Making Tax Digital Software For UK Small Business Owners

If you run a small business, work as a sole trader, or earn income as a landlord, Making Tax Digital (MTD) will affect how you keep records and report to HMRC. Using Making Tax Digital software helps you keep digital records and submit updates to HMRC in the required format. Some of the rules are already in force, and more changes are coming soon. This guide covers all three phases of Making Tax Digital — VAT and Income Tax Self Assessment — so you know exactly where you stand and what you need to do next.

At a Glance

Making Tax Digital is HMRC’s programme to move the entire UK tax system online using digital record-keeping
Making Tax Digital for VAT is already in force — all VAT-registered businesses must use compatible software now
Making Tax Digital for Income Tax Self Assessment starts in April 2026 for sole traders and landlords with a qualifying gross income over £50,000
The income threshold drops to £30,000 from April 2027
The government has set out plans to introduce legislation to lower the qualifying income threshold to £20,000 from 2028, as per GOV.UK for the latest confirmed position
Making Tax Digital for Corporation Tax has been cancelled by HMRC
You need HMRC-recognised compatible software for all Making Tax Digital submissions
A new points-based penalty system applies for late submissions under MTD for Income Tax

What is Making Tax Digital?

Making Tax Digital is an HMRC initiative to modernise the UK tax system by requiring businesses and individuals to keep digital records and report tax information using compatible software. The aims are to reduce errors, give taxpayers a clearer real-time view of what they owe, and make compliance simpler and more efficient.

Making Tax Digital is being introduced in stages, tax by tax. VAT came first, and Income Tax will be phased in from April 2026.

Is Making Tax Digital for VAT already in force?

Yes. Making Tax Digital for VAT has been mandatory for all VAT-registered businesses since April 2022, regardless of turnover. If you are VAT-registered, you must already:

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Keep digital VAT records
Submit your VAT returns using HMRC-recognised MTD-compatible software

What records must I keep digitally for VAT?

Your digital VAT records must include:

Your business name, address, and VAT registration number
The VAT accounting scheme you use
VAT on sales — the time of supply, the value, and the rate charged
VAT on purchases — the time of supply, the value, and the input tax you are claiming

What is MTD bridging software for VAT?

If you keep your VAT records in a spreadsheet and do not want to switch to full accounting software, bridging software is an option. It creates a digital link between your spreadsheet and HMRC’s systems, satisfying the digital submission requirement without replacing your existing records.

Making Tax Digital for Income Tax Self Assessment

Making Tax Digital for Income Tax Self Assessment (MTD for IT) is the next major phase of the Making Tax Digital programme. It replaces the traditional annual Self Assessment return for eligible sole traders and landlords, requiring quarterly digital submissions to HMRC plus a year-end final declaration, all through compatible software.

The first deadline is 6 April 2026, applying to those with a qualifying gross income over £50,000. The threshold drops to £30,000 from April 2027, with further changes planned.

This is a significant change to personal tax reporting and self-assessment, and it is worth understanding well in advance. For full details — including who is affected, what qualifying income means, quarterly deadlines, the penalty system, landlord-specific rules, and exemptions – see our dedicated guide:

👉 Making Tax Digital for Income Tax — Full Guide

Making Tax Digital for Corporation Tax

Making Tax Digital for Corporation Tax has been scrapped by HMRC in July 2025, they stated: “HMRC do not intend to introduce MTD for CT”. Instead, they are exploring ways to upgrade their internal systems, benefiting businesses of all sizes.

💡 Tip: Even without a mandate, many limited companies will benefit from using accounting software.

Benefits of Using MTD-Compatible Software

MTD means you have to use software — but that is not necessarily a bad thing. Many small business owners who make the switch find that it genuinely improves the way they manage their finances. Here is what you stand to gain.

You will save time on admin

Cloud accounting software automates the tasks that eat up time — pulling in bank transactions automatically, calculating VAT, and submitting returns directly to HMRC. Once your bank feed is connected, much of the routine data entry takes care of itself. For most small businesses, this adds up to a meaningful saving every month.

Your numbers will be more accurate

Manual bookkeeping in spreadsheets leaves room for errors — a miskeyed figure, a formula that breaks, a transaction missed at year’s end. Software with automatic bank feeds and built-in calculations significantly reduces these risks. Your records are up to date throughout the year, not reconstructed from a shoebox in January.

