A guide to making tax digital for income tax

Making Tax Digital for income tax (MTD) is set to become UK law in April 2026, significantly altering how businesses and landlords manage and report their income to HMRC. 

In this blog post, we will discuss what MTD is, its benefits, common challenges people will face, and how we can help. 

What is Making Tax Digital (MTD)?

MTD is a government initiative aimed at transforming the UK tax system by moving it fully online. It requires individuals and businesses to keep digital records and submit their tax information to HMRC using approved software. 

The goal is to make tax administration more effective, efficient, and easier for taxpayers. 

This shift will significantly change how people interact with tax systems, and while it introduces new responsibilities, it also provides opportunities to improve the way finances are managed daily. 

Who will be affected by Making Tax Digital? 

From April 2026, Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) will apply to self-employed individuals and landlords with a total annual income of more than £50,000. Then, starting April 2027, it will be extended to those earning between £30,000 and £50,000. 

This means that if you’re a sole trader running your own business or a landlord receiving rental income, you’ll be required to follow the new MTD rules if your total income from these sources exceeds the threshold. 

Types of income that fall under MTD for ITSA include: 

• Income from self-employment (sole traders) 

• Income from property rental (UK or overseas) 

• Partnership income (if you’re the nominated partner – though this won’t apply until a later phase) 

• Certain other untaxed income 

Even if you only own a small business or rent out a single property, you will be affected if your income exceeds the applicable threshold. It is a common misconception that MTD only applies to people with complex finances or large operations; however, many people with straightforward tax affairs will need to comply. 

Some exceptions apply, such as people who are unable to use digital tools due to age, disability, or location (for example, no internet access). In such cases, you may be eligible to apply to HMRC for a digital exclusion exemption. 

What will those affected need to do differently?

Rather than submitting a single tax return once a year, those affected will be required to provide quarterly updates on their income and expenses. 

These updates will be made using MTD-compliant software, which must be used to maintain digital records throughout the tax year. 

At the end of each year, two additional submissions will be required: 

• An End of Period Statement (EOPS) to finalise each source of business or property income 

• A Final Declaration that confirms overall tax position and replaces the traditional Self Assessment return 

To remain compliant, financial records must be accurate, up to date, and recorded digitally. Delays or guesswork will not be an option; staying organised throughout the year will be essential for avoiding errors and penalties.

What benefits will MTD bring for those affected?

Below, we explore some of the key advantages that MTD will offer to businesses and landlords. 

Improved accuracy through automation

MTD will increase accuracy in financial reporting.

By switching from manual spreadsheets or paper-based systems to digital record-keeping and MTD-compatible software, the risk of human error is significantly reduced. 

Automated features, such as real-time data syncing with bank accounts, automatic VAT calculations, and built-in error detection tools reduce the likelihood of common errors such as duplicated entries or missed transactions. 

The software highlights discrepancies as they occur, allowing users to correct errors before submissions are made. 

This not only results in more accurate VAT returns but also increases businesses’ confidence that their records are correct and compliant. 

Real-time financial visibility

MTD introduces the ability to view and review your financial information in real-time. 

Unlike traditional methods that rely on end-of-year summaries or manual updates, MTD-compatible software provides a real-time view of your financial position throughout the year. 

Thanks to features like up-to-date dashboards, instant reporting tools, and automatic bank feeds, businesses can monitor income, expenses, and cash flow on a daily or weekly basis. 

This real-time insight helps you stay in control of your finances, avoid surprises, and have a clear picture of where your business stands. 

It also allows for better forward planning. Whether you’re planning a VAT payment, saving for a tax bill, or considering an investment, having access to accurate, up-to-date information makes it much easier to make confident, informed decisions. 

As well as this, it allows businesses to identify issues such as late payments or overspending early on, meaning they can be addressed before they escalate into larger problems. 

Streamlined tax submissions

MTD-compatible software lets users to submit their tax information directly to HMRC via a secure digital link, eliminating the need to print, post, or manually upload forms. 

This direct integration with HMRC’s systems simplifies the submission process, saving time and reducing the risk of errors or delays. 

The digital approach is not only faster, but also more efficient and less stressful, especially as deadlines approach. 

