Making Tax Digital: A Business Guide to Choosing Cloud Accounting

This guide reflects GOV.UK guidance as checked on 15 October 2026. Making Tax Digital rules are still being phased in, so check the linked GOV.UK pages before acting. It is general information, not tax advice. If your affairs are complex, speak to a qualified accountant.

What Making Tax Digital is

Making Tax Digital (MTD) is HMRC's programme for moving tax records and returns into software. Instead of keeping paper or unconnected spreadsheets and filing once a year, businesses in scope keep digital records and send information to HMRC from software that connects to its systems.

It now has two strands: MTD for VAT and MTD for Income Tax (sometimes called MTD for Income Tax Self Assessment, or MTD ITSA).

Who must use MTD, and when

Qualifying income is your total turnover from self-employment and property, before expenses. It is not your profit. A sole trader with £22,000 of trading turnover and £10,000 of rental income has qualifying income of £32,000, and would be in scope from April 2027 if that figure is on the relevant return. See GOV.UK's guide to using MTD for Income Tax for the full rules, including exemptions.

Our free MTD readiness checker works through the thresholds for your situation. If you are deciding whether to stay self-employed or incorporate, which changes your MTD position, see the sole trader vs limited company calculator.

The MTD for Income Tax calendar

Once you are in MTD for Income Tax, you send a quarterly update from your software for each self-employment and property business, then file a tax return after the year ends.

The tax return for the year, made through your software, is due by 31 January after the tax year ends. Earlier HMRC material called this a 'final declaration'; GOV.UK now simply calls it the tax return. Quarterly updates are summaries of income and expenses. They are not tax payments, and payment deadlines do not change.

Penalties: what changes

MTD for Income Tax uses a points-based system for late submissions, as described in GOV.UK's penalties guidance. Each missed deadline earns a point. When you reach the threshold of four points for quarterly submissions, you get a £200 penalty, and a further £200 for each later missed deadline until the points are reset.

HMRC has said it will not issue penalty points for late quarterly updates in the 2026/27 tax year, to give new users time to adjust. Late payment penalties still apply: 3% of the tax unpaid 15 days after the due date, another 3% after 30 days, then interest-style charges at 10% a year. From 2027/28, the two fixed charges rise to 4% each.

What 'digital records' and 'digital links' mean

This is where many businesses get caught out. HMRC's VAT Notice 700/22 sets out the rules for VAT, and the same principles carry into Income Tax.

• Digital records: you must keep your records in software or a spreadsheet, not on paper.
• Digital links: when data moves from one program to another on its way to HMRC, the transfer must be digital. Accepted examples include linked spreadsheet cells, importing and exporting files such as CSV, and connecting systems by API.
• Not a digital link: copying and pasting, or retyping figures by hand, between programs.

In practice, this means a business can still use spreadsheets, provided they connect to HMRC through bridging software and no figures are retyped along the way.

Three ways to comply

HMRC's software finder for MTD for VAT and for MTD for Income Tax lets you filter by features, such as free products for simple affairs, bridging software, or support for property income. As with payroll, HMRC does not recommend one product over another.

How to choose MTD software: a practical checklist

• Is it on HMRC's list for every strand you need? A product compatible with MTD for VAT is not automatically ready for MTD for Income Tax.
• Does it cover all your income sources? If you have both self-employment and rental income, check that both are supported, including jointly owned property.
• Does it connect to your bank? Bank feeds cut data entry and reduce errors.
• Will your accountant use it? Agent access and familiarity save time and fees.
• Does it link to your payroll? If you employ people, check how payroll journals flow in. Our guide to HMRC-recognised payroll software covers the payroll side.
• What happens to your data if you leave? Check export options. You must keep VAT records for six years, and self-employed records for at least five years after the 31 January filing deadline for that tax year.
• What does it really cost? Compare total annual cost including VAT, add-ons and per-user charges, not just introductory offers.

A six-step plan to get ready

• Check your status. Work out your qualifying income from your latest tax return, or use our MTD readiness checker.
• Separate business and personal money. A dedicated business account makes digital records far easier. See our guide to UK business bank accounts with no monthly fee.
• Pick software and trial it before your first quarter starts.
• Sign up for MTD for Income Tax through GOV.UK when you are ready, or confirm your accountant will do it for you.
• Set calendar reminders for 7 August, 7 November, 7 February and 7 May.
• Review your expense categories. Getting them right from the start saves rework. Our self-assessment expense grader can help you sense-check claims.

Bottom line

If you are VAT-registered, you are already in MTD. If you are a sole trader or landlord, your qualifying income decides when MTD for Income Tax reaches you, with the threshold falling to £20,000 by April 2028. Choose software from HMRC's lists on the basis of your income sources, your bank and your accountant, keep every link between systems digital, and get your records in order before the quarter in which you start.