You will always know where you stand

One of the biggest advantages of moving to cloud-based software is having a live view of your finances at any time of the year. You can see your income, expenses, and estimated tax position without waiting until after the year-end. For cashflow planning and avoiding a nasty tax bill surprise, this is genuinely useful.

You will find it easier to stay compliant

With MTD deadlines coming every quarter, software that reminds you what is due and when — and lets you submit in a few clicks – makes compliance much less stressful than chasing paperwork manually. The penalty for missing submissions is a points-based system that can quickly lead to fines, so staying on top of deadlines matters.

It makes working with an accountant easier

If you use an accountant or bookkeeper, cloud software makes collaboration much simpler. They can access your records remotely, spot issues early, and spend less time on data entry — which often means lower fees for you.

What to look for when choosing software

Before comparing options, think about what you actually need. The right software for a sole trader with a single income source differs from that needed by a landlord with multiple properties and a VAT-registered trade.

Key things to consider to keep digital records:

Which MTD taxes apply to you — VAT, Income Tax, or both? Not all software covers both, so check before committing
Multiple income sources — if you are both a sole trader and a landlord, you will need software that can manage separate quarterly submissions for each
Bank feeds — automatic transaction importing saves time every month and reduces errors
Invoicing — if raising invoices is part of your workflow, check that the software handles this well
Ease of use — you will be using this every quarter, so the interface needs to work for you
Free plan or trial — several options offer a free tier or trial period; make use of them before committing
Cost — monthly subscription costs vary significantly; compare plans for your business size

Paid Making Tax Digital Compatible Software

Here is our top list of HMRC-recognised Making Tax Digital compatible software providers:

QuickBooks Online

QuickBooks Online is HMRC-recognised for both Making Tax Digital for VAT and MTD for Income Tax software. Its straightforward interface makes it easy to track income and expenses, connect your bank feed, and submit directly to HMRC. Automation features reduce manual data entry, and built-in reporting gives you a clear picture of your finances throughout the year — not just at tax time.

QuickBooks is a strong all-rounder and particularly well-suited to small businesses that want a reliable, widely supported platform with a large user community and plenty of familiarity among accountants.

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XERO

Xero is one of the most popular cloud accounting platforms for UK small businesses, with built-in Making Tax Digital for VAT and Income Tax. It offers unlimited users across all plans, a clean dashboard, automatic bank feeds, and a wide range of third-party integrations, including Square, Fo-cardless, and Stripe. Xero is particularly well-regarded for ease of use if you are new to accounting software.

Pay your bills, record your expenses, claim back your VAT, and do it all from Xero’s slick, seamless interface. With simple dashboards and clear visual graphs of your financial data, you can understand your numbers at a glance.

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Sage

Sage is a leading choice for businesses aiming for Making Tax Digital (MTD) compliance, thanks to its user-friendly features and strong support. Its intuitive interface simplifies the MTD VAT return submissions and digital records, ensuring compliance with HMRC.

The software’s automation capabilities save time and reduce errors, allowing businesses to focus on growth rather than manual tasks. Sage also offers valuable insights into financial health through its analytics tools, aiding informed decision-making. There is a free version for sole traders recording simple income and expenses.

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FreshBooks

FreshBooks is a cloud accounting platform that is particularly strong on invoicing, making it a popular choice for freelancers and service-based businesses. It is HMRC-recognised for Making Tax Digital for VAT and offers a clean, easy-to-use interface with robust expense tracking and time recording features.

FreshBooks is best suited to sole traders who do a lot of client invoicing and want a polished, simple experience. It is less suited to businesses with complex stock or multi-source income needs.

Low-cost and Free Making Tax Digital Compatible Software

FreeAgent

FreeAgent is a well-regarded UK accounting package that is fully HMRC-recognised for both MTD for VAT and MTD for Income Tax. It is designed specifically for freelancers, sole traders, and small businesses, with a clean interface that makes it straightforward to use even if you have no accounting background.

💡 Tip: FreeAgent is available completely free if you have a business bank account with NatWest, Royal Bank of Scotland, or Mettle.

For everyone else, FreeAgent is a paid subscription — but it remains competitively priced and is one of the most MTD-focused options available for small UK businesses.

Zoho Books

Zoho Books is HMRC-recognised for Making Tax Digital for VAT and Income Tax. It offers a free plan for businesses with turnover under £35,000, which makes it one of the few genuinely free options for smaller sole traders and landlords who fall below that threshold.

