Making Tax Digital: What Small Businesses Should Prepare For
Making Tax Digital, often shortened to MTD, is changing how many sole traders and landlords report income and expenses to HMRC.
The key point is this: MTD is not only about filing a tax return online. It requires digital records, compatible software and regular updates to HMRC.
GOV.UK currently states that Making Tax Digital for Income Tax will become mandatory in phases from 6 April 2026. Sole traders and landlords registered for Self Assessment will need to use it if their qualifying income from self-employment or property is above the relevant threshold. The current thresholds are:
- over £50,000 for the 2024/25 tax year: use MTD from 6 April 2026
- over £30,000 for the 2025/26 tax year: use MTD from 6 April 2027
- over £20,000 for the 2026/27 tax year: use MTD from 6 April 2028
GOV.UK also states that partnerships will need to use Making Tax Digital for Income Tax in future, but the timeline has not yet been confirmed.
For support with digital records and software, see Merranti’s Accounting Software and Cloud Accounting pages.
What is Making Tax Digital?
Making Tax Digital is HMRC’s move towards digital tax records and software-based reporting.
For Income Tax, it affects how self-employed people and landlords keep records and report income and expenses. Instead of relying only on a once-a-year Self Assessment tax return, affected taxpayers will need to keep digital records and send quarterly updates using compatible software.
GOV.UK describes its Making Tax Digital for Income Tax guidance as HMRC’s new way to do Self Assessment for sole traders, landlords and agents. It explains digital records, quarterly updates, adjustments and submitting the tax return using software that works with Making Tax Digital for Income Tax.
Useful outgoing link: GOV.UK: Use Making Tax Digital for Income Tax
Who will Making Tax Digital affect?
Making Tax Digital for Income Tax will affect sole traders and landlords who are registered for Self Assessment and have qualifying income above the relevant threshold.
GOV.UK states that you will need to use Making Tax Digital for Income Tax if all of the following apply:
- you are a sole trader or landlord registered for Self Assessment
- you get income from self-employment or property, or both
- your qualifying income is more than the relevant threshold for the tax year
Useful outgoing link: GOV.UK: Find out if and when you need to use Making Tax Digital for Income Tax
This means MTD for Income Tax is especially relevant for:
- self-employed tradespeople
- consultants
- freelancers
- landlords
- sole trader retailers
- sole trader ecommerce sellers
- property businesses
- self-employed professionals
- businesses currently using spreadsheets or paper records
For sole traders and landlords, see Merranti’s Self Assessments page.
Do limited company directors need to use MTD for Income Tax?
A limited company director does not usually fall into Making Tax Digital for Income Tax just because they are a director.
MTD for Income Tax is aimed at self-employment and property income. If a director only receives salary and dividends from a limited company, that is not the same as sole trader income.
However, a director may still be affected if they also have:
- self-employment income
- rental property income
- a separate sole trader business
- partnership income when partnership rules are introduced
- other income that brings them into Self Assessment
Limited companies already have digital requirements in some areas, such as VAT if registered, but MTD for Corporation Tax has not been implemented.
For company accounting support, see Merranti’s Limited Company Accounting page.
Suggested future internal blog link once published: Self Assessment for Company Directors: When You Need to File a Tax Return
What counts as qualifying income?
Qualifying income broadly means income from self-employment and property before expenses, not profit after costs.
This distinction matters. A sole trader with £55,000 turnover and £25,000 expenses may have £30,000 profit, but the turnover figure can still bring them into scope if it is qualifying income above the threshold.
Business owners should check:
- self-employment turnover
- UK property income
- foreign property income, where relevant
- combined self-employment and property income
- whether income falls inside or outside the MTD rules
- whether any exemptions apply
GOV.UK says HMRC will review Self Assessment tax returns and check qualifying income each tax year. If income is above the relevant threshold, HMRC should write to confirm when the taxpayer needs to start using MTD, but GOV.UK also states it is still the taxpayer’s responsibility to check if and when they need to use the service.
What will businesses need to do under MTD?
