporting processes, the tax system has become much more efficient in terms of time and cost.

This modernisation ultimately shifts compliance from a reactive, annual scramble to a proactive, year-round process.

Who has to comply with Making Tax Digital?

MTD requirements vary depending on the type of tax you pay and on the way your business is structured. Below is a clearer breakdown of who is affected, what’s required, and when the rules apply:

1. MTD for VAT

MTD for VAT was the first stage of the programme and has been in effect since April 2019.

All VAT-registered businesses have to follow MTD for VAT rules. This originally applied to businesses with VAT-taxable turnover above the VAT registration threshold, but it’s since been extended to all VAT-registered businesses, regardless of turnover.

What does compliance involve?

Under MTD for VAT, businesses must:

• Keep digital records of all VAT-related transactions
• Use MTD-compatible software to submit VAT returns directly to HMRC
• Maintain digital links between records and submissions, rather than manually retyping figures into HMRC’s online portal

In short, paper records and manual submissions through the old HMRC VAT portal are no longer acceptable.

2. MTD for Income Tax (MTD ITSA)

MTD for Income Tax Self Assessment represents the next major phase of the programme. It mainly affects self-employed individuals and landlords.

Making Tax Digital for Income Tax applies to sole traders and landlords based on their total gross income from self-employment and/or property. The rules are being introduced gradually, and you’ll have to comply according to certain thresholds:

• From 6 April 2026: If your combined gross income from self-employment and property is over £50,000
• From 6 April 2027: If your combined income is over £30,000
• From 6 April 2028: If your combined income is over £20,000

If your income exceeds the threshold for the relevant phase, you’ll need to keep digital records and submit quarterly updates using MTD-compatible software.

Even if your income is currently below these thresholds, the scope of MTD may expand in the future, so many businesses choose to adopt digital record-keeping earlier to stay prepared.

What does compliance involve?

Under MTD for Income Tax, you must:

• Keep digital records of your business and property income and expenses
• Submit quarterly updates to HMRC, summarising your income and allowable expenses
• Complete an end-of-period statement after the tax year ends
• Submit a final declaration confirming your overall income and tax position

What counts as digital record-keeping?

HMRC requires structured, digital records that can be maintained and submitted through compatible software.

In practical terms, digital record-keeping means:

• Using software that can create, store, and update tax-relevant information electronically
• Recording key transaction data, such as dates, amounts, and VAT details, in a digital format
• Ensuring information can be sent directly to HMRC via secure Application Programming Interfaces (APIs)
• Avoiding manual retyping of figures into HMRC’s online forms, except in very limited circumstances

The goal is to reduce human error caused by copying and pasting numbers, rekeying totals, or relying on disconnected spreadsheets.

While spreadsheets can still be used in some cases, they need to be digitally linked to MTD-compatible bridging software that can submit data directly to HMRC. Manually transferring figures from a spreadsheet into separate software wouldn’t meet the digital-linking requirement.

Compliant tools typically include cloud-based accounting software, digital invoicing platforms, bookkeeping apps, and fully integrated financial systems. These platforms automatically capture transactions and maintain a clear audit trail.

In short, HMRC expects your records to be kept in a fully connected digital system.

What are digital submissions?

Digital submissions are the electronic transfer of tax information from your software to HMRC.

Instead of logging into the HMRC portal and typing in totals, your software sends the required data directly through secure APIs. This ensures:

• The data is transferred accurately
• The submission is authenticated
• HMRC confirms receipt electronically

Depending on the type of tax and your circumstances, digital submissions may include:

• Quarterly summaries of income and expenses under MTD for Income Tax
• VAT returns submitted directly from compatible software
• End-of-period statements
• Final declarations confirming your overall tax position

For businesses, this creates a more streamlined reporting process. For HMRC, it improves processing efficiency and enables more timely updates on tax positions.

The key deadlines you need to know

MTD doesn’t change when tax is due, but it does change how often you have to report information. Staying on top of deadlines is essential to avoiding penalties.

Deadlines for VAT

VAT returns and payments are generally due one month and seven days after the end of your VAT period.

Under MTD for VAT:

• Returns must be submitted through MTD-compatible software
• The existing filing and payment deadlines remain the same
• Manual submission through HMRC’s old portal is no longer allowed for most VAT-registered businesses

Example timeline for a typical quarterly VAT period:

• VAT period: 1 January to 31 March
• Return and payment deadline: 7 May

If you pay VAT by Direct Debit, HMRC typically collects the payment three working days after the submission deadline, provided the return was filed on time.

Deadlines for Income Tax

MTD for Income Tax introduces more frequent reporting, even though payment dates largely remain aligned with the existing Self Assessment system.