The free plan covers invoicing, expense tracking, bank reconciliation, and VAT returns — more than enough for many small businesses. Paid plans unlock additional features, including automation and more users.

Landlord Software

Landlord Vision

Landlord Vision is an all-in-one property management platform that is HMRC-recognised for MTD for Income Tax. Designed specifically for UK landlords, it combines digital record-keeping for property income, quarterly MTD submissions, tenancy management, per-property expense tracking, and deadline reminders — all in one place. For landlords who want MTD compliance without adapting general accounting software to fit a purpose it was not built for, it is well worth considering.

Tips for a Smooth Transition to Making Tax Digital

Moving to MTD-compatible software does not have to be complicated. A little preparation goes a long way. Here are the most important steps to make the switch as straightforward as possible.

1. Start Early

The biggest mistake businesses make is leaving it until the last minute. Starting early gives you time to research your options properly, move your existing data across without rushing, get familiar with the software before your first quarterly deadline, and sort out any teething problems before they matter. If your mandatory start date is April 2026, now is the right time to act.

2. Be clear on your specific obligations

MTD is not one-size-fits-all. What you need to do depends on whether you are VAT-registered, within the MTD for Income Tax thresholds, or both. A VAT-registered sole trader has different requirements to a landlord with no VAT obligation. Get clear on which rules apply to you before you choose your software, so you do not pay for features you do not need or pick a product that does not cover everything you do.

3. Plan your data migration

If you are moving from spreadsheets or another system, take time to clean up your records before you migrate. Transferring messy or incomplete data into new software just moves the problem. Most MTD-compatible platforms include import tools for spreadsheets and other accounting systems — use them, check the results carefully, and keep a backup of your original records.

4. Use the training and support available

Every major software provider offers tutorials, help guides, and customer support. Make use of them. Most people find MTD-compatible software straightforward once they have spent a little time with it, but there is no need to figure things out from scratch when good resources are freely available. Many providers also run webinars specifically aimed at small businesses and first-time users.

5. Talk to your accountant or bookkeeper

If you use an accountant or bookkeeper, involve them in your software decision. They will often have a preference based on what they can access remotely, and choosing the same platform can make your working relationship smoother and potentially reduce your fees. If you do not currently use an accountant but are unsure about your MTD obligations, it is worth getting professional advice before your start date.

6. Keep an eye on HMRC updates

MTD rules and thresholds have changed several times since the programme was announced, and further updates are possible. Make sure you are subscribed to GOV updates.UK or check back regularly, and ensure your software provider keeps their product up to date with any regulatory changes. Always check GOV.UK for the current position before making decisions based on dates or thresholds.

By following these tips, you can navigate the transition to Making Tax Digital software smoothly and efficiently, ensuring compliance and potentially improving your business’s financial management. Embrace the digital future of tax with a well-prepared approach!

Do I need separate MTD software for VAT and Income Tax?

Not necessarily. Most of the major platforms — Xero, QuickBooks, and Sage — are HMRC-recognised for both MTD for VAT and MTD for Income Tax, so one subscription covers both obligations. However, not every product on the market covers both, so it is worth checking before you commit.

Can I use a free trial before committing to MTD software?

Yes, and it is strongly recommended. Most of the main providers, including Xero, QuickBooks, and Sage, offer either a free trial or a heavily discounted introductory period. This gives you the opportunity to test the interface, connect your bank feed, and check the software suits the way you work before paying full price. Zoho Books also has a free plan for businesses with a turnover under £35,000, and FreeAgent is free for NatWest, Royal Bank of Scotland, and Mettle business account holders.

What happens if I miss a quarterly MTD for Income Tax deadline?

MTD for Income Tax uses a points-based penalty system. You receive one penalty point for each missed quarterly submission. Once you reach the threshold, four points for quarterly filers, a £200 fixed penalty is triggered, with further £200 penalties for each subsequent late submission. Points can be removed once you have a period of compliance and submit a request to HMRC.

Does MTD software replace my accountant?

No, MTD software handles the record-keeping and submission side of your tax obligations, but it does not provide the professional judgment an accountant brings. It will not tell you whether you are claiming all the expenses you are entitled to, how to structure your business tax-efficiently, or how to handle more complex tax situations. Many accountants and bookkeepers actually prefer their clients to use cloud software, as it allows them to access your records remotely and spend less time on data entry, which can mean lower fees for you. Think of the software as the tool and your accountant as the expert who helps you use it to your best advantage.

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Last updated March 2026