A business or landlord within Making Tax Digital for Income Tax will need to:
- keep digital records
- use compatible software
- send quarterly updates
- make adjustments where needed
- submit the final tax return using software
- keep details up to date with HMRC
- work with an agent if they use one
This is why preparation matters. MTD is not something to deal with only at the filing deadline. It affects the way records are kept throughout the year.
Suggested future internal blog link once published: The Most Common Bookkeeping Mistakes Small Business Owners Make
Digital records: what changes?
MTD means business and property records need to be kept digitally.
That does not necessarily mean every business needs the most complex accounting software. Some businesses may be able to use spreadsheets with bridging software, while others will be better using accounting software that connects to bank feeds, invoices and expenses.
Digital records should usually make it easier to track:
- sales
- rent received
- business expenses
- property expenses
- bank transactions
- cash transactions
- mileage
- supplier invoices
- receipts
- categories of income and expense
- adjustments before final submission
Good digital records can also reduce year-end stress because the records are maintained throughout the year.
For software setup and digital bookkeeping, see Merranti’s Accounting Software and Cloud Accounting pages.
Compatible software: why it matters
MTD updates must be sent using software that works with Making Tax Digital.
GOV.UK provides guidance on choosing software for Making Tax Digital for Income Tax, including checking whether the software can keep digital records, send quarterly updates and submit the final tax return.
Useful outgoing link: GOV.UK: Choose the right software for Making Tax Digital for Income Tax
Before choosing software, businesses should ask:
- Does the software support MTD for Income Tax?
- Can it connect to the business bank account?
- Can it record income and expenses digitally?
- Can it handle property income, if relevant?
- Can it handle multiple trades or income sources?
- Can it produce useful reports?
- Can an accountant access the records?
- Is it simple enough to use consistently?
- What does it cost?
- Is support available?
The right software depends on the business. A landlord with one property may not need the same system as a sole trader with high transaction volume.
Quarterly updates: what should businesses expect?
MTD for Income Tax requires quarterly updates.
These updates are not the same as a final tax return. They are periodic summaries of income and expenses submitted during the year through compatible software.
This means business owners will need to keep records current enough to report during the year, not just once at year-end.
Quarterly updates make bookkeeping habits more important. Businesses that currently organise records once a year will need to change their process.
A practical approach is to review records monthly, so quarterly submissions are not rushed.
Suggested future internal blog link once published: How to Prepare Your Business for Year-End Accounts
MTD and VAT
Making Tax Digital already applies to VAT-registered businesses.
If a business is VAT registered, it should already be keeping digital VAT records and filing VAT returns through compatible software, unless exempt.
For businesses that are both VAT registered and within MTD for Income Tax, it is important that accounting systems are set up properly so VAT records, income tax records and business reports agree.
For VAT support, see Merranti’s VAT Services page.
Useful outgoing link: GOV.UK: Making Tax Digital for VAT
Suggested future internal blog links once published:
- VAT Registration: When It Becomes Compulsory and When It Might Be Worth Doing Early
- Should I Register for VAT If I Am Below the Threshold? Pros and Cons
MTD for trades and construction businesses
Making Tax Digital can be especially relevant for tradespeople who still rely on paper records, bank statements or spreadsheets.
A trades business may need to track:
- customer invoices
- materials
- subcontractors
- CIS deductions
- tools
- van costs
- mileage
- insurance
- VAT
- cash payments
- supplier invoices
- business and personal spending
Digital records can make this easier, but only if the system is set up properly.
Construction businesses also need to be careful that CIS, VAT domestic reverse charge and job costing records are handled correctly.
Suggested future internal blog links once published:
- Construction Accounting: Common Tax and Cash Flow Issues Builders Face
- CIS Tax Explained for Subcontractors and Contractors
- The Accounting Checklist Every Growing Construction Business Needs
MTD for landlords
Landlords with property income above the relevant threshold may be brought into MTD for Income Tax.
Property records may need to include:
- rent received
- letting agent statements
- repairs
- insurance
- mortgage interest
- service charges
- ground rent
- legal fees
- property management fees
- mileage or travel costs, where relevant
- replacement domestic items
- capital costs that may need separate treatment
Landlords should be especially careful to distinguish between repairs and improvements, because the tax treatment can differ.