Under MTD ITSA, you’ll generally need to submit:

1. Quarterly updates

These summaries report your income and expenses during the year.

Typical deadlines are:

• Quarter 1 (6 April to 5 July): due 5 August
• Quarter 2 (6 July to 5 October): due 5 November
• Quarter 3 (6 October to 5 January): due 5 February
• Quarter 4 (6 January to 5 April): due 5 May

HMRC may allow calendar quarter elections for some taxpayers, which align updates with standard calendar dates (31 March, 30 June, 30 September, and 31 December).

2. End-of-period statement (EOPS)

After the tax year ends, you need to finalise your business records and confirm adjustments such as:

• Allowable expenses
• Capital allowances
• Accounting adjustments

The EOPS deadline is 31 January following the end of the tax year.

3. Final declaration

This replaces the traditional Self Assessment tax return. It confirms your total income from all sources, including employment, investments, property, and self-employment.

The final declaration is also due by 31 January.

4. Income Tax payment deadlines

These remain largely unchanged:

• 31 January: balance of tax for the previous tax year + first payment on account for the current year
• 31 July: second payment on account

Because MTD provides more frequent financial updates, many taxpayers will have a clearer view of their tax bill before these payment deadlines arrive. This can make it easier to plan cash flow and avoid last-minute surprises.

Who is exempt from MTD?

HMRC recognises that digital compliance may not be practical for everyone. In certain circumstances, MTD exemptions may be granted.

You may qualify for an exemption if:

• A disability makes it difficult or impossible for you to use digital tools
• You live in a location without reliable internet access
• Digital record-keeping would place a disproportionate burden on you due to your specific circumstances

Exemptions aren’t automatic – you must apply to HMRC and provide a valid reason before the relevant MTD obligations take effect.

Keep in mind that, even if you are exempt from submitting digitally, HMRC may still require you to maintain adequate records.

If you believe you may qualify, it’s important to contact HMRC early to avoid non-compliance penalties.

Preparing for MTD: A practical checklist

If you’re just starting with Making Tax Digital, preparation is all about structure. Here is a straightforward checklist to help you transition smoothly:

1. Choose MTD-compliant software

Make sure you are using software that meets HMRC’s digital record-keeping and submission requirements. It should be able to maintain digital records and submit data directly to HMRC via approved connections.

2. Connect your bank feeds

Link your business bank account to your software so transactions are imported automatically. This removes the need for manual entry and helps maintain accurate, up-to-date records.

3. Understand your reporting schedule

Know when your quarterly updates, VAT returns, end-of-period statements, and tax payments are due. MTD introduces a more frequent reporting rhythm, so awareness of deadlines is essential.

4. Monitor your tax position throughout the year

MTD is designed to provide better visibility of your tax obligations. Reviewing your estimated liabilities regularly helps you plan ahead and avoid cash flow pressure.

5. Set money aside for tax

Regular reporting works best when paired with regular preparation. Putting aside funds as income comes in can prevent last-minute stress when payment deadlines arrive.

How ANNA makes Making Tax Digital simple – for FREE

For many freelancers, sole traders, and landlords, the most difficult part of Making Tax Digital for Income Tax Self Assessment is keeping records accurate and up to date throughout the year.

Instead of juggling spreadsheets, banking apps, accounting software, and tax tools, ANNA brings everything together in one platform built specifically for small businesses and self-employed professionals.

For the first year, ANNA offers free support for MTD Self Assessment for Income Tax – and your 2025–26 filing is free, too! If you already filed your 2025–26 return using different software, ANNA will also refund you the cost of opening that other account, just to welcome you aboard.

With ANNA, you get:

• Automatic MTD quarterly updates: Prepares your records so quarterly submissions are ready to file on time
• Year-end Self Assessment submission: Submits your final declaration directly to HMRC through the app
• Free 2025/26 Self Assessment filing: Connects with your HMRC account and unlocks free filing for the 2025/26 tax year
• Auto Accountant bookkeeping: Categorises transactions automatically and keeps your records organised
• 24/7 Auto Accountant support: Answers your tax questions anytime with clear, jargon-free guidance
• Automatic VAT calculations and filing: Calculates your VAT return and submits it to HMRC if you are VAT-registered
• Simple invoicing with card payments: Lets you create invoices and accept card payments so clients can pay faster
• Personalised tax calendar: Tracks important deadlines with reminders tailored to your business
• Payroll for one employee: Runs payroll with automated PAYE and National Insurance calculations

So sign up with ANNA today and stay ahead of MTD while spending less time on tax admin and more time growing your business. And if you have any questions, we’re in the app, ready to help 24/7.