Instead of scrambling to gather paperwork or manually calculating totals, users can use the software to prepare and submit accurate returns with a few clicks. 

Time savings on admin tasks

MTD will significantly reduce the amount of time spent performing routine admin tasks. 

Digital accounting tools automate many of the time-consuming processes that were once done manually, such as data entry, receipt reconciliation, and spreadsheet management. 

Instead of manually entering figures or searching for paper invoices, users can benefit from features such as pre-designed invoice templates, mobile apps for capturing receipts on the go, and live bank feed integrations that automatically pull in transactions. 

These tools simplify bookkeeping, making daily financial management faster and more efficient. 

As a result, businesses and individuals can significantly reduce administrative hours and redirect them to more valuable activities, such as growing the business, serving clients, or simply reducing workload stress.

Common challenges people will face 

While Making Tax Digital promises to simplify the tax process, the transition is not without challenges, particularly for those unfamiliar with accounting software or digital systems. 

Tech overwhelm and software confusion

Making Tax Digital (MTD) requires the use of compatible accounting software, which can be daunting for individuals and small business owners unfamiliar with digital systems. 

With countless platforms available, each with different interfaces, pricing plans, and capabilities, many people struggle to determine which is best suited to their needs, especially those who are less tech-savvy than others. 

On top of this, learning new jargon like ‘digital links’ or ‘API-enabled software’ can make the process feel overly complicated. This confusion can cause delays in implementation and increase the risk of non-compliance. 

Deadline misunderstandings and submission frequency

Under MTD, the transition from annual tax returns to more frequent quarterly updates can catch people off guard. 

Unlike traditional methods, MTD requires ongoing digital record-keeping and regular updates to HMRC. Missing a deadline, whether due to forgetfulness, a lack of understanding, or system errors, can result in penalties and may jeopardise a business’s standing with HMRC. 

Many taxpayers underestimate the importance of meeting these deadlines, particularly if they have multiple responsibilities. 

Bank reconciliation backlogs 

Bank transactions must be reconciled on a regular basis under MTD, but this is often overlooked. 

When transactions aren’t matched against invoices or expenses promptly, discrepancies build up quickly. This makes it harder to produce accurate records, which are required for each submission.  

Over time, this backlog can create confusion about cash flow, make year-end reviews more stressful, and increase the risk of submitting incorrect information. 

Inaccurate data entry and human error 

Digital systems are only as accurate as the information entered into them.  

A simple typo or misclassification of a transaction can distort reports, resulting in inaccurate VAT returns or financial statements. 

Businesses that rely on manual entry face an even greater risk of human error. These inaccuracies can draw unwanted attention from HMRC and result in audits, delays, or fines, especially if the errors occur over multiple reporting periods. 

Choosing the right software  

MTD requires the use of HMRC-approved software to keep digital records and submit updates. This means that traditional spreadsheets or paper-based bookkeeping will no longer suffice once MTD rules are implemented. 

There are several trusted options available, including platforms like Xero, which is designed to support more efficient finance management while remaining compliant with HMRC requirements. 

When choosing MTD-compatible software, it’s important to consider more than just cost. Think about the size of your business, the complexity of your finances, and how comfortable you are with technology. Many providers offer free trials, so it’s worth testing a few to see which one best fits your workflow. 

How One Two One Accounts can help 

With Making Tax Digital, bookkeeping is no longer just a background task, it’s a vital part of staying compliant. Keeping on top of it all can feel like a big ask, especially if you’re already stretched running a business. 

The good news? You don’t have to do it alone. With the right proactive bookkeeping support, you can meet MTD obligations with confidence and focus your time where it’s needed most. 

At One Two One Accounts, we offer expert bookkeeping services that go hand-in-hand with MTD requirements.  

From keeping accurate digital records to ensuring your submissions are based on real-time, up-to-date information, we help take the pressure off your shoulders. 

Our structured approach to bookkeeping gives you clarity and control.  

We’ll keep your accounts in perfect order, reconcile your transactions regularly, and ensure every entry is accurate.  

We don’t just keep your books tidy; we turn your numbers into insight, helping you understand your business performance and prepare for what’s ahead. 

Get in touch with us today to find out how we can support you.