Making Tax Digital (MTD) for Small Businesses — What You Need to Know in 2026

Making Tax Digital is HMRC's programme to move the UK tax system onto digital record-keeping and reporting. If you're a freelancer, sole trader, or small business owner, MTD will affect how you keep your records and submit information to HMRC — and for many, it already does.

This guide explains what MTD is, who it currently applies to, what's coming next, and what you actually need to do to stay compliant.

What is Making Tax Digital?

Making Tax Digital requires businesses and individuals to keep digital tax records and submit tax information to HMRC using compatible software — rather than manually filling in forms or using spreadsheets alone. The goal is to reduce errors, make tax administration more efficient, and give businesses a clearer real-time picture of their tax position.

MTD is being rolled out in phases, covering different taxes and different income thresholds at different times. It started with VAT, and is now expanding to Income Tax.

MTD for VAT — already in force

MTD for VAT has been mandatory for all VAT-registered businesses since April 2022, regardless of turnover. If your business is VAT-registered, you are already required to:

1. Keep digital VAT records
2. Submit VAT returns using MTD-compatible software
3. Maintain a digital link between your records and your submission — you cannot manually re-key figures from a spreadsheet into HMRC's portal

If you're VAT-registered and still submitting returns manually through HMRC's online portal, you are not compliant with MTD and could face penalties. You need to be using MTD-compatible software.

MTD for Income Tax — what's coming and when

MTD for Income Tax Self Assessment (MTD for ITSA) will require self-employed individuals and landlords to keep digital records and submit quarterly updates to HMRC, rather than a single annual tax return. This is the biggest change for freelancers and sole traders.

The rollout is happening in stages based on income level:

Note: "Qualifying income" means your gross income from self-employment and/or property — before expenses. It's not your profit figure.

What does MTD for Income Tax actually require you to do?

Under MTD for ITSA, instead of filing one annual Self Assessment tax return, you'll need to:

1. Keep digital records of all your income and expenses throughout the year using MTD-compatible software
2. Submit quarterly updates to HMRC — four times a year, summarising your income and expenses for that quarter
3. Submit an end-of-period statement at the end of the tax year, finalising your figures and making any adjustments
4. Submit a final declaration (replacing the current Self Assessment return) to confirm your overall tax position for the year

The quarterly updates are not tax payments — they're information submissions. Your actual tax bill is still calculated and paid as it is now. The difference is that HMRC gets a more regular picture of your income throughout the year, and so do you.

What counts as MTD-compatible software?

HMRC maintains a list of approved MTD-compatible software on its website. To be compliant, your software must be able to:

1. Keep digital records of income and expenses
2. Submit quarterly updates directly to HMRC via the MTD API
3. Maintain digital links throughout — you cannot export data to a spreadsheet and re-enter it manually

Common MTD-compatible options include FreeAgent, Xero, QuickBooks, and a growing number of newer tools. Bridging software also exists for those who want to keep spreadsheet records but need to connect them to HMRC's system — though this is a more complex setup.

What about limited companies?

MTD for Corporation Tax — which would bring limited companies into the same digital reporting framework — has been consulted on but no mandatory start date has been confirmed as of early 2026. Limited companies are currently required to comply with MTD for VAT if VAT-registered, but the income tax quarterly reporting requirements do not apply to them.

Exemptions from MTD

HMRC does provide exemptions from MTD in certain circumstances:

1. Your income is below the relevant threshold
2. You are subject to an insolvency procedure
3. HMRC is satisfied that it is not reasonably practicable for you to use digital tools due to age, disability, remoteness, or other reasons

Exemptions are not automatic — you need to apply to HMRC. If you believe you qualify, contact HMRC before your mandatory start date.

What are the penalties for non-compliance?

HMRC introduced a new points-based penalty system alongside MTD. Each missed submission earns a penalty point. Once you reach a threshold of points — which varies depending on how frequently you're required to submit — a financial penalty of £200 applies. Further penalties apply for continued non-compliance.

Late payment penalties are separate and calculated as a percentage of the outstanding tax, increasing the longer it remains unpaid.

What should you do right now?

If you're already VAT-registered

Check that you're using MTD-compatible software to submit your VAT returns. If you've been using HMRC's old online portal, you are not compliant and need to switch. Your accountant or bookkeeper can help you get set up quickly.

If your income is over £50,000 (self-employed or landlord)

MTD for ITSA applies to you from April 2026. You should be choosing and setting up compatible software now, making sure your record-keeping is digital, and ideally running a test quarter before it becomes mandatory. Don't leave this until March 2026.

If your income is between £20,000 and £50,000

You have more time — April 2027 or 2028 depending on your income level — but starting to use digital record-keeping now means you won't face a steep learning curve when it becomes mandatory. It also gives you better visibility of your finances throughout the year.

If your income is under £20,000

No confirmed mandatory date yet, but HMRC has indicated the threshold will eventually come down further. Good habits now will serve you well whenever the requirement arrives.

How invoicing fits into MTD

Your invoices are the foundation of your MTD compliance. Every invoice you issue represents income that needs to be recorded digitally and reported to HMRC quarterly. The cleaner and more consistent your invoicing, the simpler your MTD submissions will be.

Specifically, MTD requires a digital record of each transaction — the date, amount, and category. An invoice issued through software like Invoice Kwik creates that record automatically, in real time, without any manual re-entry. This is exactly the kind of digital link HMRC requires.

Using invoicing software that integrates with your accounting or MTD submission tool means your income records flow through automatically — no manual exports, no spreadsheet re-keying, no risk of the data errors that MTD is designed to eliminate.

A note on the bigger picture

MTD represents a significant shift in how UK businesses interact with HMRC. The quarterly reporting requirement will feel like more admin in the short term, but many businesses find that having an up-to-date picture of their income and tax position throughout the year is genuinely useful — no more January scramble, no nasty surprises at the end of the tax year.

The businesses that will struggle most with MTD are those still relying on paper records or annual spreadsheet catch-ups. If you're already using digital invoicing and bookkeeping tools, the transition will be straightforward.

Try Invoice Kwik free — HMRC-compliant digital invoicing, ready when you are.