MTD preparation for landlords should include choosing software that can handle property income and keeping records throughout the year rather than only before the Self Assessment deadline.
Why separate bank accounts help
Separate business bank accounts are not always legally required for sole traders, but they make MTD preparation much easier.
Separate accounts help reduce confusion between:
- business income
- personal spending
- business expenses
- drawings
- transfers
- cash deposits
- mixed-use costs
For limited companies, the company should have its own bank account because company money is legally separate from personal money.
Digital bookkeeping works better when business transactions are not mixed with personal spending. Bank feeds, expense categories and quarterly updates are easier to manage when the account is clean.
Suggested future internal blog link once published: What Records Should a Limited Company Keep? A Simple Compliance Checklist
What should small businesses do now?
Small businesses should start preparing before the first MTD deadline applies.
A practical preparation checklist:
- Check whether you are a sole trader, landlord or both.
- Check your qualifying income for the relevant tax year.
- Confirm whether MTD applies and from when.
- Review whether any exemptions might apply.
- Choose compatible software.
- Decide whether to use spreadsheets with bridging software or full accounting software.
- Set up separate bank accounts if needed.
- Start keeping digital records.
- Upload receipts and invoices regularly.
- Categorise income and expenses consistently.
- Speak to your accountant or tax agent.
- Practise reviewing records quarterly.
- Check VAT records if VAT registered.
- Prepare for quarterly updates before the first deadline.
- Keep a record of adjustments needed before final submission.
The earlier this starts, the easier the transition should be.
Common mistakes to avoid
Waiting until the deadline
MTD affects record keeping throughout the year. Waiting until the first quarterly update is due may create unnecessary stress.
Assuming MTD only affects limited companies
MTD for Income Tax applies to sole traders and landlords above the thresholds, not limited companies by default.
Looking at profit instead of qualifying income
MTD thresholds are based on qualifying income, not profit after expenses.
Using software that is not compatible
Not all bookkeeping tools will be suitable for MTD submissions. Software should be checked before relying on it.
Mixing personal and business transactions
Mixed accounts make digital record keeping harder and increase the risk of errors.
Ignoring property income
Property income can bring landlords into MTD, and combined property and self-employment income may matter.
How Merranti can help
Making Tax Digital is a record-keeping and software change as much as a filing change. Businesses that move early to digital bookkeeping should find it easier to submit updates, understand tax, and avoid year-end pressure.
Merranti Accounting can help sole traders, landlords and small businesses check whether MTD applies, choose accounting software, set up digital records, review bookkeeping, prepare Self Assessment returns and manage VAT records.
If you need help preparing for Making Tax Digital, visit Merranti’s Accounting Software page, see Cloud Accounting, or contact Merranti to discuss your setup.
FAQ
What is Making Tax Digital?
Making Tax Digital is HMRC’s system for digital record keeping and software-based tax reporting. For Income Tax, affected sole traders and landlords will need to keep digital records and send quarterly updates.
Who needs to use Making Tax Digital for Income Tax?
Sole traders and landlords registered for Self Assessment may need to use MTD if their qualifying income from self-employment or property is above the relevant threshold.
When does Making Tax Digital for Income Tax start?
MTD for Income Tax is being phased in from 6 April 2026 for those over the £50,000 threshold, from 6 April 2027 for those over £30,000, and from 6 April 2028 for those over £20,000.
Does MTD apply to limited companies?
MTD for Income Tax does not usually apply to a limited company director just because they are a director. It applies to self-employment and property income above the thresholds. VAT-registered companies may already have MTD for VAT obligations.
Do I need special software for MTD?
Yes. You need software that works with Making Tax Digital. This may be full accounting software or spreadsheets with bridging software, depending on your circumstances.
Can Merranti help with Making Tax Digital?
Yes. Merranti can help check whether MTD applies, choose software, set up digital records, review bookkeeping and support Self Assessment or VAT reporting.
